Most investing losses are not caused by bad analysis. They come from good investors making predictable human mistakes at the worst moments. You cannot switch these biases off, but you can build habits that catch them.
Behavioral biases are shortcuts the brain takes under uncertainty. In markets, they push people to buy after big rises, sell after big falls, hold losers too long and cut winners too early. The defence is process: decisions written down in advance, checked against evidence.
What to look at
- Loss aversion: losses hurt about twice as much as equal gains feel good, so people hold losers hoping to break even.
- Confirmation bias: seeking information that agrees with you. Deliberately read the bear case for everything you own.
- Anchoring: fixating on your purchase price. The market does not know or care what you paid.
- FOMO and recency: chasing whatever has gone up most recently, usually near the top.
- Overconfidence: trading too often and sizing too large after a few wins.
The shape of it
Better decisions = Pre-commitment + Written evidence + Fixed review times
An example
You bought at $100; it is now $60 and the thesis is broken. Holding 'until it gets back to $100' is anchoring. The only relevant question is whether you would buy it today at $60. If not, the money is better elsewhere.
Where people go wrong
Feeling certain is not evidence. The moments you are most sure are usually the moments the crowd agrees with you, which is when prices already reflect it.
Keep a decision journal: what you did, why, and what you expected. Reading it a year later is the most humbling and useful investing education there is.