You can learn every technical indicator, memorize every financial ratio, and still lose money in the stock market. The reason is not a lack of knowledge — it is the human brain itself. Our brains evolved to handle physical threats, not financial decisions, and the mental shortcuts that kept our ancestors alive now actively sabotage our investing.
Understanding these psychological traps is arguably more important than understanding P/E ratios. Here are the biases that cost DSE investors the most — and how to counter each one.
FOMO: Fear of Missing Out
FOMO is the most powerful force driving retail investors into bad decisions on the DSE. It sounds like this: “DSEX has gone up 500 points this month and I am sitting in cash. Everyone is making money except me.”
The mechanics are simple. You see others profiting. You feel left behind. The emotional pain of missing out overrides your rational analysis. You buy — usually at elevated prices, usually without proper research, usually right before a pullback.
During the 2010 rally, FOMO drove millions of new investors into the market during Phase 4 — the euphoria phase — when prices were at their most inflated. They were not investing; they were reacting to the fear that everyone else was getting rich without them.
How to counter FOMO: Remind yourself that the market will be open tomorrow, next week, and next year. There will always be another opportunity. Missing one rally is painless. Buying at the top of one can set you back years. Write down why you are considering a purchase. If the reason is “because it is going up,” that is FOMO talking, not analysis.
Anchoring Bias
Anchoring is the tendency to fixate on a specific number and let it dominate your thinking, even when it is irrelevant to the stock’s current value.
The most common form on the DSE: “I bought this stock at ৳180, so I will not sell until it gets back to ৳180.” The stock may now be worth ৳110 based on its fundamentals. The company may have reported declining earnings for three consecutive quarters. But the investor’s brain is anchored to ৳180 because that is what they paid.
Anchoring also works in reverse. If a stock was once at ৳500 and has fallen to ৳250, investors assume it is “cheap” without checking whether ৳250 is still overpriced relative to earnings.
How to counter anchoring: Ask yourself this question regularly: “If I did not own this stock and had cash instead, would I buy it today at today’s price?” If the answer is no, your anchor is keeping you in a bad position.
Confirmation Bias
Once you have decided a stock is a good investment, your brain begins filtering information to support that decision. You seek out articles praising the company. You dismiss negative news as temporary. You spend time in online groups where others hold the same stock, reinforcing your view.
This is confirmation bias, and it is especially dangerous in Bangladesh’s stock market where information asymmetry is high. If you hold a textile company and someone posts a bearish analysis in a Facebook group, your instinct is to argue rather than evaluate. But the bearish analyst might be right.
How to counter confirmation bias: Actively seek out reasons why your investment thesis might be wrong. Before buying, write down three things that could go wrong. If you cannot think of any, you have not done enough research — every stock has risks.
Loss Aversion
Behavioral finance research shows that humans feel the pain of losing money roughly twice as intensely as the pleasure of gaining the same amount. Losing ৳10,000 hurts more than gaining ৳10,000 feels good.
This asymmetry creates two destructive behaviors:
-
Holding losers too long. You refuse to sell a losing position because selling would make the loss “real.” The stock drops from ৳150 to ৳120 to ৳90 to ৳60, and at each step you hold on, hoping for a recovery that may never come. Meanwhile, that capital is trapped in a losing investment instead of being deployed in a better opportunity.
-
Selling winners too early. You bought a pharmaceutical stock at ৳200 and it rises to ৳260. You are up ৳60 per share and the fear of losing that gain makes you sell immediately. The stock continues to ৳350 over the next year. Your loss aversion cost you more gains than any actual loss would have.
The result is a portfolio full of losers (because you never sell them) and absent of winners (because you sold them too soon).
How to counter loss aversion: Set rules-based exit criteria before you buy. “I will sell if the stock drops 15% below my buy price” or “I will hold as long as quarterly EPS growth remains positive.” Let rules, not emotions, drive your sell decisions.
Sunk Cost Fallacy
The sunk cost fallacy is the belief that because you have already invested time, money, or effort into something, you should continue investing rather than “waste” what you have already put in.
On the DSE, it sounds like this: “I have already lost ৳40,000 on this stock. If I sell now, that ৳40,000 is gone forever. I should hold — or even buy more — so I can at least break even.”
The problem is that the ৳40,000 is already gone regardless of what you do. Holding a bad investment does not recover lost money — it just risks losing more. The stock does not know your buy price and has no obligation to return to it.
How to counter sunk cost fallacy: Evaluate every position based only on its future prospects, never on what you have already spent. The relevant question is always: “Starting from today, is this the best use of this capital?”
Overconfidence After a Win
A string of profitable trades can be as dangerous as a string of losses. After several wins, investors begin to believe they have a special talent for the market. They increase their position sizes, reduce their research time, and take on more risk.
This is especially common during bull markets, when almost every stock goes up. The investor attributes to skill what is actually attributable to a rising tide lifting all boats. When the tide turns, the oversized positions and insufficient research catch up quickly.
How to counter overconfidence: Keep a detailed trading journal. Record not just what you bought and sold, but why. Over time, you will see that many of your “smart” calls were actually luck — and that is a healthy and humbling realization.
Building a Rational Decision-Making Framework
Knowing about these biases is necessary but not sufficient. You need a system that prevents them from influencing your decisions:
-
Investment checklist. Before buying any stock, run it through a checklist: What is the P/E? Is revenue growing? What is the debt level? What is my exit criteria? If you skip the checklist because you are “feeling good” about a stock, that is a bias at work.
-
Cooling-off period. After deciding to buy or sell, wait 24 hours before executing. Impulse decisions are almost always emotionally driven.
-
Written investment thesis. For every stock you own, write one paragraph explaining why you hold it. Review these quarterly. If the thesis no longer holds, sell — regardless of whether you are at a profit or loss.
-
Portfolio tracking. Use a tool like FinTrail to see your actual results objectively. When your real P&L is in front of you — not a curated memory of your best trades — it is much harder to maintain overconfidence or ignore losing positions.
-
Accountability. Share your investment plan with a trusted friend or family member. Not for tips, but for accountability. “I told my brother I would sell if it dropped below ৳150, and it has dropped to ৳140 — time to follow through.”
The Compound Effect of Emotional Discipline
Every time you resist FOMO, cut a losing position based on rules, or pause before an impulsive trade, you are building a habit. These habits compound over years just like investment returns do. A disciplined investor with average stock-picking skills will outperform a brilliant analyst who trades on emotion.
The market will always try to make you feel something — excitement, fear, regret, greed. Your job is to acknowledge those feelings and then make decisions based on data, not emotions.
Think About This
- Which of these biases do you recognize most strongly in your own investing behavior? When was the last time it influenced a decision?
- Do you currently have a written investment thesis for every stock you hold? If not, could you write one today?
- Think about your last three trades. Were they planned decisions or reactions to price movements and emotions?
