Investor Psychology: How Behavioural Biases Can Sabotage Your Success
By James Parkyn - PWL Capital - Montreal
Happy New Year! I hope you had a relaxing and fulfilling holiday season. As we kick off 2026, brace yourself—the forecast flood is coming.
Financial pundits love to inundate investors at this time of year with market predictions to tell us how to invest.
You can safely tune out the vast majority of this noise. Its greatest harm is that it exacerbates our behavioural biases. Such biases shape how we save and invest—and often cause us to make mistakes, such as overtrading, chasing returns and selling in a down market.
Biggest investing risk is us
As we often say in our blog and podcast, the biggest risk to our portfolios isn’t the economy, interest rates or market prices. Most of the time, it’s us. You can have the best financial plan in the world, but if you let emotions or biases take over, that plan can fall apart very quickly.
Understanding the most common biases can help you avoid bad decisions. Fortunately, behavioural finance is one of the most researched areas in economics. It studies one of the most fascinating and perhaps frustrating parts of investing: investor psychology.
Biases can come in two forms:
Cognitive—mistaken processing of information
Emotional—feelings overruling facts
Emotions move markets
Researchers like Nobel winner Daniel Kahneman and Amos Tversky described in a 1979 paper how investors are risk averse in situations of gain, but risk prone in situations of losses. This research is the basis of what is now known as loss aversion bias.
Richard Thaler, another Nobel Prize winner in economics in 2017, developed the concepts of mental accounting and overconfidence biases. Robert Shiller, another Nobel laureate, studied herding and bubbles. And Meir Statman highlighted how emotions and social factors affect investment decisions.
This research contradicts traditional finance theories, which assume investors behave rationally. In contrast, behavioural finance shows that emotions, biases and mental shortcuts often lead to unwise investment decisions.
Recency bias
One of the most common biases is recency bias. This is a cognitive tendency to give more importance to recent events or information. It leads investors to assume a recent trend is more likely to continue in the future.
I’ve seen this often during my career. For example, investors are typically more comfortable taking risks in a bull market, as they expect strong performance to continue. They also shy away from risks after a market correction or bear market as they expect markets to keep dropping.
Overconfidence bias
Another bias we see a lot is overconfidence—the tendency to overestimate one’s investing abilities. An investor who picks a winning stock or successfully times the market one time thinks they can do it again.
Contributing to this is the overload of information online, which creates an illusion of understanding. Overconfidence bias leads to poor portfolio performance because of excessive trading and underestimation of risks.
Aversion bias
Equally powerful is aversion bias. First described by Daniel Kahneman and Amos Tversky in 1979, this is the tendency to prioritize avoiding losses over earning gains. In down markets, investors tend to stay on the sidelines and avoid buying stocks, or they outright sell their positions. They then miss out on gains when stocks rebound.
Herding bias
Herding bias is also very powerful. Investors often make investment decisions based on what others are doing, without due diligence. This bias can prompt investors to panic sell or take unnecessary risks due to the fear of missing out. This bias is at the root of both financial bubbles and panics.
Warren Buffett has good advice to counter this particular bias: “Be fearful when others are greedy and greedy when others are fearful.”
Confirmation bias
Confirmation bias is another big problem. This is the tendency to look only for evidence that supports our views. Investors are inclined to search for and favour information that supports their investing decisions and reject anything contrary.
Social media exacerbates this bias because it pushes out content similar to what we’ve already searched for.
Anchoring bias
Finally, we have anchoring bias. This is a cognitive bias that leads an investor to be overly attached to the first information they encounter when making a decision. This tends to distort appreciation of new data.
Take someone who buys a stock for $20, only for the stock to drop. The investor then refuses to sell below the buy price even if the outlook and fundamentals of the company have changed negatively.
Another example is an investor refusing to sell a stock that has declined until it returns to its all-time high.
Advisor coaching adds value
What can you do about your biases? Awareness is a good step. Another is getting advice from a trusted advisor. This is where advisors add a lot of value for clients. Advisors aren’t just portfolio managers. We’re guardrails and behavioural coaches.
Vanguard’s Advisor’s Alpha study estimated that behavioural coaching adds up to 2% in net returns annually.
Markets will always be unpredictable, and biases will always be a factor. But with awareness, discipline and support from a trusted advisor, investors can avoid the traps that sabotage long-term success. Mastering our own behavior is the ultimate edge in investing.
On behalf of the PWL team, I’d like to wish you and your family good health, happiness and success in all you do in 2026!
Find more commentary on personal finance and investing, our podcast, past blog posts, eBooks, model portfolios and market statistics on the website of PWL Capital’s Parkyn-Doyon La Rochelle team and our Capital Topics website.