5 behavioral biases to avoid while investing: Here's how they are negatively impacting your investments

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Even in calm markets, it doesn't take much to sway investors when it comes to buying or selling decisions. Even as they believe they are in control, they are swirled around by a plethora of emotions and prejudices. Expectedly then, any volatility, as is being witnessed in the Indian markets now, can send them into a tizzy of cognitive and emotional biases that can result in flawed decisions and financial losses 'Behavioural biases aren't flaws in intelligence, but shortcuts the brain uses to deal with uncertainty. During highstress moments, these shortcuts can lead to poor decisions,' affirms Dr Prerna Kohli, Clinical Psychologist & Founder, MindTribe.'This results in mistakes like panic selling, timing the market, over-leveraging, ignoring diversification and neglecting the fundamentals,' says Atul Shinghal, Founder and CEO, Scripbox.Though it's not easy to completely shrug off deep-seated cognitive biases , being aware of these and making a conscious effort to avert set responses can help mitigate their impact to a certain extent. 'Recognising your mental biases isn't weakness; it's the first step towards making calm, conscious financial choices,' says Kohli.Here are some biases that come into play during market volatility and the ways you can avoid them.Clinical psychologist Prerna Kohli explains how to navigate impulses during volatility.Are you anxious, overconfident, or reacting to regret? Labelling the emotion helps reduce its grip and gives time to think.Do not react instantly. Give yourself time before making financial decisions during volatile periods.When you feel thrown off by the market, go back to your original plan and use your financial goals as a compass.A financial adviser can help separate emotion from strategy and lend objectivity to decision-making.The term 'hot hand' is derived from basketball, where a shooter is considered more likely to score in the future if he has been successful in the past. First used in 1985 by behavioural scientists, Amos Tversky, Thomas Gilovich and Robert Vallone, this cognitive bias makes one predict future success based on previous performance.This bias makes people believe that just because a stock or asset has done well in the past, it will continue to do well in the future. 'This leads to chasing overvalued assets, buying at peaks, ignoring risks, and overtrading, especially when volatility amplifies short-term gains,' says Shinghal.Instead of relying on a small data set from the recent past, pick a bigger sample size because figures and statistics can change rapidly during volatility. Conduct your own research and analysis to predict future outcomes, and always stick to fundamentals instead of blindly chasing recent winners.This is the tendency to choose a larger variety of options while making a simultaneous decision, and lesser variety while making a separated, sequential decision. 'Psychologically, it stems from the need to feel 'covered' or 'safe' even if the actual risk isn't reduced,' says Kohli.This bias shows up especially during volatility when investors, in a hurry to reduce risk, pile up multiple investments intending to diversify their portfolios. So they may invest in multiple mutual funds, even though all of these have an exposure to the same universe of stocks. 'Overdiversification also prevents capitalising on high-conviction opportunities during volatile dips, as it spreads the capital too thinly,' says Shinghal.Analyse the risk-reward profile of each investment option instead of buying a large basket of seemingly diverse assets.This cognitive bias makes people believe that they knew more about the event after it occurs than they did before it happened. This makes them overestimate their ability to foresee future events and take wrong decisions based on flawed predictions.During volatility, people become anchored to a dip or correction and believe they can predict such a future event, often leading to incorrect estimates and wrong investing decisions. This could result in not selling during volatility or buying overvalued assets.Try not to be overconfident in your predictions during volatility and stick to long-term perspective when it comes to buying or selling decisions.This cognitive bias makes people take decisions on the basis of immediate or recent events, instead of taking a long-term view, distorting their perception and decision-taking ability.During volatility, this bias shows itself in panic-selling after temporary dips or avoiding the markets after a crash. 'A few days of market volatility can overshadow years of stable returns. This distorts risk perception and leads to impulsive shifts in strategy,' says Kohli.Stick to your financial goals and long-term strategy, instead of being swayed by short-term noise. 'Also study historical recoveries, like Sensex's post-2008 rebound, and stick to dollar-cost averaging to buy during volatility,' advises Shinghal.This bias makes the emotional impact of a loss more painful than the joy of a similar gain, forcing investors to stick to loss-making decisions just to avoid pain.During market dips, this pain can drive investors to sell too quickly, just to relieve anxiety. 'For instance, in 2023, during a volatile Adani Group stock crash (~30% drop), many Indian investors sold holdings like Adani Ports out of fear, missing a 20% rebound within months,' says Shinghal.Review your investments periodically with a long-term perspective and weed out underperformers in line with your financial goals.

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