Irrational Decisions in Investing

When I was young in the business, one of my favorite clients was a retired salesman named Arthur. Together, we built a long-term financial plan to determine how much growth his assets needed and how much risk made sense for his goals. From there, we designed his investment strategy.

Arthur’s sales motto was simple: “Make the plan. Work the plan.”

It became one of my favorite lessons in wealth management.

During the Tech Bubble of the late 1990s, sticking to a plan was harder than it sounded. From 1995 through early 2000, the S&P 500 rose dramatically, but technology stocks like Qualcomm seemed especially unstoppable. It felt tempting to abandon diversification and chase whatever was soaring highest.

We didn’t. We worked the plan.

Then came the opposite emotional extreme. From 2000 through 2009—often called the “Lost Decade”—investors endured years of high volatility, fear, and disappointing returns. Qualcomm, for example, lost 88% just during the period from March 2000 to October 2002. Many investors felt tempted to give up on stocks entirely.

That could have turned out to be an unfortunate decision for most investors, as markets eventually recovered and saw significant gains in the following years.  In this case, we stayed disciplined with a diversified portfolio and continued working the plan.

The challenge for investors is often not intelligence. It’s behavior.

What Is an Irrational Financial Decision?

Irrational financial decisions happen when emotions, fear, excitement, or cognitive blind spots overpower long-term judgment.

Even thoughtful people can make poor decisions under stress. Our brains naturally rely on shortcuts and emotional reactions, especially during periods of uncertainty or excitement.

These cognitive biases can quietly influence investment decisions:

• Recency Bias: Assuming recent performance will continue indefinitely. Investors often chase whatever has performed best lately, sometimes buying near a peak rather than considering where we may be in the economic cycle.
• Home Bias: Favoring investments that feel familiar, such as local companies or domestic markets, while overlooking opportunities elsewhere.
• Anchoring: Focusing too heavily on the original purchase price of an investment rather than evaluating its current value and future potential.
• Loss Aversion: Refusing to sell an investment at a loss simply because realizing the loss feels painful, even when better opportunities may exist.
• Overconfidence: Believing our instincts are more reliable than evidence, process, or data.
• Herd Mentality: Buying investments because they are popular or widely discussed rather than because they align with a thoughtful strategy.
• Panic Selling: Selling during periods of fear and uncertainty, often missing the eventual recovery.

Many investors these biases at some point; they are built-in cognitive shortcuts that most humans are subject to. The goal is not to eliminate emotion or bias entirely—it’s to recognize irrational impulses before they drive major decisions.

How Can Investors Work with These Biases?

Know Your “Why”

Before investing, understand what you are trying to accomplish. Are you seeking stability for a shorter-term goal, such as funding college tuition? Or are you investing for long-term growth and retirement decades into the future? Your goals should shape your strategy.

It can also help to establish sell criteria ahead of time. Naming the conditions that would justify reducing an investment creates structure and lessens emotionally driven decision-making during stressful periods.  The moments of greatest fear are often the moments when investors feel least comfortable staying invested.

Stay Open to New Ideas

As your life, goals, and the economy evolve, your portfolio may need to evolve as well. Remaining open to new opportunities, industries, and global markets can help investors avoid becoming too concentrated in familiar areas.

Think Like a Professional Portfolio Manager

If you were starting a mutual fund entirely in cash today:

• Would you buy your current investments?
• Would you choose to buy a highly concentrated position?
• Are your investments positioned for the next economic cycle rather than the last one?
• If your original purchase price didn’t matter emotionally, would you still buy these holdings today?

These questions can help investors separate emotion from analysis.

Check Your Emotions

You do not need to ignore emotions completely. Fear, excitement, and uncertainty are normal.

But recognizing what you are feeling can help you determine whether a decision is being driven by facts or by temporary emotions.

Why Perspective Matters

Professional investment firms rely on teams because decision-making improves when ideas are tested from multiple perspectives—especially during stressful market environments. Plus, teams provide accountability. The same principle could be useful for individual investors.

A financial plan may help clarify your “why,” while an investment strategy offers guideposts during changing market conditions. And thoughtful conversations help challenge assumptions before major decisions are made.

Markets could tempt investors to either chase excitement or flee discomfort. A disciplined process can help create stability when emotions run high.

Make the plan. Work the plan.

* Certified Financial Planner Board of Standards Inc. owns the certification marks CFP®. CERTIFIED FINANCIAL PLANNER™ and CFP® in the U.S., which it awards to individuals who successfully complete CFP Board’s initial and ongoing certification requirements.

This article is for informational and educational purposes only and does not constitute legal, tax, or financial advice. The client experience described in this article is an individual example and may not be representative of all client outcomes. Results vary based on each client’s unique circumstances. Market returns can vary significantly across different time periods, and investors may experience extended periods of volatility or below-average returns. Investing involves risk, including potential loss of principal. Readers should consult with qualified professionals regarding their specific circumstances.