Cognitive Biases: Your Brain’s Silent Saboteurs

Big Idea Series: Investor Behaviour 101 — Episode 2

Ever made an investment decision that seemed smart at the time… but you later realized it was emotion, not logic, driving you? You’re not alone. Welcome to the world of cognitive biases — the invisible mind traps that often sabotage our financial decisions.

What Are Cognitive Biases?

Cognitive biases are systematic errors in thinking. They shape how we interpret information, evaluate risk, and make decisions — often without us even realizing it.

In investing, these mental shortcuts can lead to overconfidence, panic selling, buying the hype, or sticking with a bad decision simply because it’s familiar.

5 Common Investor Biases to Watch Out For

1. Confirmation Bias

“I only read news that supports my belief.”

You buy a stock thinking it's a future multibagger, then ignore all red flags.
Fix: Follow opposing views. Play devil’s advocate before decisions.
Examples:

• Yes Bank investors ignoring RBI warnings in 2018.
• DHFL investors dismissing credit rating downgrades before the collapse.
• Suzlon buyers clinging to early 2000s growth projections despite debt warnings.
• Reliance Communications (RCom) held despite telecom sector stress.
• IL&FS bondholders trusting AAA ratings until default shook confidence.

2. Recency Bias

“It’s been rising for 3 months. It must continue!”

Chasing trends can mislead.
Fix: Focus on long-term data, not short-term noise.
Examples:

• Mid-cap rally of 2017 that reversed sharply in 2018.
• Post-COVID small-cap boom creating false expectations of unlimited upside.
• Tech stocks surge in 2021 after global lockdowns led to tech adoption spike.
• Investors piling into FMCG stocks after short-term COVID outperformance.
• Bitcoin proxy stocks in India during the 2021 global crypto bull run.

3. Anchoring Bias

“I’ll wait till it hits ₹100 again.”

Fixating on a past price skews decisions.
Fix: Ask yourself, "Would I buy this today for the first time?"
Examples:

• Investors anchored to RCom’s 2008 peak prices despite debt spiral.
• Kingfisher Airlines investors hoping for ‘return to IPO level’ before the airline shut down.
• Unitech investors holding onto real estate hopes post-2010 collapse.
• JP Associates shares stuck in portfolios long after infra slowdown.
• IRB Infra and GMR Infra held despite sector overleverage visible post-2012.

4. Loss Aversion

“Losing ₹1 hurts more than gaining ₹2 feels good.”

This causes irrational selling or holding.
Fix: Track portfolio-level performance.
Examples:

• Jet Airways held long after flights ceased operations.
• Suzlon retained for over a decade despite weak fundamentals.
• Retail investors not exiting Satyam post scam disclosures.
• Kingfisher shares held hoping for revival until delisting.
• Holding Yes Bank when price fell from ₹400+ to ₹10 due to FOMO recovery hopes.

5. Herd Mentality

“Everyone’s investing in that IPO. I should too!”

Following the crowd can lead to bubbles.
Fix: Ask: "Would I invest if no one knew?"
Examples:

• Reliance Power IPO frenzy (2008) followed by huge listing disappointment.
• Paytm IPO attracted massive subscriptions but tumbled post-listing.
• Adani Group stocks driven by retail buying post-2021 bull run.
• Tejas Networks & micro-cap rallies during bull markets despite earnings mismatch.
• Investors blindly copying portfolio moves of celebrity investors via news headlines.

Why This Matters More Than You Think

“Investing is not a battle of information, it’s a battle of behaviour.”
— Morgan Housel, The Psychology of Money

Biases affect all of us. Mastering your behaviour is often more important than picking the perfect fund.

Try our Investor Behaviour Checklist to spot your own biases and build better habits.

Quick Tools to Outsmart Your Biases

• Investment Journal: Keep a personal log for every investment you make. Note down your goals, rationale, expected outcomes, and concerns. Revisiting this journal during market volatility helps you understand if your choices were driven by logic or emotion.
• Review Dates: Avoid checking your portfolio daily. Instead, schedule fixed review dates — monthly or quarterly — to assess performance, reallocate funds if needed, and prevent knee-jerk reactions to market swings.
• Pre-commitment: Define your entry and exit strategy before investing. Set rules like "If this stock drops 15%, I will reassess," or "I will exit once my financial goal is achieved," to reduce emotional decision-making later.
• SIPs & Automation: Systematic Investment Plans help you invest consistently regardless of market highs and lows. Automating your investments removes the temptation to time the market, reduces decision fatigue, and builds long-term wealth through discipline.

Coming Up Next

Next Article: The Fear & Greed Cycle – Riding the Emotional Rollercoaster

Explore the Full Series

Want to read all parts of the Investor Behaviour 101 series? Start from the beginning and track your learning journey.

Explore All Posts in the Big Idea Series

Quick Glossary

References

• CFA Institute – Four Behavioral Biases and How to Fight Them
• Morningstar – How Cognitive Dissonance Thwarts Investment Decision-Making
• CFA Institute – The Herding Mentality: Behavioral Finance and Investor Biases
• Morningstar – The Four Behavioral Investor Types

Related Reads

• How SIP Works
• What Kind of Investor Are You?
• Building a Long-Term Investing Mindset

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