Cognitive & Emotional Investing Biases
Emotional Biases in Investing: What Carl Jung Would Have Told You About Your Portfolio
Love him or hate him, Carl Jung’s influence on psychology and philosophy is deeply woven into modern thought. His work casts a shadow over how we understand ourselves — quite literally, as Jung often used the metaphors of “mirrors” and “shadows” to explore the subconscious.
If Jung were reading this, he might say the choice of those words wasn’t an accident. According to him, subconscious influences shape how we think, speak, and act — often without us realizing it. He famously said, “Until you make the unconscious conscious, it will direct your life and you will call it fate.”
In other words: ignorance isn't bliss — it’s costly.
Nowhere is this more financially true than in investing. Turns out, the very biases we don’t even know we have can drag down our returns. Let’s explore what the research says — and how to recognize these sneaky patterns in ourselves.
What the Data Says
The research firm Dalbar has long studied investor behavior. One of their core findings is this: retail investors underperform the market — consistently.
Earlier this year, for example, it was reported that the average retail investor was underperforming the S&P 500 by 11%. Why?
Because many investors are doing the opposite of what logic would suggest: buying high and selling low.
That behavior has less to do with strategy and more to do with the emotional and cognitive biases operating just under the surface.
Emotional Biases
These types of biases are rooted in feelings — fear, pride, anger — and they often override data or long-term planning.
Loss-Aversion Bias
Fear of losing money causes an investor to sell too quickly, even when a short-term dip is likely to recover. Long-term returns suffer because of premature exits.
Overconfidence Bias
Investors who believe they “know the market” or have insider-like knowledge — especially in industries they work in — may overestimate their ability to predict outcomes. They credit success to skill and dismiss failure as bad luck.
Endowment Bias
This bias leads investors to assign more value to stocks they already own. As a result, they hold onto underperformers instead of reallocating to better opportunities.
Disposition Effect
Investors under this bias:
Sell winning stocks too early to “lock in gains.”
Hold onto losing stocks too long, hoping for a rebound that may never come.
Cognitive Biases
If you’re telling yourself, “I’m not emotional — I make rational decisions,” you might be falling for these logic-based mental traps.
Confirmation Bias
This happens when investors seek out only information that agrees with their views — ignoring red flags or contradictory data.
Gambler’s Fallacy (Recency Bias)
A stock’s recent surge leads investors to assume the trend will continue. But just because it’s gone up three days in a row doesn’t mean it will tomorrow.
Status Quo Bias
Reluctance to change can cause investors to stick with outdated strategies or unbalanced portfolios, even when adjustments are clearly needed.
Home Market Bias
Some investors only trust their local or national market, ignoring international opportunities that could offer better diversification or returns.
Risk-Averse Bias
Too much focus on negative outcomes leads investors to avoid even well-researched opportunities. Playing it overly safe often means missing out on growth.
Bandwagon Effect
Rather than conducting research, investors simply follow the crowd. If “everyone’s buying,” they buy too — often too late.
What This Means for You
Psychologists like Jung — and yes, even Dr. Phil — have pointed out that what irritates us in others often reflects something in ourselves. So if you found yourself scoffing or cringing at any of the biases above… you might be guilty of them.
But that’s not a bad thing. The first step in fixing a bias is spotting it.
NEST Keeps It Data-Driven
We say it all the time: at NEST, we don’t rely on emotions or notions. We rely on data.
Our portfolios are updated daily, based on insights from top-tier research firms, combined with in-house analysis. This process is active, multi-faceted, and bias-resistant — built to help you make smart decisions with confidence.
📩 Want to build an investment strategy without the baggage? Reach out at info@nestfinancial.net.
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DISCLAIMER: The information and opinions shared in this article are for educational purposes only and are not financial planning or investment advice. For guidance tailored to your goals, contact us at info@nestfinancial.net.