Many novice investors assume the goal is simple: “make the most money”. But things rarely turn out this way. Even though we want the best outcomes, we often make decisions that that prioritize emotional comfort instead. Whether it’s the desire for peace of mind, fear of loss, or a need for control, emotions can be powerful drivers of investment behaviour. Most times, to the investor’s detriment.
So, to help battle the emotional drag on your portfolio, this post describes common examples of investors who prioritize their emotions over rational decision making. And then, we offer some strategies to overcome these biases. Since confronting our emotional biases is one of the best ways to improve investment outcomes.
Emotional Satisfaction vs. Financial Performance
It’s common for investors to claim a decision “felt right,” even when the results suggest otherwise. Take the example of someone who sold stocks during a market correction when headlines were negative. They were caught up in the news of the day, an echo chamber within their social circle, and became susceptible to a crowd mentality.
They sold stocks when the market was down. Then, “rationalized” their decision by saying they think the stock market will go down even further and so selling stocks seems justified. Then, when markets recover, rather than admit they were wrong, they still claim they made the best decision, even when the facts contradict their assessment. How can this be?
This is an example of emotional decision making. The investor fell prey to several biases when they sold their stocks to time the market, including loss aversion bias (fear of losing outweighs potential gains), availability bias (recent events clouding their judgement), and confirmation bias (seeking facts that reinforce current opinions).
The lesson? Don’t buy or sell because you “think” the market will turn. Make decisions based on facts, not opinions. Fact: markets have fallen. Opinion: markets will continue falling.
Risk Aversion and the Illusion of Safety
Some investors knowingly choose lower-return portfolios with minimal volatility because it “feels safer.” This isn’t inherently wrong as risk tolerance is a valid input to portfolio design. However, when investors overly discount long-term performance for the comfort of short-term stability, they may be falling victim to effect heuristic and ambiguity aversion (avoiding unknowns, even if they might offer better outcomes). Over time, the trade-off between lower risk and lower return can significantly reduce wealth, especially when inflation erodes purchasing power.
The Solution? Identify your financial goals, then draft an investment policy that reflects them. Don’t rely on your feelings to make decisions without a plan.
Emotions Driving Asset Allocation Decisions
Entrepreneurs are especially prone to emotional investing. Many prefer to hold large cash balances and make occasional angel investments rather than ride the ups and downs of the stock market. They’re drawn to decisions that feel tangible and within their control. Stocks, by contrast, often seem abstract and volatile.
This tendency reflects familiarity bias (preference for what we know), illusion of control, and sometimes overconfidence. Unfortunately, holding too much cash or concentrating wealth in illiquid private investments will often underperform and create liquidity problems too.
What can entrepreneurs do to avoid these tendencies? Acknowledge the best way to build wealth is through entrepreneurship, but the best way to maintain it is by investing in a passive portfolio that doesn’t rely on the human touch. Otherwise, the traits that made the entrepreneur rich will be the same ones that cause their downfall.
Choosing People Who Make Us Feel Good
Many investors stay with investment advisors who are warm, responsive, and reassuring. Even when their investment performance or cost structure is lousy. This is a classic example of familiarity bias and the endowment effect. In some cases, the advisor may inadvertently reinforce poor behaviours or fail to challenge emotional decisions because doing so could jeopardize the relationship.
A good advisor should help clients manage both their money and their emotions, providing clarity and discipline without merely validating their feelings. Indexing has proven that investment advisors don’t beat the market. So, even though investment advisors may offer lots of other benefits such as great customer service, administrative support, timely communication, and tax advice. Investors shouldn’t trust advisors who claim to provide superior investment results.
What’s the answer? Work with investment advisors who make verifiable claims, not those who tout their investing prowess. And, be willing to cut ties with an advisor who’s dragging you down, even though you like them personally.
Balancing Emotions with Evidence
None of this is to say that emotions should be ignored. Investing is deeply personal, and peace of mind has real value. But the goal should be to find a process that acknowledges your emotional needs without compromising your financial results. A thoughtful investment policy statement, regular portfolio reviews, and the right advisory relationship can help balance logic and emotion, so you don’t have to choose one over the other.
Feel Good or Get Results?
Emotions and investing are inseparable, but emotions shouldn’t be in charge. Understanding your emotional tendencies and the biases behind them can help you make better decisions. If your financial strategy is designed only to make you feel better, it might not be better. The best outcomes come when investors find clarity, confidence, and discipline, not through guesswork or gut reactions.
