Behavioral Insights into Investing: Why Smart Investors Still Make Bad Decisions

Why do smart people still make investing mistakes? In the first episode of the series Behavioral Insights into Investing, My Two Cents explores how behavioral biases like overconfidence, herding, loss aversion, and the disposition effect can shape the way individual investors trade, react to risk, and make decisions. This episode also looks at why financial literacy matters, especially for teens who are increasingly interested in investing. Educational and awareness purposes only. Not investing advice.

Research used in this episode:

• Schwab 2026 Teen Investing Survey: 95% of teens are interested in learning more about investing, and 70% are very or extremely interested in investing. (aboutschwab.com)
• Systematic review on behavioral biases affecting individual investors: Emerald
• Behavioral biases and individual stock investor behavior/performance: ScienceDirect
• Financial literacy and behavioral biases in investment decisions: Frontiers in Psychology / PMC
• Financial literacy moderating behavioral biases and investment decisions: Emerald

Transcript

Intro

SPEAKER_00 0:13

Hey everyone, welcome back to My Two Cents, the podcast where we talk about money, choices, and the real life decisions behind financial wellness. I'm your host, Mahima Ramachandran, and today we're starting a brand new series called Behavioral Insights into Investing. Before we start, a quick note. This series is for educational and awareness purposes only. It is not investing advice or a recommendation to buy or sell anything.

Understanding Behavioral Biases

SPEAKER_00 0:46

So, why are we talking about behavioral finance? Because research shows that investing decisions are not just shaped by numbers, they're shaped by human behavior. Studies on individual investors like ourselves have found that biases like overconfidence, hurting, loss aversion, and the disposition effect can influence how people trade, whether they diversify, or even the returns that they experience. And other research suggests that financial literacy can really help reduce the impact of some of these biases, especially thinking-based biases like overconfidence and anchoring. So when people hear the word investing, they often think about charts, numbers, stock prices, and maybe people staring intensely at the red and green lines. But investing is also about psychology. It is about what happens when you believe you are being rational, but your brain in reality is pushing you towards a decision you may regret later.

What are Behavioral Biases in Investing?

SPEAKER_00 2:03

Let's start with the basic idea. A behavioral bias is a repeated pattern in the way people think or react that can affect their decisions. These biases are not just random mistakes. In fact, they can actually be predictable. Let's take some examples. People often feel the pain of losing money more strongly than the happiness of gaining back that same amount. This bias is called loss aversion. On the other hand, people may believe that they are better at picking winning investments than they actually are. This is a key example of overconfidence. In another situation, people may follow what others are doing because it feels safe and more predictable to move with the crowd. This is called hurting. All these biases show up in our daily lives, but they can become especially powerful when money is involved, because investing brings together uncertainty, risk, emotion, identity, and time. And that is a lot for the human brain to handle all at once. Behavioral

What Happens When the Market Drops

SPEAKER_00 3:18

biases do not just make investing feel stressful. They can actually affect the final decisions we make with our money. So let's have a situation with two investors. Investor A has a long-term plan. They invest in a diversified portfolio and understand that the markets can rise and fall. Investor B also starts out with a plan, but then the market drops. News headlines sound dramatic, and investor B panics and sells near the bottom. A few months later, the market slowly begins to recover, but investor B is already out. The difference between these two investors may not be intelligence. It actually is behavior. That is why behavioral finance matters. It helps explain why knowing what to do and actually doing it can be two very different things.

Chasing What Everyone Else Is Buying

SPEAKER_00 4:18

We just described a situation of panic selling and loss aversion. Let's take another example of hurting. This happens when people tend to follow the crowd, especially when they feel uncertain. You might see this with popular stocks, crypto, fashion brands, collectibles, or anything that suddenly becomes the new thing people are talking about. Even if you had no interest in that investment yesterday, today it might feel suddenly urgent that you have that in your hands. That urgency is powerful because it mixes social pressure with fear of missing out. The risk is that people may buy something because it's popular, not because they actually understand it. It is essential to always take a step back and think about whether this investment is being backed by logic or just by feeling.

The Role of Financial Literacy

SPEAKER_00 5:17

So where does financial literacy come into all of this? Financial literacy means understanding basic money concepts like risk, return, diversification, inflation, interest, and long-term planning. Research suggests that financial literacy can reduce the impact of some behavioral biases, especially thinking-based biases like we talked about, overconfidence, anchoring, and representativeness. In plain language, when people understand investing better, they're actually less likely to rely on gut reactions or shortcuts. Financial literacy is there to give us tools, but behavioral finance also helps us notice when the emotions are trying to grab the steering wheel of our investing journey. So really the goal is to recognize what exactly is influencing your final decisions.

Why Teens Should Learn This Early

SPEAKER_00 6:29

Most teens are probably not managing huge investment portfolios, but that is exactly why this is a great time to learn. Because we really want to start building these habits really early. And the interest is already there. According to Schwab's 2026 Teen Investing Survey, 95% of teenagers say they are at least somewhat interested in learning more about investing, and 70% say that they are very or extremely interested in investing. The survey also found that teens's top motivations include getting more money, paying for college, and learning how money and investments work. So this is not some faraway adult topic in our distant futures. It is already becoming a part of how we teens think about money, opportunity, and the future. Before someone invests in serious money, they can learn how their mind reacts to different situations involving risk, hype, loss, comparison, and the biggest one of uncertainty. And investing is only one of the many areas where this applies. The same mental patterns that we introduced today show up when deciding whether or not to save or spend, whether to use credit, whether to follow trends, or whether to compare yourself to others financially. Learning behavioral finance early gives you a vocabulary for what is happening. Instead of saying, oh, I'm bad with money, you can say, maybe I'm reacting to present bias, maybe I'm following the crowd, maybe I'm overconfident because one decision worked out. The

The Main Message

SPEAKER_00 8:19

main takeaway from this is that investing is not only about picking the right assets. It's really about managing your own behavior. Markets move, news changes, but one thing investors always bring into every decision is themselves, their emotions, assumptions, fears, confidence, habits, and all the social influences. Behavioral finance matters because it helps explain why people can still make poor financial decisions. And it also shows that better investing is sometimes about having a better process. That means writing down reasons before you invest. It could mean diversifying instead of betting everything on one idea. It could mean waiting before acting on something that is being hyped up. Over

Conclusion

SPEAKER_00 9:13

the next few episodes of our new series, Behavioral Insights into Investing, we're going to break down specific investing biases one by one. We'll look at ideas like loss aversion, overconfidence, hurting, anchoring, and confirmation bias. We'll talk about how each one shows up, why it matters, and how investors can become more aware of it. And that is My TwoSents. Thank you for listening to My TwoSents. If this episode made you think differently about investing, share it with a friend, a classmate, or someone who loves checking stock charts a little too often. I'll see you in the next episode.