Understanding Investing Biases and How to Counter Them

Last updated: July 2025

If you’re like us, you likely think of yourself as a rational decision-maker because most of the time your decisions are based on careful thought. You weigh out the pros and cons, consider the facts and take time to reflect. But our minds aren’t as objective as they seem. Sometimes we focus on what feels familiar, overthink and might not notice when emotions sneak into the equation.

The same can go for how we handle investments. Novice investor or professional, we all have biases. Learn more about how these might come into play, and how you can prevent them from impacting your decisions.

Cognitive Biases

Anchoring Bias: How tall is Mount Everest? Not sure? If we threw out a number — say 8,000 metres — as an "anchor," your answer is likely to be near it. (Correct answer is 8,848 metres, but it's said to be shrinking!) With anchoring, we tend to rely too heavily on that first piece of information given to us as a reference point. It's like investing in a company only because its shares have fallen from a 52-week high without considering any other fundamentals.

How to Counter It: Consider taking time to reflect on your choices and consider other perspectives — i.e. alternate reference points.

Overconfidence: Ever read a tip about a company and then convince yourself that you've got more, or better, information than another investor? Or maybe you've chalked up a recent successful investment to your "magic touch." That could be overconfidence at play. It can lead to over-trading, riskier investment choices and less diversification.

How to Counter It: It can be helpful to remind yourself that you can't know everything when it comes to how an investment may perform. It can be tempting, but it’s usually helpful to avoid over-checking your portfolio and be cautious of getting emotionally attached to an investment. Instead, you could start with an asset mix that's right for your investment goals and time horizon, and keep in mind that an occasional portfolio rebalance can keep your asset allocation in line.

Confirmation Bias: When this bias is in play, we tend to look for information to confirm our initial impressions, even if there's more or more reliable information to the contrary. For example, if we really believe in a company and they release some less-than-stellar news, we can still convince ourselves that the investment was a good decision.

How to Counter It: Exposing yourself to other points of view and arming yourself with additional facts can help you see many sides of a situation.

Mental Accounting: Congratulations, you won the lottery! Now you can buy that yacht. Sometimes we categorize money based on how it comes to us. We might treat employment income differently than what we might call windfall money — which we tend to use for splurges. But really, it's all money!

How to Counter It: A financial plan built around your goals can help steer you away from impulse purchases and help keep your savings on track.

Recency Bias: When an investment has a great quarter, or conversely, a bad one, we might over-emphasize that fact since it's fresh in our mind, which could lead us to place a bigger emphasis on risk or capital preservation.

How to Counter It: It can be helpful to check an investment's performance over a longer period of time to get a stronger historical picture. One great quarter could have been an outlier in an otherwise lackluster couple of years.

Emotional Biases

Endowment: Love that new car? Will you (n)ever own another make? The endowment effect means we overvalue what we already own. That sometimes leads to holding certain investments longer than we should.

How to Counter It: Try not to become too attached to your investments. Assessing similar investments can give you an objective view of their true value.

Loss Aversion: The emotional pain we feel from a loss tends to outweigh how good we feel from an equal gain. This might cause you to try to sidestep loss at all costs; instead of cutting your losses on what's no longer working for you, you might hang on.

How to Counter It: Understanding your investment goals and what you need to get there can help. It could also be useful to objectively review the situation and evaluate if it’s time to cut your losses and move on. Loss and change are often necessary to make way for new opportunities. You could also consider if there’s an opportunity for tax-loss selling.

Optimism: What goes up, can also go down. Those of us who are overly optimistic believe our results will be above average and that bad things only happen to others. This can prevent us from taking measures to control risk and minimize losses.

How to Counter It: Upbeat is great, but it's okay to take a moment to think about what the impact of a loss would be. Remember, risk management and investment planning go hand-in-hand.

*With files from Rita Silvan