There’s a field of study called Behavioural Finance, which primarily came into existence when economists finally had to admit that humans are not, in fact, rational beings. As a species, we tend to be emotional, pattern-seeking, loss-fearing individuals who nevertheless insist that we’re making perfectly logical decisions. The stock market therefore is more a daily reflection of our collective psychology than a rational forum.

I find this area of study fascinating, and so for this month's commentary, rather than regurgitating performance data or talking about the ongoing conflicts in the Middle East, I thought I'd highlight a few of the behaviours I encounter from time to time.

Loss Aversion – This is a very common trait. Psychologists Daniel Kahneman and Amos Tversky established decades ago that losing $1,000 feels roughly twice as bad as gaining $1,000 feels good. This isn’t a character flaw — it’s human wiring. The problem is that markets are indifferent to our feelings, and decisions made from the pain of loss rarely improve the situation. Selling after a drop locks in what was, until that moment, still theoretical.

Anchoring — Picture an investor who bought shares at $80, watched the price fall to $55, and is now waiting for it to “get back to $80” before selling. How many of you have had this experience? That $80 figure has no particular significance to the market — it’s simply the price at which the investment was made. Anchoring is the tendency to attach meaning to an arbitrary reference point and make decisions around it rather than around the current reality.

Confirmation Bias — Long before social media capitalized on the feedback loop, investors were doing it manually — reading the analysts who agreed with them, dismissing the ones who didn’t, and calling it research. Confirmation bias is the tendency to seek out information that supports what we already believe and quietly sidestep whatever complicates the picture. It feels like conviction but often isn’t.

Herding —There is genuine psychological comfort in doing what everyone else is doing. If it goes wrong, at least you’re not alone. Herding is how stock market bubbles happen and how perfectly sensible people end up buying at the top and selling at the bottom. The fact that “everyone” is doing something has never been particularly useful market intelligence, and yet it happens all the time.

Status Quo Bias — Doing nothing feels safe and sometimes it is. But status quo bias is something different — it’s the tendency to avoid decisions because any change feels riskier than staying put, regardless of whether staying put is actually the better choice. A portfolio that made sense five years ago may not make sense today. Inertia and strategy are not the same thing, even when they look identical from the outside.

Overconfidence — Studies consistently show that the vast majority of people rate themselves as above-average drivers. Investors are no different. This tendency peaks during bull markets, when returns feel like skill rather than momentum. This shows up through excessive trading, under-diversification, and a general reluctance to consider that one might be wrong. The market has a long and well-documented history of humbling those that are certain they know better.

The good news is that awareness is genuinely half the battle. None of us are entirely immune, therefore recognizing the impulse before acting on it is, more often than not, when the best decisions are made.

Libby

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