Behavioral Biases in Investing

Warren Buffett: "Investing is simple, but not easy."

Why? Because your brain works against you.

1. What is Behavioral Finance?

Behavioral Finance studies why investors make irrational decisions.

Spoiler: We are not logical. We are emotional.

2. The Big Biases (And How They Cost You Money)

A. Loss Aversion (Losses Hurt 2x More Than Gains Feel Good)

Scenario: You bought a stock at ₹100. It's now ₹70.

• Logical Decision: If you wouldn't buy it today at ₹70, sell it.
• Your Decision: "I'll wait till it goes back to ₹100." (It never does).

Why? Admitting a loss feels like failure. You hold on, hoping.

Solution: Set a Stop Loss (5-10% below buy price). Automate the decision.

B. Herd Mentality (Everyone's Buying, So Should I!)

Example: 2021 Crypto Mania.

• Bitcoin at ₹50 Lakhs. Your friend made 10x. FOMO kicks in.
• You buy at the peak.
• Bitcoin crashes to ₹15 Lakhs. You panic sell.

Famous Quote: "Be fearful when others are greedy, and greedy when others are fearful." — Warren Buffett.

Solution: Invest based on your research, not WhatsApp tips.

C. Recency Bias (What Happened Recently Will Continue Forever)

Example: Stock market gave 40% returns in 2023.

• Your Brain: "This is the new normal! Let me invest all my savings!"
• Reality: 2024 correction. -10%.

Or: Market crashed in 2020 (COVID).

• Your Brain: "Never investing in stocks again!"
• Reality: Missed the 2021 rally (70% gains).

Solution: Look at 10-year averages, not last year.

D. Anchoring (Stuck on the First Number You See)

Scenario: You bought Infosys at ₹1,500. It's now ₹1,200.

• Your Logic: "₹1,500 is the 'right' price. It will go back."
• Reality: The market doesn't care what you paid.

Solution: Ignore your buy price. Make decisions based on current value.

E. Confirmation Bias (Only See What You Want to See)

Example: You bought Yes Bank at ₹300 (It was ₹400 before).

• You: Read only bullish articles. Ignore warnings.
• Result: Stock goes to ₹15. You lose 95%.

Solution: Devil's Advocate — Actively search for reasons NOT to invest.

F. Overconfidence (I'm Smarter Than the Market)

Example: You made 50% on one stock.

• Your Brain: "I'm a genius! Let me do F&O trading!"
• Reality: 95% of retail F&O traders lose money.

Solution: Accept that you don't know the future. Diversify.

G. Mental Accounting (₹100 is ₹100, Period!)

Scenario: You won ₹50,000 in a lottery.

• Logic: It's money. Invest it wisely.
• Reality: You blow it on a vacation (Because it's "bonus" money).

But: If salary increased by ₹50k, you'd save it.

Solution: Money is fungible. ₹1 = ₹1. Doesn't matter where it came from.

H. Paralysis by Analysis (Too Much Thinking, Zero Action)

Scenario: You research 100 mutual funds for 6 months.

• Result: Never invest. Market runs up 20%.

Solution: Good > Perfect. Start with Index Funds. Improve later.

3. Real-Life Disasters Caused by Biases

A. 2008 Satyam Computers

• Investors kept buying as price fell (Loss Aversion + Anchoring).
• Stock went from ₹500 to ₹10. Fraud revealed.

B. 2020 COVID Crash

• Recency Bias: People sold at the bottom (March 2020).
• Nifty fell to 7,500. Those who sold missed it going to 22,000 (3x).

C. 2017 Bitcoin Bubble

• Herd Mentality: Everyone's uncle was buying.
• Bitcoin touched $20,000. Crashed to $3,000.
• Retail investors bought high, sold low.

4. How to Defeat Your Brain

Strategy 1: Automate

• SIP: Removes emotion. Invests every month, regardless of market.
• Stop Loss: Auto-sell if stock falls X%.

Strategy 2: Write Down Your Rules

• "I will not sell in panic."
• "I will not buy based on tips."
• "I will rebalance once a year."

Strategy 3: Delay Big Decisions

• 24-Hour Rule: Before buying/selling, wait 24 hours. Emotion fades.

Strategy 4: Diversify (So One Mistake Doesn't Kill You)

• If one stock crashes, it's only 5% of your portfolio.

Strategy 5: Learn, But Don't Obsess

• Check portfolio once a month. Not every hour. Volatility will scare you.

7-Day Action Plan

Day 1: Reflect on your biggest investment mistake. Which bias caused it?
Day 2: Read "Thinking, Fast and Slow" by Daniel Kahneman (Nobel Prize winner in Behavioral Economics).
Day 3: Check your portfolio. Are you holding any loss-making stocks due to Loss Aversion?
Day 4: Write down your "Investment Commandments" (5 rules you'll never break).
Day 5: Delete stock market apps from phone (If you check prices 10 times a day). Keep only MF app.
Day 6: Set up an auto-SIP. Remove the decision from your hands.
Day 7: Join a community of long-term investors (Not traders). Mindset matters.

Quiz

---

💡 Final Wisdom: "The investor's chief problem—and even his worst enemy—is likely to be himself." — Benjamin Graham. Know thyself.