Recognising Biases in Investing and Tips to Avoid Them September 4, 2025
Common biases like overconfidence, herd mentality, and loss aversion influence both risk assessment and decision-making. Know the emotional and behavioral biases in investing.
In investing, the biggest challenge is often not the market but our own minds. Emotions, habits, and common mental shortcuts can quietly steer decisions in the wrong direction.
A Charles Schwab survey found that over 50% of retail investors make choices purely because of the fear of missing out (FOMO). Other influences such as confirmation bias, overconfidence, and the bandwagon effect can cloud judgment and lead to poor outcomes.
But once you’re aware of these traps, you can take steps to avoid them and make investment decisions that truly work toward your financial goals.
What Is Behavioural Bias in Investing?
Behavioural biases are predictable psychological patterns in thinking that lead us away from logical, fact-based decision-making. For example, you hear that investors are rushing into a certain tech stock touted as “the next big thing”. You purchase the stock at a premium without analysing the stock in detail. If the decision plays out in your favour, this flawed reasoning feels justified, which may encourage bigger mistakes in the future. If the stock falls, you realise that you were merely jumping on the bandwagon.
5 Common Investor Biases (and How They Can Hurt Your Portfolio)
- Herding – Chasing Hot Stock
- Confirmation Bias
- Loss Aversion
- Overconfidence
- Irrelevant Price Anchoring
Herding happens when investors mimic the actions of others, assuming the crowd possesses superior information or due to a lack of confidence in their own analysis. This often results in chasing trends at the last minute, after most of the profit has been realised.
Confirmation bias occurs when you consciously look for information that confirms your existing beliefs but dismiss evidence that proves the contrary. For instance, if you believe a technology company is a great investment option, you might only read positive articles and ignore any negative news about that company.
Loss aversion makes investors hold onto losing stocks longer than they ought to, in the hope of a recovery. The pain of a loss feels greater than the joy of an equivalent gain, causing poor decisions and prolonged losses.
Overconfident investors overestimate their abilities and knowledge, believing they can outpace the market. This often leads to excessive trading, under-diversification, or unnecessary risks.
Anchoring bias occurs when investors become obsessed with certain prices, such as the previous high of a stock or the price they paid for, and makes irrationally buy or sell decisions consequently.
Strategies to Mitigate Behavioural Biases
Even though these behavioural biases can affect your investing strategy and reduce potential returns , there are ways to mitigate them.
Do Your Research: Carry out fundamental and technical analysis before investing in a stock. This analysis helps you assess risks and returns objectively and choose the right stocks for your portfolio.
Be Disciplined: Be it systematic investment, setting stop-loss levels, or asset allocation, discipline takes emotion out ofdecision-making and helps you stay consistent.
How Phillip SMART Portfolio Can Help You Invest Bias-Free
The Phillip SMART Portfolio is built to take emotion and bias out of investing:
- Cyborg Methodology – An algorithm processes over 1,000 data points daily, reducing reliance on emotions on trends, while experienced managers add market insight.
- Automated Rebalancing – Keeps your portfolio on track, avoiding panic selling, herding behaviour or chasing rallies.
- Professional Oversight – Experts manage your portfolio using a disciplined, research-based approach, countering overconfidence and confirmation bias.
- Low Entry Barrier – Start from just S$300, making it easier to begin investing steadily, reducing loss aversion and fear of entering the market.
- Customised Portfolios – Choose from Income, Growth, or US Equity profiles to match your goals and risk tolerance, preventing irrational anchoring to irrelevant benchmarks.
Find out more about SMART Portfolio : https://smart.poems.com.sg/
Conclusion
Behavioural biases are an inseparable part of the human psyche and making decisions that are completely free from these biases is often easier said than done. However, by developing a rational and focused approach, investors can avoid the pitfalls of these biases. Alternatively, you can also leverage the Philip SMART Portfolio that uses a data-driven strategy to grow your corpus and secure your future.
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About the author
Debbie Liew
Digital Marketing Executive
Debbie is currently with Phillip Digital Channel, specialising in promoting financial solutions such as Excess Fund Facility (SMART Park), Robo (SMART Portfolio), Finance Fit and Phillip Protect. Passionate about both digital marketing and finance, Debbie is dedicated to creating engaging content that benefits investors.
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