Investing looks logical on paper. Projected returns and risk levels can all be mapped out neatly. In practice, the decisions that your clients make are formed by habits, emotions, and mental shortcuts. These are often described as behavioural finance biases or simply investment biases.
These patterns are not just academic ideas. They show up in review meetings, during bouts of market volatility, and when your clients want to chase what has just gone up in price. In this article, Wealth Professional Canada will look at what investment bias is and what you need to know to help clients.
Investment bias is a pattern of thinking that leads investors away from rational, evidence-based decisions. These patterns often feel harmless and can even seem reasonable. The problem is that they can quietly undermine long-term outcomes.
Behavioural finance has identified many different biases that influence financial decisions. Some of them overlap, some interact, and some even pull in opposite directions.
An investor might be overconfident about picking stocks, yet also reluctant to sell losing positions because they feel attached to them. Someone might also chase recent performance in one part of the portfolio while clinging to outdated holdings somewhere else.
Investment bias does not mean that your clients are careless or reckless. In most cases, investors are trying to act prudently but rely on shortcuts because comprehensive analysis is tiring. It can also be time-consuming and uncomfortable.
Even trained professionals can fall into these traps. For example, financial analysts might let previous ratings guide new recommendations instead of going back to first principles.
For financial advisors, the goal is not to eliminate bias entirely. That is not realistic. The goal is to:
Watch this video to learn more about investment biases:
Even financial planners can exhibit biases, but it’s not entirely a negative thing. Find out why in this article.
Anchoring is the tendency to fixate on the first number or reference point that comes to mind and then judge everything else relative to that starting point. Once an anchor is set, it can be very hard to adjust away from it, even when new information appears.
In investing, anchors are everywhere. Your clients might focus on:
When that happens, the anchor can dominate the conversation. A share bought at 40 that has fallen to 30 might be seen as a bad holding until it gets “back to 40.”
This is regardless of what has changed in the company or in the market. Your clients might refuse to sell because they feel they would be locking in a loss, even if the logic for owning the position is no longer valid.
Anchoring can also affect financial advisors. For example, when updating a recommendation, it can feel easier to tweak an existing view than to rebuild the analysis from scratch. This can lead to small changes around a starting point instead of a clean reassessment based on current facts.
To reduce anchoring, it helps to:
Anchoring cannot be removed completely, but you can nudge conversations away from arbitrary reference points and toward objective criteria.
Confirmation bias appears when people actively search for, notice and remember information that supports what they already believe. This occurs while ignoring or discounting evidence that points in another direction. It is one of the most common and powerful forms of investment bias.
For your clients, confirmation bias can show up in many ways:
There is a related pattern known as commitment bias. Once someone has told others about a decision, they are more likely to stick with it even when conditions change.
In investing, this can mean that clients speak proudly about a stock pick to family, colleagues, or social media contacts. The more they talk about it, the harder it is to accept the idea that selling might now be sensible.
To help your clients, you can try introducing alternative viewpoints in reviews, not just confirming what your clients already think. You can also ask what information would have to appear for them to change their mind. Another way to aid them is by framing portfolio changes as part of a disciplined process, not as a personal admission of being wrong.
Encouraging your clients to consider the opposite case and to think about what would challenge their current view can slowly weaken the hold of confirmation and commitment bias.
Status quo bias is a preference for what already exists. In investing, it is closely linked with what is known as endowment bias or the mere ownership effect. People tend to place a higher value on something they already own than on an identical item they do not hold.
In the portfolio setting, this can lead your clients to hold on to dated or unsuitable securities simply because they already own them.
Investors who exhibit status quo bias might resist recommendations to rebalance away from legacy positions. They might also believe that their current mix is better simply because it is familiar.
As a financial advisor, you must frame changes as part of an ongoing alignment with goals, rather than as a rejection of past choices. With this, you can make it easier for your clients to move past status quo bias. Learn more about status quo bias in this video:
Investor psychology matters when clients get stuck in status quo bias and hold on to what feels safe instead of what will help them grow. For a real-world example, check out how a financial advisor uses investor psychology in her advisory work.
Confidence is vital in investing. Your clients need enough belief in a plan to stay the course through market cycles. At the same time, confidence can easily turn into overconfidence. When that happens, investors overestimate their skill and knowledge and underestimate risk.
Overconfidence in investing often shows up as:
Research and market experience both suggest that frequent trading tends to hurt results. Every trade has two sides. Both parties think they are right, but at least one of them is mistaken. After trading costs and spreads, frequent activity often drags performance down instead of lifting it.
There is also a close link between overconfidence and hindsight. After a positive outcome, it is tempting to believe that success was the result of skill alone.
When a decision turns out bad, people are more likely to blame external forces. This pattern, often called attribution bias, prevents real learning. If investors consistently credit themselves for winners and shift responsibility for losers, they never get a clear view of their own process.
Financial advisors can counter overconfidence by showing performance over meaningful time periods instead of focusing on single trades. You can also encourage written investment logs where your clients record their reasoning and later compare it with outcomes.
When you help your clients realize that even thoughtful decisions can sometimes fail, you can promote humility and a more realistic sense of risk.
Recency bias is the tendency to give more weight to the latest events than to older data, simply because they are fresh in memory. In markets, this often leads investors to believe that current conditions will persist indefinitely.
For example, after a strong run in a sector or asset class, your clients might feel that it will keep doing well and might want to add more just because it has been rising.
The opposite can happen after a period of weakness. Recent losses can dominate their thinking, pushing them to sell quality holdings at depressed prices.
A specific expression of recency is performance chasing. Investors move into what has done well lately and abandon what has lagged, often arriving late to trends and missing the eventual reversal.
This is related to herd behaviour. When many investors react to the same recent pattern, they crowd into similar trades that have already been discovered by larger and better resourced players.
To address recency bias, remind your clients that portfolios are built for multi-year objectives, not for the last quarter. You can also explain that short-term swings are expected and do not, by themselves, justify major strategy changes.
Watch this video to know more about bias and its types:
For other investment concepts, feel free to browse through our Glossary page.
Investment bias will always be present. Anchors, recent memories, emotional attachments, and overconfidence are built into how people process information. The goal for financial advisors is not to eliminate these tendencies, but to recognize them early and guide your clients toward more thoughtful choices.
You can also refine your own habits, so that your recommendations come from careful analysis rather than hidden shortcuts. The more you integrate an understanding of bias into your process, the more resilient your practice can become when markets test discipline.
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