6 Cognitive Biases That Lose Money

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Dear Investor,

Charlie Munger, one of the greatest investors to ever do it, left behind a simple but powerful investing quote:

Munger spent much of his life studying cognitive biases—mental shortcuts we use to make decisions faster. They helped humans survive in the wild, but they’re a problem when it comes to investing.

These biases can cause even experienced investors to make bad decisions like:

• Holding onto a stock that’s clearly losing value, hoping it will bounce back

• Chasing trends without doing any real research

• Ignoring risks because it’s more comfortable to believe you’re right

The scary part? Most of us don’t even realize we’re doing it.

Every investor likes to think they’re making decisions based on logic and facts. But in reality, investing is a psychological game. You might be great at analyzing numbers, but if you can’t recognize when your brain is working against you, you’ll make mistakes.

Think about it: How many times have you convinced yourself to hold a stock because it once traded higher? Or bought into a company just because it seemed like everyone else was doing the same?

These decisions don’t come from analysis. They come from biases.

So today, I want to walk you through seven of the most common cognitive biases that investors fall for. Each one will include a real-world stock market example and, more importantly, how you can avoid making the same mistakes.

Let’s get into it.

Herd Mentality (FOMO)

Let’s start with one of the easiest traps to fall into — herd mentality.

This happens when investors buy a stock simply because everyone else is buying it. We see the crowd piling into a trade, and our brains go straight to, They must know something I don’t. Nobody wants to feel left behind while everyone else is making money.

But in reality? By the time everyone is talking about a stock, it’s probably too late.

Look at Rivian (RIVN) as an example.

When Rivian went public in late 2021, it had massive hype. It was the next big electric vehicle (EV) company, and investors couldn’t get enough of it. Everyone wanted to buy into what they thought would be the next Tesla.

The result? Rivian’s stock skyrocketed to nearly $150 a share.

There was just one problem. Rivian hadn’t delivered a single car to customers. It was all hype.

When the dust settled, reality kicked in. As of 2025, Rivian is trading around $14 a share.

The investors who bought in during the IPO rush weren’t making decisions based on fundamentals. They were chasing the crowd. And they paid for it.

How to Avoid Herd Mentality:
Before you buy any stock, ask yourself:

1. Would I still buy this if nobody else was talking about it?

2. Do I actually understand how this business makes money?

Following the crowd might feel good in the moment. But in investing, the crowd is usually wrong.

Anchoring Bias

Anchoring happens when investors fixate on a specific number — usually a past stock price — and let that number influence their decisions. It feels logical to think, If a stock was once worth that much, it will get back there.

But in investing, the past price doesn’t always matter.

Let’s talk about Zoom (ZM).

In 2020, Zoom became the poster child of pandemic stocks. The company’s growth exploded as businesses shifted to remote work and virtual meetings became the norm. The stock soared to $559 a share in late 2020.

But fast forward to today, and Zoom is trading around $79 a share.

So what happened?

Zoom’s business is still solid, but growth has slowed as the world has returned to in-person work. The pandemic boom created a short-term spike in demand that wasn’t sustainable.

Many investors who bought Zoom near its peak couldn’t let go of that $559 anchor. They thought, If it was once worth that, it’ll get back there.

But here’s the hard truth:
Just because a stock hit a certain price in the past doesn’t mean it will again. The market constantly reassesses what a company is worth based on the present and future, not the past.

How to Avoid Anchoring Bias:
Ask yourself these two questions before holding onto a stock based on its past price:

1. What is this business realistically worth today?

2. Would I buy it at this price if I didn’t already own it?

Holding onto an anchor will keep you stuck in the past, but investing is all about looking forward.

Confirmation Bias

This one gets all of us — even the pros. Confirmation bias is when you only pay attention to information that supports what you already believe, while ignoring anything that challenges your viewpoint.

As investors, it feels good to find evidence that backs up our thesis. It makes us more confident in our decisions. But the risk is that we close ourselves off to facts that don’t fit our narrative.

Now, I’ll say this upfront: I’m a Bitcoin bull.

I believe in the long-term potential of Bitcoin and the role it can play as an alternative asset. But even I have to keep my confirmation bias in check. It’s easy to fall into a trap where you only listen to the bullish arguments — Bitcoin to $500K, Bitcoin replacing fiat currency, etc.

But what about the risks?

During the 2022 crypto crash, a lot of Bitcoin investors got hit hard because they ignored the bearish arguments. They weren’t prepared for what would happen if interest rates rose, liquidity dried up, or governments started tightening regulations.

Here’s the thing: the bears aren’t always wrong. In fact, you should make it a habit to figure out why people are bearish on a stock or asset. What risks are they seeing that you’re missing? What if they’re right?

It’s uncomfortable to poke holes in your own thesis. But if you’re not willing to challenge your beliefs, you’re setting yourself up for surprises — and not the good kind.

