Portfolio Psychology

In 1979, Daniel Kahneman and Amos Tversky published "Prospect Theory: An Analysis of Decision Under Risk" in Econometrica. It is one of the most cited papers in the history of economics and the founding document of behavioural finance. Before it, the dominant model of human decision-making was…

Loss aversion — the finding that losses feel approximately twice as painful as equivalent gains feel pleasurable — is arguably the most robust and consequential result in behavioural finance. Its investment consequences are not merely theoretical: they lead directly to measurable, costly mistakes…

When you buy a stock at £100 and it falls to £60, you experience a £40 loss — even if all available evidence suggests that £60 is exactly the right price for what the company is worth today. The purchase price has become your reference point, and your evaluation of the investment is anchored to…

Overconfidence is the most thoroughly documented cognitive bias in all of behavioural finance. It describes a systematic pattern in which people overestimate the accuracy of their own knowledge, the quality of their predictions, and the value of their private information. In general knowledge…

Home bias is the well-documented tendency of investors to hold a far greater proportion of their portfolios in their domestic stock market than would be justified by that market's share of global equity capitalisation. It is one of the clearest examples of irrational portfolio construction —…

Recency bias is the tendency to treat recent experience as a reliable guide to the future — to extrapolate the last few years' returns forward and assume they represent the new normal. It is one of the most pervasive and costly biases in retail investing, because financial markets are…

The fundamental challenge of long-run investing is that the decisions which matter most — whether to stay in the market during a crash, whether to rebalance toward equities when they have fallen 40%, whether to sell or hold when every instinct screams danger — must be made under the most…

If the core problem in behavioural finance is that human emotion corrupts rational investment decisions at precisely the wrong moments, one powerful solution is to remove as many decisions as possible from the process. Automation does not make better decisions than a thoughtful investor in a calm…

Jeremy Siegel's 1994 book Stocks for the Long Run assembled two centuries of US financial data to make one of the most important empirical claims in personal finance: over every 20-year holding period in US history since 1802, equities have outperformed bonds, cash, and gold in real…

A commonly cited argument in long-term investing is that time reduces risk. The logic is straightforward: over a single year, equity returns might range from -40% to +50%; over a 30-year period, the annualised return has historically fallen within a much narrower band. The idea that holding…

The long-run case for equities is compelling: over 20- and 30-year periods, equities have historically outperformed every other major asset class in real terms. But the long run is built from a sequence of short runs — and the single greatest threat to capturing long-run equity returns is not…