June 2, 2026
These tips can help keep your decision-making aligned with your financial goals.
Key takeaways
- Inherent biases can cause us to make financial decisions that aren't in our best interest.
- Overconfidence, recent trends and the influence of other investors can all steer you away from your financial goals.
- Focusing on the big picture and taking a long-term view of investing can help you avoid making emotional decisions.
We're all subject to inherent biases that can lead us to take too many or too few risks or join the crowd — even when we're not sure where it's headed. "As investors, these biases may prompt us to make decisions that don't align with our long-term goals," says Anil Suri, head of Asset Allocation and Portfolio Construction for the Chief Investment Office, Merrill and Bank of America Private Bank. "These biases may be so ingrained that we don't even realize when they're leading us astray."
To avoid falling into these traps, the first step is to recognize some common biases, including these five, and then build safeguards to protect yourself.
1. Overconfidence
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1. Overconfidence
Something (or someone) tells you that a company is about to take off, so you invest expecting a big return. "That could happen, but even 'sure things' can go wrong," Suri warns. Hidden weaknesses or shifting consumer tastes could devalue the company and jeopardize your own goals, like saving for the down payment on a home or for a child's education. "Confidence drives success in life," he adds, "but overconfidence — thinking you know more or have more control than you do — poses serious risks."
1. Overconfidence
Avoiding the trap
Build (and stick to) a long-term strategy. "It's hard to resist a hunch or feeling in the heat of the moment," Suri notes. Take some time to consider your personal goals. Then commit to steadily investing in a balanced portfolio. "
Diversification is the best way to protect against volatility and stay on course," Suri adds.
1. Overconfidence
Tip
If you want to invest based on a hunch or take a chance on a company, put some "fun money" aside to tap into. This way, you won't put your long-term goals at risk.
2. Overreacting to short-term losses
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2. Overreacting to short-term losses
"Markets move up and down. That's part of investing," Suri says. But fear over short-term losses, known as "myopic loss aversion," could lead you to sell at inopportune times, wait for the perfect moment to invest or avoid investing altogether. Selling when markets drop could mean you miss out when they rise and pay more to buy back in. And while
staying in cash may feel reassuring, it can't provide the long-term growth you need.
2. Overreacting to short-term losses
Avoiding the trap
Focus on your time frame. "If a specific goal you're investing for is years away, you have plenty of time to recover," Suri says. "Downturns may even create opportunities to add to your investments when prices are lower." But if your goal is approaching and you'll need that money soon, it's important to
reassess your investment mix to be sure you're not taking on more risk than you can afford. "Knowing your time frame can help you stay invested and avoid overreacting."
2. Overreacting to short-term losses
Tip
As the time frame for when you'll need your money shortens, consider shifting to a more conservative mix of stocks and bonds.
3. Recency bias
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3. Recency bias
"We tend to assume that current trends, whether it's your favorite team's winning streak or positive market conditions, will simply keep going," Suri says. This tendency, known as "recency bias," may feed directly into other biases, such as overconfidence that a bull market will last forever or outsized concerns over temporary market volatility.
3. Recency bias
Avoiding the trap
Take a long-term view. "Historical perspective offers the best protection against recency bias," Suri says. Look at market results over several years to remind yourself that ups and downs are a natural part of investing.
3. Recency bias
Tip
"If you work with an advisor, remember they bring broad experience from many market environments to the table and an objective point of view," Suri says. "Periodic conversations can help you temper emotional reactions and maintain a more balanced investing perspective."
4. Herd mentality
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4. Herd mentality
There's natural comfort in being "part of the crowd" when making decisions. Yet crowds can be wrong, especially when euphoria or fear enter the equation. The "everybody" that's doing something could just be a relatively few people making a lot of noise, Suri cautions. And whether the crowd is right or wrong about a specific investment, it may not be a good fit for your long-term approach.
4. Herd mentality
Avoiding the trap
Stay focused on your personal goals. Keep in mind that your personal goals aren't the same as everyone else's, so their investment approach may not align with yours. "Stay focused on your goals and review them at regular intervals," Suri suggests. This can help ensure you stay invested in a way that supports your own needs.
4. Herd mentality
Tip
Taking time to research an investment can help you decide if it's right for you — not just popular with others. When you do, seek out contradictory views so your research doesn't simply confirm what everyone else is saying.
5. Thinking (and acting) too fast
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5. Thinking (and acting) too fast
"In some situations, such as avoiding danger, split-second decisions can be essential for survival," Suri notes. "For investors, those 'gut feelings' may lead you astray." While technology has made instant trading easier than ever, studies show that investors who take their time and consider decisions from different angles fare better than those who respond suddenly to headlines or tips, he adds.
5. Thinking (and acting) too fast
Avoiding the trap
Hit your "pause button" before investing. "Establish a firm policy of taking time to make investment decisions, even (or especially) for opportunities that seem irresistible or when volatility seems to demand selling right away," Suri advises. "While it's possible to miss out on an occasional opportunity, having a mental pause button is much likelier to help you avoid mistakes from emotional decisions."
5. Thinking (and acting) too fast
Tip
Before you make a quick decision to sell an investment, pause to consider all the potential consequences, including the
possible tax implications, which may affect what you ultimately keep — not just what you earn.