Behavioural finance basics

Investors are not rational. They anchor on irrelevant numbers, weight recent events too heavily, follow the crowd, and feel losses 2x more than equivalent gains. The behavioural finance toolkit lets the adviser recognise these biases in self and client, and design portfolios and conversations that mitigate them.

Key biases: Anchoring (fixating on a number, e.g., bought-at price). Recency bias (extrapolating recent trends). Herding (following the crowd into bubbles). Loss aversion (losses hurt more than equivalent gains). Confirmation bias (seeking only confirming evidence). Overconfidence (in own ability). Mental accounting (treating different money differently). Each bias produces a predictable mistake — and the antidote is usually a rule (e.g., automatic SIPs to avoid market timing) or a structure (e.g., bucket portfolios to avoid mental-account confusion).

Practitioner-grade insight: most behavioural mistakes happen at extreme markets — bull tops and bear bottoms. The adviser's value-add is highest precisely then. A scripted bear-market conversation ("you knew you might lose 40%; here is the plan") and a bull-market check-in ("are these gains affecting the IPS?") are the two highest-leverage advisory practices. Document them. Reuse them.