Most investment mistakes don't come from a lack of information. They come from being human.
Behavioral finance is the study of how emotions, mental shortcuts, and habits push people away from the decisions they'd make on paper. Everyone has these tendencies. What changes as your net worth grows is the size of the bill when one of them wins.
A bad call on a $50,000 account stings. The same call on a $5 million portfolio, a concentrated stock position, or the proceeds from selling a business can change a retirement.
Here are seven of the most common behavioral mistakes, what the research says about each one, and some practical ways to keep them in check.
How much does investor behavior actually cost?
Morningstar has measured this for years in its annual Mind the Gap study. It compares what funds earned with what the average dollar invested in those funds actually earned, after accounting for when investors bought and sold.
In the 2026 edition, the average dollar invested in U.S. mutual funds and ETFs earned 8.7% per year over the 10 years ended December 31, 2025. The funds themselves returned 9.9% per year. That 1.2 percentage point gap equals about 12% of the funds' total return.¹
The good news is buried in the same report. Investors in U.S. stock funds earned 12.8% per year against a 13.3% fund return, which means they captured nearly all of it.¹ When people stay put, the gap gets small.
To be fair, not everyone agrees on what that gap measures. A 2026 paper in the Financial Analysts Journal looked at the previous year's study and argued the gap doesn't actually reflect poor investor timing.² Either way, the individual behaviors below are well documented on their own.
1. Holding on to the stock that made you wealthy
This is the big one for executives, early employees, and anyone who inherited a large position. The stock made the family money, so it feels safe. You know the company. You may have helped build it.
The numbers are tough on that feeling.
J.P. Morgan looked at every company that was ever in the Russell 3000 Index from 1980 through 2020. Forty-four percent suffered what it calls a catastrophic loss, defined as a decline of 70% or more from the peak that was never recovered. Forty-two percent had negative absolute returns, and 66% trailed the index.³
Research by Hendrik Bessembinder at Arizona State University found something similar over a longer stretch. Looking at U.S. stocks from 1926 through 2016, roughly 4% of companies accounted for all of the stock market's wealth creation above Treasury bills. More than half of all stocks failed to beat one-month Treasury bills over their lifetimes.⁴ ⁵
The warning signs aren't always obvious either. In J.P. Morgan's 2024 update, 54% of the companies that later suffered catastrophic declines were profitable at their peak, and Wall Street analysts were mostly rating them a buy.⁶
None of this says your company will be one of them. It says the odds of any single stock carrying a family's future are worse than most people assume.
What can help: Write down how much of your net worth you'd be comfortable having in one company if you didn't already own it. If the real number is much higher, that's worth a closer look. A staged selling plan, charitable gifting of appreciated shares, or other diversification strategies can reduce the risk over time rather than all at once.⁶
2. Letting the tax bill make the decision
A large embedded gain can freeze people in place. Nobody likes writing a big check to the IRS, so the position stays put year after year while the risk keeps growing.
J.P. Morgan notes that taxes are the most common reason investors give for holding a concentrated position.⁶ That's understandable. But a tax you avoid by holding can be smaller than the loss you take if the stock falls and doesn't come back.
There are real situations where holding makes sense. For example, inherited assets generally receive a new cost basis equal to their fair market value on the date of death, which can eliminate the built-in gain for heirs.⁷ For someone late in life, that can be a legitimate part of the math. The point is to run the numbers on purpose rather than let avoidance make the call by default.
What can help: Look at the after-tax picture of a few options side by side: selling gradually over several tax years, gifting shares to charity or family, or using tax-loss harvesting elsewhere in the portfolio to offset some of the gain. Your CPA should be part of that conversation.
3. Anchoring to the high-water mark
It's common to remember the highest number you ever saw on a statement and treat that as what the account is "really" worth. Anything below it feels like money you're owed back.
This shows up most clearly in how people handle winners and losers. In a well-known study of 10,000 brokerage accounts from 1987 through 1993, Terrance Odean found investors sold winning stocks about 50% more often than losing ones, relative to their opportunities to do so.⁸ ⁹ People wanted to lock in gains and avoid admitting a loss. Odean found the habit wasn't justified by how those investments performed afterward, and in taxable accounts it led to lower after-tax returns.⁸
The price you paid, or the peak you remember, doesn't tell you anything about what an investment will do next.
What can help: For each position, ask one question: "If I had this amount in cash today, would I buy this?" If the answer is no, the purchase price or the old high shouldn't be the reason you keep it.
