Why Smart People Still Make Dumb Investing Decisions
And what you can do to avoid the same mistakes
You’ve probably read the books.
You’ve seen the charts.
You know the math.
So why, when markets get rocky or investing hype takes over your social feeds, does it still feel so hard to make rational investing decisions?
A 2024 study on behavioral finance helps explain why—and what to do about it.
Published in the International Journal of Innovative Research in Technology, this paper pulls together decades of research to highlight the psychological traps that lead investors astray. Think of it as a guide of what not to do with your money—and a case for building better systems to protect yourself from, well, yourself.
What is behavioral finance, and why should you care?
Traditional investing models assume people are rational.
They assume you make decisions based on expected returns, risk profiles, and labour under the delusion that people think about their money in terms of clean mathematical optimization.
But in reality, most investors are driven by a mix of emotion, instinct, and flawed reasoning.
Behavioral finance recognizes that people don’t just weigh probabilities—they feel fear, chase trends, get overconfident, and anchor to bad information. And this isn’t just a theoretical concern.
These biases cost people real money.
The paper walks through the most common—and costly—behavioral biases in investing. Let’s take a look at the top offenders.
The 4 Most Dangerous Biases for Investors
Here’s a very brief overview of what the paper found to be four of the most impactful behavioral investment biases. For paid subscribers, I will link to a deep-dive article on each of these issues.
1. Anchoring
We tend to fixate on irrelevant numbers: the price we bought a stock at, last month’s peak, or an analyst’s target. Even when the world changes, we stay anchored to a number that’s lost its meaning.
Example: “I’ll sell once it gets back to $100.”
Why it’s dangerous: That number has nothing to do with the stock’s future value. It’s just a mental trap.
For paid subscribers, here’s a deep-dive on Anchoring:
2. Overconfidence
The research confirms what you’ve probably seen in yourself or others: most people think they’re above average at investing. (Which, of course, is statistically impossible.)
This leads to excessive trading, ignoring risk, and chasing hot picks without proper due diligence.
The study cites Barber & Odean (1999), who found that the most active traders earned the lowest net returns after fees.
Here’s a deep dive on why excessive trading hurts your returns:
3. Herd Behavior
When everyone’s buying, we want to buy. When everyone’s panicking, we want to sell. The paper points to this as one of the biggest drivers of bubbles and crashes.
It’s not just FOMO—it’s biological. Following the herd feels safer, even when it’s not smarter.
For paid subscribers, here’s a detailed breakdown of how mindlessly following financial trends can lead to terrible investment outcomes:
4. Loss Aversion
We hate losing money more than we like gaining it. In fact, losing feels about twice as painful as an equivalent gain feels good.
This is why we sell winners too early and hold onto losers too long, hoping they’ll bounce back. That’s called the disposition effect, and it wreaks havoc on portfolios.
More on the research behind loss aversion (and how to avoid it):
So what can you do about it?
First, the goal with behavioral baises is not to “fix” them (they are often a by product of being human) but to minimize the damage they do on your finances.
Here’s what the paper recommends—and what I agree with based on everything I’ve read in the past:
Make a plan before you invest
Decide your asset allocation, risk tolerance, and exit strategy before you buy.
That way, when emotions are high, you’re not reacting—you’re following a plan.
Use checklists or journaling to slow yourself down
When you’re about to buy or sell something, ask:
Why now?
What would change my mind?
Am I following a system or reacting emotionally?
You’d be surprised how many bad decisions dissolve under that kind of scrutiny.
Limit how often you check your portfolio
The paper reinforces what other studies have found: frequent monitoring = more stress = more bad decisions.
Check your investments quarterly, not daily.
Embrace boring
Funds with low fees, long track records, and diversified holdings are still your best bet.
The paper explicitly recommends investment funds with:
No or low load fees
Low expense ratios
Experienced managers
Strong long-term returns
Nothing flashy. Just reliable.
Remind yourself: you’re probably not the exception
If you think you’re the one investor who can time the market, pick the winners, and trade your way to riches—you’re probably wrong.
The most successful investors I’ve studied remove ego from the process.
They automate.
They diversify.
They ride out the noise.
Final thoughts: you’re not broken—your brain just wasn’t built for investing
Behavioral finance doesn’t make you a worse investor. It makes you a more aware investor.
Once you recognize how loss aversion, herd behavior, and overconfidence affect your decisions, you can start building a system that protects you from those instincts.
This is why smart people still make dumb investing decisions. But it’s also why you don’t have to.
Because financial success isn’t just about what you know—it’s about how you behave.
This article is for informational purposes only. It should not be considered Financial or Legal Advice. Not all information will be accurate. Consult a financial professional before making any significant financial decisions.