Behavioural traps in investing
Peter McGahan
Monday 30th March, 2026.
I’VE yet to meet an investor who set out to buy high and sell low. But I’ve had plenty of readers here who nearly did exactly that between the irresponsible headlines and sleep. Behaviour, not spreadsheets, is where most investing outcomes are won or lost.
Here are the key behaviours which can cost you money. In these very troubling times, I hope they are useful.
Panic selling is fear pretending to be a plan. It locks in losses which would likely have recovered, and it often creates a double loss - you sell after a fall, then buy back higher.
DALBAR’s work on investor behaviour puts a number on it. In 2024, the Average Equity Investor earned 16.54 per cent while the S&P 500 returned 25.02 per cent, a gap of 8.48 percentage points. On $100,000, buy-and-hold ends the year at $125,020. The “average” investor finishes at $112,774 - over $12,000 less in one year. Sorry about the dollars as an example. It was a dollar study.
A study of 653,455 brokerage accounts found that 30.9 per cent of investors who panic-sell never return to risky assets. Panic selling was more common among men, those over 45, married investors, people with more dependants, and those who rated their experience/skill as “excellent”. Confidence can be a dangerous companion.
Performance chasing and recency bias - Chasing what has just done well is one of the most common errors. Recency bias makes recent returns feel like a guide, even though markets can change character just as the crowd gets comfortable. By the time most investors notice a “hot” investment, the easy money is often gone.
Loss aversion and the disposition effect - Loss aversion is when losses hurt more than gains feel good. Psychologists Daniel Kahneman and Amos Tversky found the pain of losing is psychologically about twice as powerful as the pleasure of an equivalent gain.
That imbalance feeds the disposition effect - selling winners too early to “bank” a gain, while holding losers too long to avoid admitting a mistake. Terrance Odean’s work on brokerage accounts found investors preferred realising winners, even though the winners they sold often went on to outperform the losers they kept.
Regret aversion makes intelligent people freeze. If you do nothing, you can’t be “wrong”. If you follow the crowd, you won’t be wrong alone.
It shows up as paralysis, as staying in cash for years, or as pouring more money into a failing idea. During the COVID-19 crash of 2020, investors who cashed out and stayed in cash missed the S&P 500’s 18.4 per cent gain for the year.
Herd mentality - Herding is outsourced thinking. Research often cited in this area suggests that just five per cent of apparently informed people can influence the decisions of the other 95 per cent.
Bubbles and panics repeat. In early 2021, GameStop surged from around $20 to an intraday peak near $483, driven largely by social-media momentum and fear of missing out. It plummeted 90 per cent very quickly.
Financial news detox. The problem is most financial media is built to hold attention, not to improve outcomes.
Research and industry analysis repeatedly finds heavier news consumption increases anxiety and worsens timing. The Financial Times has built a sentiment series which correlates strongly with the VIX - the market’s so-called fear gauge. Estimates often put the cost of the behaviour gap at around two per cent a year in lost returns.
Another study found 48 per cent of respondents were “too nervous to invest” - the highest since the survey began in 2019. Anxiety is normal. Acting on it, repeatedly, is what does the damage.
Overconfidence shows up as excessive trading, concentrated bets, and a belief you can time exits and entries. FINRA research found that 64 per cent of investors rate their knowledge highly, yet those with higher confidence answered fewer questions correctly.
Confirmation bias is when you search for information which supports what you already believe and ignore what doesn’t. Anchoring is when you cling to your purchase price or a previous high as if it is meaningful today. The sunk cost fallacy is “throwing good money after bad” because you can’t bear to admit the earlier money is gone.
So, what can you do?
Ensure your adviser is qualified to give investment advice and rely on that research if they are. Vanguard’s research suggests avoiding performance chasing and emotional decisions can add around 1.5 per cent a year in net returns. Over time, that is the difference between staying on course and quietly leaking your future security.
We are currently writing an investment guide. If you would like a complimentary copy, please email info@wwfp.net and it will be sent to you when it is ready.
Peter McGahan is the Chief Executive Officer of Independent Financial Adviser firm, Worldwide Financial Planning. Worldwide Financial Planning is authorised and regulated by the Financial Conduct Authority.
