Tricking Yourself – Staying Alert

Our feelings can betray us at times. We are, after all, only human. The problem is that these heuristics can cloud judgment. Instead of carefully weighing whether an investment fits your goals, emotions start calling the shots. Investors may anchor on past peaks, telling themselves an asset is still cheap compared to where it once traded. Or they may believe that a strong upward stock market run will keep going simply because it has. Prospect Theory, a cornerstone of behavioral finance, shows that we don’t always think in terms of absolute outcomes, but rather key in on gains and losses relative to a reference point. At market highs, that reference point shifts upward, and it feels like sitting out means falling behind.

Feeling the Pain – Loss Aversion

It may sting to feel that you may have missed the “big market run up.” Interestingly, the flipside of FOMO is far more emotionally painful. Behavioral research shows that losses can feel twice as painful as equivalent gains feel good. This can lead to loss aversion behavior – explaining why so many investors panic-sell during declines and why a market decline after buying at the top can feel devastating. Loss aversion also keeps investors holding on to losing positions in hopes of “getting back to even,” even when the fundamentals no longer justify it.

Discipline over Emotion

The takeaway is that while excitement in rising markets is normal, it’s rarely the best guide for long-term success. By recognizing how herd behavior, recency bias, anchoring, and loss aversion can influence our thinking, we can make more disciplined choices. A thoughtful plan helps you avoid chasing returns at the top or abandoning your strategy at the bottom. In investing, steady discipline usually beats emotional reaction.