How can different emotional biases affect your investment decisions, and what can you do to avoid them? Here’s what you need to know.

How to Invest: 4 Tips to Avoid Emotional Investing

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Science suggests we are wired to delude ourselves and fall for certain biases that trick our brains.🧠

66% of investors have regretted impulsive or emotional investments.

 58% of investors, their portfolio actually performs better when they successfully remove emotions from the equation, 

 which can lead to poor decisions, and potentially eat away at returns.

 and give some practical tips for how to remove them from your investment decision-making.

A silhouette of a man with a pink puzzle and a little cartoon man lighting a torch representing different thinking biases.

our perception of how things should be, even when it's not true

In other words, a bias is when we assume something based on our experiences or beliefs. For example, sports fans may claim that their hometown teams are the best  ⛹️♂️, no matter how well they 

For many people, investing (and savings) works in the same way, involving a number of different biases.

We will look at the most common ones and explain how to avoid them to help you make impartial investment decisions.

Investing involves a lot of steps, from collecting data to evaluating your investment options and buying and selling those investments.

With today’s information overload, it’s easy to fall into psychological traps and overlook some important aspects that may affect your investment decision.

But worry not! You can easily avoid these pitfalls if you learn how to identify, understand, and overcome them. And we are here to help.🤓 

So, the most common investors' biases are (

Emotional investment: Anchoring or Confirmation Bias

As they say, first impressions are hard to shake.

Confirmation bias makes us seek out information that matches our existing beliefs and reject information that doesn’t.

 are more likely to focus only on information that reinforces their opinion about a specific investment. 

For example, investors may stick with a declining company stock far longer than they should, just because they interpret every piece of news about the company positively, seeking to reinforce their belief that the company is still a good investment.

. By drawing incorrect conclusions based on faulty reasoning, we may make undesirable investment decisions.

be aware of the danger of confirmation bias

 and recognize that it can cloud your judgment. Second, actively 

seek out and understand information that’s at odds with your existing beliefs

As Charlie Munger, the Vice Chairman of Berkshire Hathaway and Warren Buffett’s closest partner, once said: 

“Rapid destruction of your ideas when the time is right is one of the most valuable qualities you can acquire. You must force yourself to consider arguments on the other side.”

An illustration of an enlightened cartoon man sitting on a multicolor fear and greed index.

. In other words, people will often prefer not to lose €50 than to find €50.

So, to avoid losses, an investor could hold on to a losing asset for too long, hoping that they will eventually turn it around.

Such an investment strategy could lead to 

, resulting in even larger losses down the road.

not getting too emotionally involved in your investments

. Many of the risks associated with investments are beyond our control. So if the only thing holding you back from selling an investment is the loss it's made, it might be time to sell.

That’s why sometimes it may be better to accept a loss, especially when investing in riskier investments like stocks and crypto. You can always then move the funds to safer investment options, like 

An illustration of cartoon people with dialogue bubbles above their heads representing different investment narratives.

People love stories. And that’s what narrative bias is all about. 

the tendency of people to interpret information as part of a larger narrative, regardless of whether the facts actually support it.

For example, investors may prefer to make investments they can relate to through a memorable or inspiring story. 

A small tech company with sluggish sales growth that has decreased by 40% and lost earnings for six consecutive quarters.

A struggling company that builds next-generation design tools for the web just hired a charismatic CEO, Warren Musk, who was quoted by Bloomberg as promising a quick turnaround for the company and vowing to increase investments and revamp sales. 

You may be surprised, but you’ve just read two descriptions of the exact same (made-up) company. See what a difference a good narrative actually makes?

The right narrative can entice investors into buying a stock, often at sky-high prices. That’s why "story stocks" have become so popular.

Other examples of “story stocks” include some of the most famous companies today, like Tesla and Amazon. In fact, Amazon is considered the most successful “story stock” of all time.

But if a narrative surrounding the stock turns out to be a bubble, we might be in trouble. Sometimes, investors can be lured into a poor decision by a compelling story, which can make them lose money as a result.

When researching your investments, you shouldn't completely ignore the story behind them, but look for information that supports or contradicts it.

 information that proves or disproves the investment narrative you’re dealing with. 

A cartoon illustration of a narcissistic man looking at himself in a mirror

Emotional investment: Overconfidence Bias

the tendency of a person to overestimate their abilities

. It may lead us to think we are better-than-average cooks 🧑🍳  or expert investors.

In investing, overconfidence bias often leads people to 

overestimate their understanding of financial markets or specific types of investment, ignoring expert advice.

This can result in unsuccessful attempts to time the market or make risky investments without knowing your risk tolerance level.

Overconfidence bias can be avoided by being realistic about the market and your abilities as an investor. You can study news, charts, and other materials available to you while also being honest with yourself about your investing skills.

Sometimes, instead of trying to time the market, following a 

well-planned DCA strategy can be the best investment option for you

If you want to start investing, here are a few practical tips: 

It is human nature to be biased about something, and investing is no exception. So always keep in mind that your investment decisions, as enlightened as they might seem, can be influenced by emotional biases such as:

 seeking out information that reinforces your opinions about a specific investment.

preferring to avoid losses over making an equivalent profit.

interpreting information as being part of a larger story, even if the facts don’t support the full story.

having a tendency to overestimate your abilities and knowledge about the market.

Of course, there’s nothing wrong with biases if you know how to avoid them. 

 is to recognize that biases can impair your judgment. 

 is to take action: do thorough research, be curious, and challenge your own beliefs.

That’s how you'll know that you’re making 

based on facts and analysis rather than thinking tainted by bias

Of course, there are many more investment biases out there, and we will cover some of them in the future 😉, but if you manage to control those four main ones, you’d already be doing better than most (emotional) investors!

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