Behavioural bias when investing
- 28 May 2025 (3 min read)
Behavioural biases are unconscious beliefs or thoughts that can influence our decisions, sometimes with negative consequences. Without proper care they can affect even the most prudent investors, and they are more likely to appear during times of stress or uncertainty. Here we highlight five of the most common biases and show you how we manage behavioural bias at AXA IM.
Loss aversion
Loss aversion is a tendency to avoid losses, even if it means missing out on gains. It stems from the idea that humans reportedly experience the pain of a loss twice as intensely as the pleasure of an equivalent gain. A great example is pulling all of your money out of the stock market after a big drop, locking in losses and potentially missing out on a subsequent recovery.
Confirmation bias
This involves focusing only on information that confirms your beliefs and ignoring any new data that might challenge them. If you feel positive about an industry, you might decide to invest after a good run of stock market performance, while overlooking poor earnings growth or upcoming regulatory challenges.
Recency bias
Recency bias encourages short-term thinking. It causes people to place undue importance on recent events, usually while overlooking what happened further in the past. They may also take recent events as an indicator of what is yet to come. For investors, this could mean taking on too much investment risk during a rising market or selling investments after a period of volatility.
Endowment bias
This is the belief that what we own is more valuable than what we do not. Once an object or investment becomes our property, letting go of it can feel like a loss - even if there is a better alternative available. This can cause investors to hold on to an investment even when it might be better to sell it.
Bandwagon effect
The bandwagon effect involves following the crowd, rather than making your own judgments. In other words, you are ‘jumping on the bandwagon’. It can be especially common during times of uncertainty or when people are faced with a difficult decision. The bandwagon effect might lead investors to impulse-buy a rising investment after it’s received a lot of positive news coverage, or perhaps to sell an investment after a friend or relative has sold theirs.
What we do at AXA IM
At AXA IM we have a robust, consistent investment process that helps us to avoid falling prey to behavioural biases.
- We strive to make objective decisions based on evidence, and only after considering any counter-arguments
- We have a diverse team of analysts, each specialising in different areas. They conduct regular group discussions and are encouraged to challenge each other on their opinions
- We continually monitor the global economy, stock markets and our underlying investments. We aren’t afraid to make changes if new information presents itself
- We have consistent processes for reviewing securities and sectors, so we can’t focus solely on information that supports a particular view
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