Being aware of behavioural finance can help investors achieve better returns. That’s because being aware of them allows us to identify and avoid their negative impact on investment decisions. Let’s illustrate this with a number of examples. Being aware of:

1. herd behaviour: Herding behaviour occurs when investors follow the crowd and make investment decisions based on what others are doing rather than on their own research. Such behaviour can lead to bubbles. Being aware of herding behaviour can help investors sidestep such irrational exuberance.
2. loss aversion: Loss aversion is a bias where people tend to feel the pain of losses more strongly than the pleasure of gains. Loss aversion can lead to investors holding onto losing positions for too long or selling winning positions too early. A good appreciation of loss aversion can help an investor to avoid making emotional decisions and stick to his or her investment approach.
3. overconfidence: Overconfidence causes people to overestimate their abilities and the accuracy of their predictions. Overconfidence leads to investors taking on too much risk or making decisions based on incomplete information. Avoiding overconfidence can help investors to avoid making decisions based on limited information.
4. confirmation bias: people tend to seek out information that confirms their existing beliefs. At the same time, they tend to ignore information that contradicts them. The effect is related to cognitive dissonance, the unease people experience when confronted with information that contradicts their views. Recognising confirmation bias can help investors seek out diverse opinions and information to challenge their views.