If you want to save intelligently and accumulate assets, you need to keep an eye on more than numbers. Behavioural finance studies show: these ten psychological distortions often influence our financial decisions for the worse.
1. Overconfidence bias
If investors consider themselves wiser than they are
Many investors overestimate their own abilities. They believe they are smarter than the market and can generate above-average returns thanks to their “golden touch”. A typical example: a private investor regularly sells fund units to invest in supposedly better stocks because he believes he can accurately predict every market development. In the end, however, transaction costs and poor decisions eat up his profits. Studies by Barber & Odean show that overconfidence leads to excessive trading and thus to poorer returns.
Tip: Choose long-term strategies, broadly diversify the portfolio and base decisions on verifiable data rather than intuition.
2. Herd instinct (social proof)
Everyone’s doing it, so I will too
The opposite of overestimation is the herd instinct. Instead of relying on your own analyses, you invest in certain securities or assets because “everyone’s doing it”. Research shows that this behaviour can lead to speculative bubbles or panic sales with enormous losses. Recent examples include the dotcom bubble around the turn of the millennium, crypto hypes or meme stocks (stocks whose prices are driven by social media hype rather than fundamentals).
Tip: Learn thoroughly about fundamentals before investing, and don’t follow the majority or (social media) trends. If you have any questions or uncertainties, expert advice can help you make informed decisions.
3. Home market trap (home bias)
A preference for your own country costs returns
People often prefer to invest their money where they know their way around – i.e. in their own country. The Swiss prefer the SMI, the Germans prefer the DAX, and the Americans prefer the S&P 500. However, if you invest around 90% of your portfolio in domestic equities and funds, you often miss out on growth and attractive opportunities at the global level. Research, for example by French&Poterba, shows: the home bias restricts diversification and thus reduces returns over the long term.
Tip: Diversify the portfolio globally in order to reduce risks and increase opportunities for attractive returns. Cover not only different countries, but also different industries.
4. Loss aversion
Losses outweigh profits
Many people tend to avoid losses at all costs – often at the expense of higher profits. The explanation for this is provided by the prospect theory of Kahnemann & Tversky: The pain of losing money is felt at least twice as intensely as the joy of winning the same amount. This fear of loss has a massive impact on investment behaviour: some people avoid investing their money altogether, others hold on to loss positions for too long just to avoid realising the losses. And yet others sell winning shares too early for fear of losing the gains they have already made. As a result, potential returns are often unconsciously reduced.
Tip: Be critical but act prudently. Plan for fluctuations, think long term and make emotion-free decisions.
5. Recency bias
Forgetting the past, overestimating the present
Recency bias describes the human tendency to attach more importance to recent events than to events that occurred longer ago. According to behavioural finance research, this short-term thinking leads to investors overestimating risks and overlooking opportunities that only become apparent over longer periods of time. Well-known examples of this are the 2008 financial crisis and the Covid crash in 2020; many private investors panicked and sold their equities without drawing conclusions from past stock market fluctuations. Only a few weeks later, the market began to recover.
Tip: Look at data over years, not weeks or months. Regular, structured portfolio reviews also prevent short-term fluctuations from dominating the decision-making process.
6. Anchoring
The first impression remains
When making decisions, however, people are not only guided by current events (recency bias), but often also by previous reference values – this is precisely what the anchoring effect describes. According to Tversky & Kahneman, such “anchors” can strongly distort our perception and judgements. When investing, this is often reflected in the fixation on the original purchase price of an equity: for example, if the price of a share falls from EUR 200 to EUR 150, many investors find it “favourable” and buy more, even if the fundamentals have deteriorated. On the other hand, if the price rises to EUR 220, investors are reluctant to invest or even sell because the original price of EUR 200 is still perceived as “fair” value, although the company could objectively be worth more today.
Tip: Don’t rely on historical prices presented to you. Always look for the latest facts and data before making a decision.
7. Confirmation bias
We see what we want to see
People love to be right. This is where confirmation bias comes in. It describes the tendency to look more for information to confirm one’s own decision, while other information tends to be shut out. For example, investors often only read reports that support their opinion and overlook warning signs. Studies show that this confirmation bias leads to miscalculations and risky investments.
Tip: Also consciously consider counterarguments, consult several sources and question them critically.
8. Mental accounting
The trick of the pots in your mind
People tend to treat money differently depending on its origin or purpose. This tendency to divide money into different pots in your head is known as “mental accounting”. Richard Thaler showed that this thinking often leads to irrational financial decisions. A classic case: an unexpected windfall, such as a tax refund, is often seen as a bonus and spent quickly instead of paying off debts or providing for old age. The illusion of saving is just as common: those who regularly transfer money to a savings account while at the same time allowing high spending on impulse purchases on the payment account undermine the effect of saving. The money is not considered as a whole, but artificially separated – often with expensive consequences.
Tip: Money is money – no matter where it comes from. Treat all income as a whole budget and avoid artificial “pots”. This creates clarity and helps to make financial decisions more rational.
9. Procrastination
He who waits, loses
Procrastination describes the tendency to postpone unpleasant or complex decisions – even if this has negative consequences. Studies show that procrastination is directly linked to poor saving and investing behaviour: Those who postpone financial decisions save less, invest less often and experience financial difficulties more often. The impact on retirement provisions is particularly serious. Although many people realise that they should start as early as possible, they postpone concluding a savings plan and thus miss out on the decisive compounding effect.
Tip: Start small – but start now. Set up automatic savings and investment plans so that decisions can’t be postponed all the time.
10. Optimism bias
The blind confidence trap
Optimism can be a strong motivator when saving and investing: those who believe in a positive financial future are more likely to start saving early and save regularly. However, excessive optimism distorts the perception of risk. Tali Sharot has shown that people often underestimate risks such as losing their job, illness or market downturns. They put too little money aside or ignore potential losses – with the result that their portfolio becomes unstable in the long term.
Tip: Plan emergency cash, calculate your savings rate realistically and take possible risks into account objectively, regardless of your confidence.
What is behavioural finance?
Behavioural finance investigates how human behaviour and psychology influence financial decisions. Unlike classical financial theory, which assumes that people always act rationally, behavioural finance shows that emotions, habits, and mistakes in thinking often lead to irrational decisions. The aim of behavioural finance is to understand such behavioural patterns and to make smarter financial decisions.
