5 behavioural biases that cost investors money

Why smart people make the same mistakes

Investing mistakes are rarely about intelligence. They come from mental shortcuts that serve us well in daily life and badly in markets: trusting recent experience, avoiding pain, following the crowd, backing our own judgement. Behavioural finance has catalogued dozens of them. Five do most of the damage, and each one leaves a trace in Indian data.

1. Recency bias: last year's winner

The bias. We give recent events too much weight and assume the near past will continue.

The evidence. Here is the best and worst equity category by median calendar-year return, among large-cap, mid-cap, small-cap, flexi-cap, value and sectoral/thematic funds (Direct, Growth plans):

The investor who moved into small caps after their 45.8% year in 2017 got the worst category of 2018. The one who abandoned large caps after they trailed in 2023 and 2024 missed them leading in 2025. Leadership rotates, and the switch is usually made just after the move has happened.

The fix. Choose categories for the role they play in your plan, not for their last 12 months. Read rolling returns rather than trailing ones, which show how a fund did across many start dates instead of one lucky window. More on this in recency bias.

2. Loss aversion: selling at the bottom

The bias. A loss hurts roughly twice as much as an equal gain pleases. In a falling market that pain pushes people to sell, just to make it stop.

The evidence. The Nifty 50 price index returned 8.8% a year from 17 September 2007 to 1 October 2026. Take out its 10 best days, out of about 4,670, and that drops to 4.6% a year. Take out 20 and it is 1.7%. Every one of those ten best days fell inside the 2008–09 and 2020 crashes, which is exactly when loss aversion is loudest. Selling to avoid further pain means missing the rebound days that follow. Our post on 19 years of Nifty corrections has the full record.

The fix. Decide your equity allocation when markets are calm, at a level where a 35–40% fall would hurt but not force you to sell. Keep near-term money out of equity. Let the SIP run. The loss aversion guide goes deeper.

3. Herding: buying what everyone is buying

The bias. When everyone around us is doing something, it feels both safe and urgent to join in.

The evidence. The fund industry responds to herds by launching what is selling. The number of sectoral and thematic Direct, Growth funds with a full calendar year of NAVs in our data went from 70 in 2017 to 202 in 2025. New themes get launched when they are already popular, which tends to mean after a strong run, not before one. Those 202 funds had a median return of 4.4% in 2025, behind large-cap funds.

The fix. Treat a hot theme or new fund offer as a reason to slow down. Ask whether it fills a gap in your portfolio or just repeats what you already own. Keep themes, if you want them at all, to a small satellite slice; the core and satellite approach shows how. Herd mentality explains the psychology.

4. Overconfidence: trading too much

The bias. Most people rate themselves as above-average drivers, and most active investors believe they can time markets or pick winners better than others.

The evidence. The starkest Indian data comes from futures and options. SEBI's study of individual traders in equity derivatives found that 87.7% of them lost money in FY 2025-26, with aggregate net losses of ₹91,685 crore. Each of those traders was presumably confident in their edge when they placed the trade. Overconfidence also shows up more mildly in fund investors who switch schemes every year, paying exit loads and capital gains tax each time.

The fix. Track your decisions honestly. If you switch funds or trade, write down why and check a year later whether it helped. Price in every cost with the brokerage calculator before you start. Our post on whether F&O trading is a career or gambling looks at the SEBI data in detail.

5. Anchoring: stuck on a number

The bias. We fix on a reference number, usually the price we paid or a recent high, and judge everything against it.

The evidence. Anchoring is harder to measure in aggregate, but it is easy to see in the current market. The Nifty 50 closed at 26,329 on 2 January 2026 and at 22,422 on 1 October. An investor anchored on 26,329 may refuse to sell a fund that no longer fits the plan "until it gets back to what I paid", or may refuse to invest new money "until it falls to some lower number", neither of which has anything to do with the fund's prospects.

The fix. For any holding, ask: if I had this money in cash today, would I buy this fund? If yes, keep it regardless of your purchase price. If no, the purchase price is not a reason to hold it. When to sell a fund sets out reasons that actually matter.

The common cure: rules made in advance

The five biases share one weakness: they act in the moment. The defence is to make decisions before the moment arrives and then automate them.

• A written target allocation, rebalanced once a year on a fixed date.
• SIPs on autopilot, raised by a fixed step each year.
• A one-line reason for owning each fund, reviewed annually, not daily.
• A rule that no new fund is added unless an old one is removed.

None of this needs a forecast. It just takes the decisions away from the version of you that is reading the headlines.

This post is educational and not investment advice. Past returns do not predict future returns.