Behavioural finance, the study of how real people deviate from the "rational investor" of textbook theory, shows that we make the same mistakes again and again. Here are three I have caught in myself.

Confirmation Bias

Everyone knows the feeling. You make a call, the market moves your way, and for a moment it feels like you have understood how the whole financial world works. Then the market proves otherwise.

What happens after that first win is confirmation bias: the tendency to seek out information that supports what we already believe and to dismiss everything that contradicts it. Once we hold a view, every bullish headline reads as proof and every warning reads as noise. The win did not make us smarter. It made us more confident, and those are not the same thing.

The uncomfortable truth is that a single correct call says very little. Markets are noisy, and a good outcome can come from a bad process. The question is not "was I right?" but "was I right for the reasons I thought?"

FOMO and Loss Aversion

Seeing a stock you are invested in tank and slip into negative territory does something to the human psyche. That is not weakness, it is wiring. Psychologists Daniel Kahneman and Amos Tversky found that a loss hurts roughly twice as much as an equal gain feels good. They called it loss aversion.

It shows up in two ways. First, we hold losing positions far too long, because selling would turn a paper loss into a real one and force us to admit we were wrong. Second, we sell winners too early, just to lock in the good feeling. Researchers call this pattern the disposition effect.

And then comes the worst version. You finally cut the loss, and a few weeks later the stock recovers without you. That stings twice: once for the loss, once for the gain you missed. This is where FOMO, the fear of missing out, takes over. Many investors buy back in at a higher price, not because the thesis changed, but because the regret became unbearable. Two emotional decisions in a row, and the market did not need to do anything special to cause either one.

The fix is boring and it works: decide before you buy what would make you sell. Write down your reason for the position and the level at which that reason is no longer valid. Then the decision is made by your calmer self, not by the version of you staring at a red number.

Anchoring

Just because a stock is down 40% does not mean it is cheap. Anchoring is our habit of fixing on a reference number, usually the last high, and judging everything against it. The old high starts to feel like the "real" price, and anything below it looks like a discount.

But the market does not remember where a stock used to trade. The previous high may have been the mistake. Whether a stock is cheap depends on what the business earns and is likely to earn, not on what someone paid for it last year.

The arithmetic also works against you. A stock that falls from 100 to 60 needs to rise 67% just to get back to where it was. And if it falls another 40% from there, it sits at 36. The investor who bought at 60 because it was "already down 40%" is now down 40% themselves.

A better question than "how far has it fallen?" is "would I buy this at this price if I had never seen the chart?"

Knowing your own tendencies

None of these biases disappear once you know about them. Knowing them does not make you immune; it makes you prepared. Recognising your own weaknesses and tendencies is the first step towards financial responsibility and real financial literacy.

In practice that means a few simple habits:

The market will test every one of these tendencies. The goal is not to never feel them. The goal is to notice them before they make the decision for you.

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