Understanding the Top Four Biases in Behavioral Finance and Their Impact in 2025

Behavioral finance explores how psychological factors influence investors' decisions, often leading to systematic biases that can impact financial outcomes. Recognizing these biases is crucial for making informed investment choices. Overconfidence Bias Overconfidence bias refers to an investor's inflated belief in their own judgment and abilities. This can lead to underestimating risks and overestimating potential returns. For instance, an investor might believe they can consistently outperform the market based on personal insights, disregarding broader market indicators. Loss Aversion Bias Loss aversion bias is the tendency to prefer avoiding losses over acquiring equivalent gains. Investors influenced by this bias might hold onto losing investments too long, hoping to break even, or avoid potential opportunities due to fear of loss. This behavior can result in missed gains and suboptimal portfolio performance. Herding Bias Herding bias occurs when investors follow the ac...