4. Confidence that carries over from your career
People who have done well in business, medicine, law, or engineering are used to being right. They've earned it. The trouble is that skill in one field doesn't always transfer to picking stocks or timing markets.
Overconfidence often shows up as trading too much. Brad Barber and Terrance Odean studied 66,465 households with brokerage accounts from 1991 through 1996. The households that traded the most earned 11.4% per year after costs, while the market returned 17.9%.¹⁰ The researchers pointed to overconfidence as the most likely explanation.
That study is from a period with higher trading costs than today. Even so, the habit it describes hasn't gone away. Morningstar's latest study still points to ad hoc trading in response to recent events as something investors should hold the line on.¹
What can help: Before making a change, write down why you're doing it and what would prove you wrong. It takes two minutes, and it's a good filter for decisions driven by a headline or a hunch.
5. Feeling losses far more than gains
Researchers call this loss aversion. A loss tends to hurt more than an equal-sized gain feels good. A 2024 review of 607 estimates from 150 studies put the average at close to two to one.¹¹
For a large portfolio, that's not an abstract idea. As a hypothetical example, a 20% decline on a $4 million portfolio is $800,000. That can feel like losing a house, even if the plan was built to handle exactly that kind of drop.
The danger is that the pain pushes people to sell at the wrong time, or to sit in cash so long that inflation does the damage instead. We covered the cost of reacting to volatility in more detail in Emotional Investing Can Be Expensive, and the risks of holding too much cash in What to Do With Extra Cash Right Now.
What can help: Check balances less often during rough markets, and judge the portfolio against your plan rather than last month's statement. Keeping a few years of expected spending in safer assets can also make a decline easier to sit through.
6. Buying the story after it's already played out
Recent winners are easy to fall in love with. A sector has a great year, a new investment gets a lot of press, and it starts to feel like everyone is in on it except you.
Morningstar's 2026 study had a clear example. From January 2024, when the first spot bitcoin ETFs launched, through June 30, 2026, those ETFs returned about 8.5% per year. The average dollar invested in them lost about 5.8% per year.¹ The money came in after big run-ups and left during the decline.
The same report found that the more volatile a fund was, the harder it was for investors to capture its returns.¹
What can help: Decide ahead of time how much of your portfolio you're willing to put toward newer or more speculative ideas, and stick to that limit. Rebalancing on a set schedule also forces you to trim what has run up rather than add to it.
7. Not letting yourself spend in retirement
This one surprises people. After decades of saving, many retirees find it very hard to flip the switch and start drawing down what they built.
The Employee Benefit Research Institute studied how retirees actually used their savings. Depending on how much they started with, the median retiree had spent down between 11.8% and 27.2% of their non-housing assets during the first two decades of retirement. Those with the most saved spent down the smallest share. About a third of retirees actually grew their assets over the first 18 years.¹²
Being careful isn't a mistake. But spending too little can mean skipped trips, delayed gifts to family, or a lot more going to taxes and heirs than you intended.
What can help: A written spending plan that shows what your savings can reasonably support, and how it holds up in a bad market, can give you permission to enjoy what you've built. It can also help to think in terms of a retirement paycheck rather than "taking money out" of an account.
Why these mistakes are harder to spot with more money
A few things make behavioral mistakes more likely, and more costly, for higher-net-worth households:
- More complexity. Multiple accounts, business interests, stock compensation, and real estate make it harder to see the whole picture at once.
- Bigger dollar swings. The same percentage move feels very different at $5 million than at $500,000.
- More confidence. Success in a career or business can make it easier to trust your instincts with money.
- Bigger taxes. Large gains and high brackets make it tempting to let taxes drive investment decisions.
None of this means you need to be perfect. It means having a process that does some of the thinking for you before emotions get involved.
Quick answers
What is behavioral finance? Behavioral finance studies how emotions, mental shortcuts, and biases affect financial decisions. It helps explain why investors often buy high, sell low, or hold on to investments longer than they should.
What is the most common behavioral mistake investors make? Buying and selling at the wrong times is one of the most measurable. Morningstar estimated that the timing of investors' purchases and sales cost them about 1.2 percentage points per year over the 10 years ended 2025, though some researchers dispute how much of that reflects bad timing.¹ ²
Why is a concentrated stock position risky? Because individual companies fail more often than people expect. J.P. Morgan found 44% of companies that were ever in the Russell 3000 from 1980 through 2020 fell 70% or more from their peak and never recovered.³
How can investors avoid emotional decisions? Set rules before you need them: a target allocation, a rebalancing schedule, limits on any single holding, and a written reason for each change. Rules made in calm markets tend to hold up better than decisions made in a rough one.