How to Avoid Confirmation Bias:
It’s simple:

1. Actively seek out opposing viewpoints. If you’re bullish on a stock or asset, go find the best bearish argument you can.

2. Ask yourself: If I didn’t already believe this, would I still invest?

Investing isn’t about being right. It’s about making informed decisions. That means embracing the uncomfortable process of challenging your own beliefs.

Endowment Effect

The endowment effect is when investors overvalue something just because they own it.

It’s a psychological bias that causes people to believe their investments are worth more than they really are — simply because they’re emotionally attached. You’ve probably heard someone say, I’m not selling this stock because it’s my best idea, even when all signs point to it being a bad investment.

The reality? The market doesn’t care if you’re emotionally attached to a stock.

A great example of this is Virgin Galactic (SPCE).

When Virgin Galactic went public in 2019, it quickly became one of the hottest space stocks. It had the Richard Branson brand behind it, and retail investors were excited about the future of space tourism.

The stock hit $55 a share in early 2021, and a lot of investors fell in love with the idea of owning a company that could revolutionize space travel. But since then, the company has struggled to meet its goals, faced delays, and burned through cash.

Today, Virgin Galactic is trading around $6 a share.

Many investors have held onto it because they’re emotionally attached. They think, I’ve already lost so much. What’s the point of selling now? That’s the endowment effect at work — refusing to let go because it’s hard to accept a loss.

But here’s the hard truth: Your portfolio is not a family heirloom. It’s a business. If an investment isn’t performing or the thesis has changed, you need to treat it like a business decision and move on.

How to Avoid the Endowment Effect:

1. Ask yourself: Would I buy this stock today at its current price? If the answer is no, it’s probably time to sell.

2. Keep emotions out of your portfolio. Stocks don’t love you back. Treat your portfolio like a business, not a collection of your favorite ideas.

The best investors know when to cut their losses. Getting emotionally attached to a stock can cost you more than you realize.

Recency Bias

Recency bias is when investors put too much weight on recent events and assume they’ll continue indefinitely. It’s why people tend to think whatever is happening right now will keep happening.

When markets are going up, it feels like they’ll never go down. And when markets are crashing, it feels like they’ll never recover. This bias causes investors to chase trends or panic-sell, depending on what’s happening at the moment.

Let’s talk about tech stocks during the 2020 boom.

After the COVID crash in early 2020, tech stocks took off. The Nasdaq surged more than 100% between March 2020 and November 2021. Companies like Zoom, Shopify, and Tesla hit insane valuations.

Many investors assumed this was the new normal. They thought, Tech stocks always go up. Remote work is here to stay. E-commerce will keep growing forever.

Then 2022 hit.

Interest rates went up, inflation spiked, and growth stocks took a beating. Companies that had been market darlings dropped 50%, 60%, or even 70% from their highs.

And we’re seeing it again right now with quantum stocks.

When Google announced its latest quantum computing breakthrough, quantum-related stocks shot up over 50% in just two weeks. Investors rushed to buy, thinking they were at the start of the next big thing.

But just a few days later, Nvidia’s CEO came out and said it’s still too early for quantum computing to have real-world commercial applications. The same stocks that had soared are now down 50% in just two days.

This is recency bias in action — on both the bullish and bearish side. Investors thought quantum computing was the future right now, and then they flipped to thinking it’s too early.

How to Avoid Recency Bias:

1. Zoom out. Look at a stock’s long-term performance, not just the last six months or year.

2. Don’t assume the current trend will continue forever. Markets are cyclical. Bull markets don’t last forever, and neither do bear markets.

Recency bias makes investors feel invincible during a bull run and hopeless during a downturn. The truth is usually somewhere in between.

Conclusion

Here’s the truth: the biggest threat to your portfolio isn’t the market — it’s you.

Cognitive biases quietly mess with your decision-making, whether you realize it or not. They make you chase trends, hold onto bad investments, ignore risks, and get stuck in the past.

Even some of the best investors in the world struggle with these biases. The difference? They’re self-aware enough to recognize them and make adjustments.

Think about it:

• Are you holding onto a stock just because you’re anchored to its past price?

• Are you following the crowd without really understanding the business?

• Are you ignoring risks because they don’t fit your narrative?

It all comes down to being brutally honest with yourself.

Here’s what I’ve learned after years of investing — the market will test your psychology more than your math skills. The investors who succeed aren’t necessarily the ones with the best spreadsheets. They’re the ones who can control their emotions and biases.

The good news? You don’t need to be perfect. You just need to be self-aware enough to ask yourself, Am I making this decision with logic — or with bias?

If you can do that, you’ll avoid a lot of the mistakes that cost investors money.

Because in the end, investing isn’t just about picking the right stocks. It’s about thinking clearly when it matters most.

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