Investing with clarity: Cutting through behavioural bias

Discover how behavioural biases like overconfidence, herd mentality, and loss aversion shape decisions—and how to overcome them.

Published on 13 November 2025

3 min read

It is important to realise that behavioural biases are a universal human experience. These mental shortcuts, or thinking habits, affect everyone, regardless of experience or knowledge. The first step to managing these biases is to recognise them as they arise. Pause whenever you notice an urge to act impulsively or follow the crowd. Reflect on your motivations and seek objective information. By consciously evaluating your choices, you can improve your ability to make rational investment decisions.

Common behavioural biases in investment decisions

Herd mentality

“The market was rallying and everyone I knew was applying for the IPO. I just followed along.” 

When many people around you are doing something, it can feel safer to do the same even if it is not aligned with your goals.  This is herd mentality, and it is common during IPO seasons or when social media hypes up a particular stock or NFO.
Loss aversion

“This happened in 2020 when the stock was down, but I just couldn’t bring myself to sell it at a loss”.

We tend to feel losses more intensely than we enjoy gains, which can lead us to hold on to losing investments in the hope they will recover—even when the data suggests otherwise. The reverse is also true. Some investors prematurely sell performing assets to lock in gains, potentially missing out on further upside. This is often referred to as the disposition effect in loss aversion.
Recency bias

“My fund or stock gave 20% returns last year. So, I increased my SIP amount.”

It is easy to believe that what just happened will keep happening. This is why people often chase performing funds, expecting similar results.
Overconfidence

“I had a few wins and thought I had figured out the market. So, I invested more.”

When past successes make you believe you can predict the market better than professionals, it often leads to excessive trading, missed opportunities, and poor returns.
Anchoring bias

“I bought it at ₹120. I will sell only when it gets back there.” 

We get stuck on specific numbers like the stock purchase price and ignore changes in the market or business outcomes.

How to avoid behavioural biases

1. Set clear investment objectives

Know why you are investing. Having defined goals helps you filter out market noise and stay focused on what truly matters.

2. Seek personalised advice

It is normal to feel a range of emotions when managing your finances but building a clear framework will help you respond with discipline and confidence. While many people may share their opinions —not all advice is tailored to your unique needs or best interests. That is why it is important to seek personalised advice from a SEBI Registered Investment Adviser (RIA). Such advisers have fiduciary responsibilities, meaning they must put your interests first and offer guidance aligned specifically with your financial goals.

3. Pause before reacting

Avoid reacting. Take a moment to assess the situation and revisit your long-term strategy. Recognise patterns in your thinking so you can steer clear of emotional traps that can derail your financial goals. Try and stick to a well-defined and personalised investment plan.

Bottom line: Behavioural biases shape your returns

Behavioural biases can affect your investment choices, often without you ever realising it. Market-savvy investors understand that beating the market starts with cutting through their own biases.

You do not have to do this alone. Seek investment advice that is personalised to your investment objectives, risk appetite, and investing timelines, to start investing with clarity and confidence.

Disclaimer: This article is for educational purposes only.