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Beginner
7 min read

Your Brain Can Be an Investing Risk

Predictable biases push investors to buy high and sell low.

The short answer

A set of well-documented psychological biases — loss aversion, recency bias, overconfidence, herding and others — predictably push investors toward buying after prices have already risen and selling after they have already fallen. Recognising these biases by name and removing decision points through automation is the most practical defence against them.

What you'll learn

  • Name at least five common behavioural biases affecting investors
  • Explain why automating decisions reduces the influence of bias
  • Identify a personal example of anchoring or FOMO in your own reasoning

The common biases

Recognising them by name makes them easier to catch in yourself.

  • Loss aversion: losses hurt more than equivalent gains please
  • Recency bias: assuming the recent past continues
  • Overconfidence: mistaking a good outcome for skill
  • Herding: buying because others are
  • Confirmation bias: seeking only supportive information
  • Anchoring: fixating on the price you paid
  • Action bias: doing something because doing nothing feels passive
  • FOMO: buying after a large rise for fear of missing out

How biases compound each other

These rarely operate alone. A sharp rally can trigger recency bias ('this keeps happening'), herding ('everyone is buying') and FOMO ('I am missing out') at the same time, each reinforcing the others. Recognising the cluster is often easier than untangling any single bias in isolation.

Why automation helps

Automatic contributions and a written plan remove the number of moments at which a bias can act. Fewer decisions means fewer opportunities for the predictable mistakes.

Why this matters

The gap between what investments return and what investors receive is largely behavioural.

Common beginner mistake

Refusing to reassess a holding because you are anchored to the price you paid.

Terms used in this lesson

Loss aversion
The tendency for losses to feel more painful than equivalent gains feel good.
Recency bias
Assuming the recent past will continue.
Anchoring
Fixating on a reference point, usually the price you paid, instead of evaluating a holding on current evidence.
FOMO
Fear of missing out — buying because something has already risen sharply.
See the full glossary

Check your understanding

No score is recorded. This is only here to test whether the lesson landed.

1. What does 'anchoring' describe in investing behaviour?

Key takeaways

  • Investing biases are well documented and predictable, not personal failings
  • Biases frequently cluster together during sharp rallies or declines
  • Automating contributions reduces the number of moments a bias can influence a decision
  • The gap between fund returns and investor returns is largely explained by behaviour

Related concepts

Written by
Suggested Investments Research Team
Content type
Educational article
Published
2026-09-13
Last reviewed
2026-09-13

Sources and methodology

What Happens When Markets CrashFrequent Trading vs. Long-Term Investing

Educational content only. This lesson is not investment, tax or legal advice and does not recommend buying or selling any specific investment. All investing involves the risk of loss.