Behavioral Finance
Why do smart investors sell winners too early, double down on losers, and pile into the same crowded trade?
Behavioral finance answers that, and these explainers map the biases that do the damage: loss aversion, anchoring, prospect theory, herding, overconfidence, and the planning fallacy, plus quieter traps like hindsight bias and hyperbolic discounting.
Each one is tied to a concrete mistake at the trade or allocation level, then paired with the process rules that blunt it.
IWP Concepts treats these as patterns to recognize in yourself and in the market rather than a glossary to memorize.
It is the groundwork for understanding bubbles, panics, and the slow leaks that erode returns over a career.
Loss aversion is the finding that a loss feels roughly two to two-and-a-half times worse than an equivalent gain feels…
Confirmation bias is the tendency to seek, interpret, and remember information in ways that support what you already…
Recency bias is the tendency to weight recent events more heavily than their long-run statistics justify. In investing,…
Anchoring bias is the tendency to rely too heavily on the first number you see when making an estimate. In investing,…
The availability heuristic is a mental shortcut where people judge how likely something is by how easily examples come…
Herding is what happens when investors stop acting on their own information and start copying the crowd. It is not…
Prospect theory is the descriptive model of how real people choose between risky options. It replaces the idea that…
Overconfidence bias is the tendency to overestimate your own knowledge, judgement, and ability to predict outcomes. In…
The disposition effect is the well-documented pattern of selling winning positions too early and holding losing ones…
The sunk cost fallacy is the tendency to let unrecoverable past spending drive decisions about the future. In markets…
The framing effect is the tendency to reach different decisions about the same facts depending on how the facts are…
FOMO is the fear of missing out on a rewarding opportunity that others appear to be enjoying. In markets it shows up as…
The narrative fallacy is the human tendency to impose coherent stories on sequences of facts, even when the underlying…
Mental accounting is the set of unwritten rules people use to label, separate, and evaluate money based on its source…
Hindsight bias is the tendency, after an event, to believe you would have predicted it. It quietly corrupts how…
Regret aversion is the tendency to avoid decisions that could later feel like obvious mistakes, even when those…
The endowment effect is the tendency to value something more highly simply because you already own it. In an investing…
Status quo bias is the tendency to stick with the current choice even when a better option is available. For investors,…
The gambler's fallacy is the belief that a streak of one outcome makes the opposite outcome "due" next. For independent…
The hot hand fallacy is the belief that a recent run of successes makes more successes likely, because the actor is "on…
Self-serving bias is the habit of crediting your wins to skill and blaming your losses on factors outside your control.…
The illusion of control is the belief that you can influence outcomes that are, in fact, largely driven by chance. In…
The representativeness heuristic is a mental shortcut for judging probability by how similar something looks to a…
The affect heuristic is the shortcut where people judge risk and reward by how good or bad a prospect feels. In…
Cognitive dissonance is the uncomfortable tension of holding two beliefs that contradict each other, or a belief that…
Hindsight bias investing is the tendency to believe, after an event has happened, that you saw it coming all along. The…
Normalcy bias in markets is the tendency to assume that conditions will keep behaving the way they always have, even…
Optimism bias investing is the tendency to expect better outcomes for yourself than the base rate justifies,…
Pessimism bias investing is the tendency to overweight the chance and severity of bad outcomes, treating losses as more…
Present bias investing is the tendency to overvalue rewards available right now and undervalue rewards that arrive…
Hyperbolic discounting is the pattern where people apply a much steeper discount to rewards in the near term than to…
The planning fallacy is the tendency to underestimate how long a task will take and how much it will cost, even when…
The illusion of explanatory depth is the gap between how well you think you understand something and how well you can…
Naive realism investing is the conviction that you see the market objectively, exactly as it is, while people who…
The just-world hypothesis is the belief that the world is fundamentally fair, so people generally get what they…
The fundamental attribution error is the habit of explaining other people's results by their character while explaining…
The Dunning-Kruger effect investing trap is simple to state: the less you know about a market, the more likely you are…
The IKEA effect is the tendency to place a higher value on things you helped create. Build a desk yourself and you…
The sunk cost fallacy investing trap is holding a losing position because of money already spent, not because of what…
