Why Your Brain Works Against You as an Investor

The human brain isn’t naturally equipped to excel at investing. Emotional impulses and mental shortcuts can easily lead us astray, but recognizing this tendency and the biases that come with it can help you achieve a better investment experience.

 

Here are five common behavioral biases that influence investors, along with strategies to overcome them:

 

1.   Outcome Bias

Many people evaluate their decisions based solely on the results, rather than the logic or circumstances under which those decisions were made. For example, imagine investing in a solid long-term strategy only to see it underperform a benchmark index in the short run. Does that mean it was a bad decision? Not necessarily—but it might feel that way.

 

What to do:   While it’s tempting to compare your portfolio to market performance, it’s far more productive to focus on whether you’re making consistent progress toward your long-term financial goals. Whether you’re ahead or behind an index is less relevant than staying aligned with your personal objectives.

 

2.   Recency Bias

Our brains are wired to spot patterns—even when none exist. If you flip a coin and it lands heads-up, you might expect tails next, or assume heads is on a “win streak.” This same bias often leads investors to believe underperforming assets are doomed to fail or overdue for a comeback, even though past performance rarely dictates future results.

 

What to do:   Accept that short-term returns are unpredictable. Avoid making assumptions about how your investments will behave based on recent events, and stay committed to your long-term strategy.

 

3.   Availability Bias

In the information age, we’re bombarded by news, opinions, and data—some helpful, some misleading. Availability bias occurs when we make decisions based solely on what’s most immediately accessible or sensational, rather than what’s truly relevant.

 

What to do:   Block out the noise. Focus on the financial goals that matter most to you and your family instead of reacting to every headline. Over time, you’ll see that most short-term market “news” has little bearing on your overall financial plan.

 

4.   Hindsight Bias

Hindsight tempts us to assume past outcomes were predictable all along, warping how we think about future possibilities. For example, many investors claim they “saw” major market downturns coming—the dot-com bubble, the 2008 financial crisis, or the COVID-19 crash—when in reality, few predicted them accurately.

 

What to do:   Recognize that the future is inherently uncertain. While it’s easy to analyze decisions after the fact, it’s far harder to predict outcomes beforehand with any degree of accuracy. Stay focused on making rational, informed decisions rather than trying to anticipate market movements.

 

5.   Anchoring Bias

We tend to latch onto familiar numbers or reference points—even when they’re unrealistic. For example, hearing about someone who achieved a 12% annual return might lead you to expect similar results from your own investments, regardless of market conditions.

 

What to do:   Educate yourself on historical market performance so you can set realistic expectations. Understand how factors like stock and bond allocations, economic cycles, inflation, and time horizons impact returns. Keep in mind that markets sometimes experience large declines, which can represent opportunities to buy stocks at discounted prices, potentially boosting long-term returns.