The bottom line
Behavioral mistakes aren't a sign that someone isn't smart. They're a sign that someone is human. The research shows these patterns again and again, across decades and across every kind of investor.
The more you have, the more each one can cost. Knowing which ones you're most prone to, and building a plan that accounts for them, is one of the most useful things you can do for your long-term results.
Sources
- Jeffrey Ptak, Morningstar, "Are you one of the investors that left money on the table?" (Mind the Gap 2026 findings, August 14, 2026; data as of December 31, 2025, crypto ETF data through June 30, 2026): https://www.morningstar.com.au/funds/are-you-one-investors-that-left-money-table
- Jon A. Fulkerson, Bradford D. Jordan, Timothy B. Riley, and Qing Yan, "Bad Timing Does Not Cost Investors 15% of Their Funds' Returns: An Examination of Morningstar's 'Mind the Gap' Study," Financial Analysts Journal (2026): https://doi.org/10.1080/0015198X.2026.2657253 (working paper version: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4904652)
- Michael Cembalest, J.P. Morgan, "The Agony & the Ecstasy: The risks and rewards of a concentrated stock position," Eye on the Market (March 15, 2021): https://assets.jpmprivatebank.com/content/dam/jpm-pb-aem/global/en/documents/eotm/agony-ecstasy-2021.pdf
- Hendrik Bessembinder, "Do Stocks Outperform Treasury Bills?" Journal of Financial Economics, Vol. 129, Issue 3 (2018), pp. 440 to 457: https://econpapers.repec.org/RePEc:eee:jfinec:v:129:y:2018:i:3:p:440-457
- W. P. Carey School of Business, Arizona State University, "Do stocks outperform Treasury bills?" (September 17, 2018): https://news.wpcarey.asu.edu/20180917-do-stocks-outperform-treasury-bills
- J.P. Morgan, "The Agony and the Ecstasy Part IV: an update on catastrophic stock declines" (October 3, 2024): https://www.jpmorgan.com/content/dam/jpmorgan/documents/wealth-management/the-agony-and-the-ecstasy-2024.pdf
- Internal Revenue Service, Publication 551, Basis of Assets: https://www.irs.gov/publications/p551
- Terrance Odean, "Are Investors Reluctant to Realize Their Losses?" Journal of Finance, Vol. 53, No. 5 (October 1998), pp. 1775 to 1798: https://faculty.haas.berkeley.edu/odean/papers/disposition/disposition.html
- Brad M. Barber and Terrance Odean, "The Courage of Misguided Convictions," Financial Analysts Journal, Vol. 55, No. 6 (1999), pp. 41 to 55: https://econpapers.repec.org/RePEc:taf:ufajxx:v:55:y:1999:i:6:p:41-55
- Brad M. Barber and Terrance Odean, "Trading Is Hazardous to Your Wealth: The Common Stock Investment Performance of Individual Investors," Journal of Finance, Vol. 55, No. 2 (2000), pp. 773 to 806: https://faculty.haas.berkeley.edu/odean/Papers%20current%20versions/Individual_Investor_Performance_Final.pdf
- Alexander L. Brown, Taisuke Imai, Ferdinand M. Vieider, and Colin F. Camerer, "Meta-analysis of Empirical Estimates of Loss Aversion," Journal of Economic Literature, Vol. 62, No. 2 (2024), pp. 485 to 516: https://www.aeaweb.org/doi/10.1257/jel.20221698
- Employee Benefit Research Institute, "EBRI Finds Evidence that Many Retirees Aren't Spending Down Their Retirement Assets" (April 17, 2018): https://www.ebri.org/retirement/content/ebri-finds-evidence-that-many-retirees-aren-t-spending-down-their-retirement-assets
Disclosure: This material is for general information and educational purposes only. It is not intended to provide specific investment, tax, or legal advice or recommendations for any individual. Please consult your tax and legal professionals regarding your specific situation. The research cited reflects historical data and published studies, which may not be representative of future results. Past performance is no guarantee of future results. Examples are hypothetical and for illustration only. Diversification and rebalancing do not ensure a profit or protect against loss in a declining market. The Russell 3000 Index is an unmanaged index used to measure the performance of the broad U.S. stock market. Investors cannot invest directly in an index. All investing involves risk, including the possible loss of principal. No strategy can eliminate the effects of behavioral biases on investment decisions.