The narrative fallacy investing problem is the urge to fit random or complex events into a tidy story with clear…
The conjunction fallacy is judging a combination of two events as more likely than one of those events alone. The…
Base rate neglect is the habit of ignoring the underlying odds of an event and leaning too hard on specific, vivid…
Denominator neglect, also called ratio bias, is the tendency to focus on the top number of a ratio and underweight the…
Hedonic adaptation is the way people return to a stable level of happiness after good or bad events. Tied to wealth, it…
The peak-end rule says we judge a past experience mostly by its most intense moment and how it ended, not by the full…
The focusing illusion is the mental glitch that makes whatever you are paying attention to feel far more important than…
Choice overload is what happens when a wide menu of options stops feeling like freedom and starts feeling like a…
Decision fatigue is the deterioration in the quality of your choices after you have made many decisions in a row. For…
Ego depletion is the once-popular theory that willpower works like a muscle that tires with use, so resisting one…
Priming is the way an earlier cue quietly shapes how you react to whatever comes next, often without your awareness.…
The halo effect is the mental habit of letting one good quality spill over into your judgment of everything else. The…
The mere exposure effect is the tendency to like something more simply because you have seen it before. In investing it…
Social proof is the habit of deciding what to do by watching what other people do, especially when you are uncertain.…
Authority bias is the tendency to give greater weight to the opinion of a perceived expert or figure of status, often…
In-group bias is the tendency to favor people, and by extension things, that belong to your own group over those that…
Out-group homogeneity bias is the tendency to see members of a group you do not belong to as more alike than they…
Default bias is the tendency to accept whatever option is pre-selected for you rather than actively choosing. In…
The anchoring and adjustment heuristic is the mental shortcut where you start from an initial value and then adjust to…
Commitment and consistency bias is the drive to act in line with what you have already said or done, even when new…
Reciprocity bias is the strong urge to return a favor, gift, or concession, even when doing so is not in your interest.…
Scarcity bias is the tendency to value something more simply because it is limited, rare, or running out. In investing…
The bandwagon effect is the tendency to adopt a belief or action because many other people already have. In investing…
The illusion of validity is the unwarranted confidence you feel in a prediction when the available facts fit together…
Outcome bias investing is the habit of judging a decision by how it turned out rather than by whether it was sound when…
Selection bias investing is the error of drawing conclusions from a sample that does not represent the full population…
Confirmation bias investing is the tendency to seek, favor, and remember information that supports what you already…
An availability cascade is a self-reinforcing process in which a belief gains plausibility simply because it keeps…
Recency and betting on form describe the pull to back whatever has been winning lately, assuming the recent run will…
The gambler's fallacy is the mistaken belief that a run of one outcome makes the opposite outcome more likely on the…
The hot-hand fallacy is the belief that a person on a winning streak has a temporarily raised chance of success, so the…
The representativeness heuristic is the mental shortcut of judging how likely something is by how closely it resembles…
The affect heuristic is the mental shortcut where your gut feeling about something, good or bad, drives how risky and…
Emotional contagion in markets is the way fear, greed, and excitement jump from one investor to the next until a mood…
Mood effects on trading describe how a passing emotional state, cheerful or gloomy, can tilt the risk you take and the…
Research on weather effects on stock returns asks a strange question with a real answer: does the weather outside a…
The seasonal affective effect, often discussed as the seasonal affective disorder markets SAD pattern, links the…
Self-attribution bias is the habit of crediting your wins to your own skill while blaming your losses on bad luck or…
The better-than-average effect is the tendency for most people to rate their own skill above the median, even though by…
Illusory superiority in investing is the conviction that your judgment, information, or discipline beats that of other…
System 1 vs System 2 is the framework Daniel Kahneman used to describe two ways the mind processes information: a fast,…
An information cascade happens when people stop relying on their own information and instead copy the actions of those…
Ambiguity aversion is the preference for risks with known odds over risks with unknown odds, even when the two offer…
Stationarity bias in backtesting is the mistake of assuming a market's statistical properties, its average return,…
Overconfidence calibration is the question of whether your stated confidence matches how often you are actually right.…
The hard-easy effect is a calibration error in which people become overconfident on difficult tasks and underconfident…