Investing is an emotional practice, especially during volatile times. When markets are volatile, many investors can experience a range of emotions, from euphoria to panic, often in quick succession. During periods of uncertainty, the tendency to act on emotion is higher, potentially leading to investing missteps (for example, panic selling or trying to time the market). That’s why it is important to examine your natural inclinations when formulating long-term plans or selecting investments.

While it is important to consider risk tolerance as you develop a financial plan and a related investment strategy, we often draw upon the Stifel Financial ID as a tool to help you recognize your behavioral traits and preferences. In doing so, you can better understand and address these 10 common investor biases that might otherwise negatively impact your potential investment returns.

Loss Aversion. Investors have a natural aversion to losing money. But notably, studies indicate that losses have a much stronger impact on most investors’ preferences than do gains. In other words, people care a lot more about losing a dollar than they do about making a dollar. Investors who are subject to this bias could panic sell during sharp market declines.

Herd Mentality. Investors subject to herd mentality tend to fall in with the views of the larger group with which they are associated. Rather than make their own choices, they end up “crowdsourcing” decisions due to, among other reasons, a wish to be accepted by the group, member influence (positive or negative), and the belief that the majority is always right.

Recency Bias. This is another common bias, one in which investor behavior is most strongly influenced by the most recent events. During volatile periods, such investors are vulnerable to short-term decision-making that could undermine their long-term plans.

Mental Accounting. Mental accounting is a behavioral bias that occurs when investors subjectively compartmentalize their assets based on how they received the money (for instance a tax refund or a bonus) and how they plan to spend it (buying a house or funding a child’s education).

Disposition Effect. This refers to investors’ reluctance to sell assets that have lost value and a greater tendency to sell assets that have made gains.

Availability Bias. The more individuals see information repeated, the more they believe it to be true without reviewing other potential outcomes.

Anchoring Bias. Anchoring bias occurs when investors rely too much on the first information they encounter when making a decision. For instance, when they see the price of an item first, as opposed to its physical features or value, they will make their decisions based primarily on the price.

Hindsight Bias. Hindsight bias occurs when investors’ regret at not having acted in advance of a market-moving event that could not have been reasonably foreseen leads them to overestimate their ability to accurately predict future market events, potentially leading to poor decision-making in the future.

Overconfidence Bias. This is the tendency of lay investors to be overconfident in their own abilities, even though they are not experts in the field.

Framing Bias. Framing bias occurs when investors make a decision based on the way data or information is presented, as opposed to the actual data. For example, charts versus data presented in a table format, or calendar year versus annualized returns.

Investment objectives, risk tolerance, liquidity needs, and behavioral preferences can all play a role in developing a financial plan and related investment strategy. By becoming familiar with these 10 common investor biases and using tools like the Stifel Financial ID, you may become better equipped to handle volatility and have a better overall investment journey.

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