By: Ryan Gavin, CFA
Portfolio Manager
Investing decisions are rarely undone by lack of information. More often, they’re shaped by subtle psychological biases that influence our interpretation of that information. These biases don’t disappear with experience or intelligence; even disciplined investors are susceptible to them. Understanding where judgment can quietly go wrong is an important step toward making better, more consistent decisions.
Sunk cost fallacy
The sunk cost fallacy is the tendency to let past, unrecoverable costs influence current decisions.
For example, you buy a concert ticket weeks in advance. On the day of the show, you feel sick and the weather is terrible. Even though staying home would clearly be better, you go anyway because you already paid for the ticket. However, the money is gone either way. The decision should be based only on whether going now is worth it, not on what you paid in the past.
The same logic applies to investing. Suppose an investor buys a stock at $100. It falls to $60 and the fundamentals deteriorate. Instead of asking whether the stock is a good investment today, the investor holds on or even buys more because they “don’t want to lock in the loss” and hope it gets back to $100. The mistake is treating the original purchase price as relevant even though it has no bearing on future returns.
One way to counter this bias is to reframe the decision. Imagine you don’t own the stock and have $60 in cash. Would you use that $60 to buy it? If not, you should sell. Choosing to hold the stock is economically equivalent to choosing to buy it at today’s price.
Outcome bias
Outcome bias is the tendency to judge a decision based on its result rather than on the quality of the decision-making process. A good decision can lead to a bad outcome, and a bad decision can sometimes produce a good one. When that happens, people often draw the wrong conclusion.
Imagine two investors. One builds a diversified portfolio based on long-term evidence and reasonable assumptions, but the portfolio underperforms in a given year. The other makes a concentrated, speculative bet that happens to pay off. Looking only at outcomes, the second investor appears smarter, even though the decision involved far more risk and relied heavily on luck.
Markets are noisy. Outcomes are shaped by randomness, timing, and events no one can predict. Judging decisions solely by short-term results encourages excessive risk-taking and undermines disciplined strategies.
A better approach is to evaluate decisions based on the information available at the time and the soundness of the process. In the long run, a good process matters more than any single outcome.
Anchoring
Anchoring is the tendency to rely too heavily on an initial reference point when making judgments. In investing, the most common anchor is the price at which an asset was purchased. Once established, that price often influences decisions even though it has no bearing on future returns.
The issue is allowing a past price to guide a forward-looking choice. Instead of asking whether the investment makes sense today, investors focus on how far the price has moved from its starting point.
Anchoring distorts judgment by diverting attention from what matters now.
Overconfidence
Overconfidence is the tendency to overestimate one’s ability to predict outcomes or identify opportunities. It often manifests as a belief that skill can overcome uncertainty. Investors may assume they can time market turns, identify mispriced securities, or know when to deviate from a long-term plan. Periods of strong performance, especially early success, can reinforce that belief, even when luck played a significant role. Overconfidence causes investors to treat uncertain outcomes as if they were predictable. This mindset often leads to concentrated positions, excessive trading, and unnecessary complexity. These actions feel decisive, but they usually increase risk without improving the odds of success.
The risk is not confidence itself but misplaced confidence. Markets reward sound decision-making over time, not certainty in any one forecast.
