Psychological Investing Minefields

June 03, 2026

I can save you a lot of time. When you apply humans to a complex process and expect predictable results... you won't get them. Psychology can turn the investment landscape into a minefield.

When I was heading to work last week, my son said, "Watch the outcome bias." I'm not sure outcome bias was the first thing on my mind when I was a junior in high school, but I assured him it was now front and center. Outcome bias leads you to evaluate the quality of your decisions based on how things turned out, rather than their reasonableness at the time they were made. It's particularly dangerous in investing. For example, if you bought Nvidia 30 years ago when its primary market was selling to teenage boys who spent more time researching gaming accelerators than showering, today you would be happy. This despite the risk you absorbed: Nvidia almost went bankrupt three times in the 1990s, coming within 30 days of missing payroll in one particularly harrowing incident.

The problem with outcome bias is that it leads you to formulate your next investment decision based on tenuous reasoning. Perhaps it was just luck that your outcome ended up as it did, whether good or bad.

A second psychological tendency that afflicts investors is over-weighting errors of commission relative to errors of omission. For example, one year ago had you committed to an investment in Charter Communications, today it would be down about 65%. You would have felt bad as you watched your investment dwindle, and refreshing the web page several hundred times did not make the investment rise. You perhaps didn't think much about buying Micron stock, but you could have; it was omitted from your range of actions. And a year later Micron would have delivered 10X your money. The opportunity cost of not buying Micron was higher than the cost of the Charter loss, but it doesn't feel that way.

If you are a reflective person, avoiding errors of omission can drive you borderline crazy and lead to decision paralysis. So many things start to look like an error of omission that the constant comparison itself becomes a problem.

If you somehow controlled these and other psychological investing hurdles, that wouldn't fully resolve the issue, because everyone else also faces them. And that means others are going to swing markets in ways that are unpredictable, and which will affect you. This is a reason many professional investors have struggled the past two decades in the markets: decisions often are not based on balance sheets or securities analysis. Much buying and selling is based on what your neighbor--the one who leaves his trash can on the street for too many days but otherwise has some great stock tips--thinks.

As an investor, you want to control for these psychologies, but assume they'll continue to exist elsewhere.

~Dan Cunningham

1. More from Science Direct on outcome bias
2. Charter, Micron stock values: 5/26/25 - 5/29/26, YCharts