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Avoiding Investment Bias: How to Make Smarter, More Objective Financial Decisions

  • Writer: Eloise Bell
    Eloise Bell
  • May 20
  • 3 min read

Have you ever stuck with a stock that was clearly underperforming, just because you “believed” in it? Or followed a hot trend just because everyone else was doing it? If so, you’re not alone. These are examples of investment bias, a common psychological trap that even experienced investors can fall into.


In today’s complex and fast-moving financial markets, staying objective is more important than ever. Let’s explore what investment bias is, how it can affect decision-making, and what steps investors can take to reduce its influence.




What is Investment Bias?.

Investment bias is a form of cognitive bias where decisions are influenced by emotions, personal beliefs, or social pressures rather than objective financial data. In other words, it’s when instinct or habit overrides analysis.

Bias can cloud judgment, distort risk assessment, and lead to suboptimal investment outcomes.



Common Types of Investment Bias.

Recognising bias is the first step to managing it. Common examples include:

  • Confirmation Bias – Favouring information that supports pre-existing beliefs.

  • Familiarity Bias – Focusing only on known industries or companies.

  • Herd Mentality – Following the crowd, especially during market volatility.

  • Overconfidence Bias – Overestimating one’s ability to make successful investment decisions.

  • Loss Aversion – Holding onto underperforming investments due to fear of crystallising a loss.



Why Investment Bias Matters.

Investment bias doesn’t just affect decision-making in the moment—it can influence portfolio construction, risk exposure, and long-term financial planning.


When decisions are based on feelings rather than facts, it may lead to:

  • Reduced diversification

  • Missed opportunities

  • Increased short-term reactivity

  • Potential underperformance


Behavioural finance studies suggest that emotional and biased investing can contribute to lower long-term investment outcomes.



How to Reduce Investment Bias.

While it's difficult to remove bias entirely, investors can take steps to reduce its impact:

  1. Create and follow a long-term plan based on individual goals and risk tolerance.

  2. Diversify across asset classes and sectors to avoid overexposure to familiar areas.

  3. Focus on evidence – Rely on research and verified data instead of news cycles or social trends.

  4. Review performance periodically – Evaluate past decisions for bias or emotion.

  5. Consider using a model portfolio service – These can support consistency and discipline.



The Role of Model Portfolios.

A model portfolio service, like those available through Clever. can support more disciplined investing by offering:

  • Structure – Based on a predefined investment strategy.

  • Diversification – Spread across different asset types to help manage risk.

  • Objectivity – Driven by research and systematic processes rather than personal preferences.

While model portfolios do not eliminate risk, they can reduce the likelihood of emotionally driven decisions and support a more consistent investment process.



Final Thoughts: Stay Objective, Stay Informed.

Everyone has biases; it’s a natural part of human behaviour. But successful investing involves recognising those biases and using tools and strategies to keep them in check.


Whether managing your own investments or advising others, focusing on long-term data, remaining diversified, and staying disciplined can help support better outcomes over time.


Investment bias can influence decisions and increase risk. By being aware of common behavioural pitfalls and using objective, research-based tools like model portfolios, investors can work towards building more resilient portfolios aligned with their financial goals.



Sources. 

  • Kahneman, D. (2011). Thinking, Fast and Slow. Farrar, Straus and Giroux.

  • Barber, B. M., & Odean, T. (2013). "The Behavior of Individual Investors." Handbook of the Economics of Finance.

  • Morningstar. “Why Behavioural Biases Matter in Investing.” Retrieved from morningstar.com/articles

  • Financial Conduct Authority. (2022). FG22/5 – Finalised Guidance for the Consumer Duty. Retrieved from fca.org.uk

  • Financial Conduct Authority. COBS 4 – Communicating with Clients, Including Financial Promotions. Retrieved from fca.org.uk

  • Behavioural Insights Team. Reports and research on financial decision-making. Retrieved from bi.team

  • Vanguard. “Putting a Value on Your Value: Quantifying Vanguard Advisor’s Alpha®.” Retrieved from advisors.vanguard.com


This article is for informational purposes only and does not constitute financial advice or a personal recommendation. Past performance is not a reliable indicator of future results. The value of investments can fall as well as rise, and you may not get back the full amount invested. Always seek independent financial advice if unsure about your investment decisions.

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