Published on Feb 10, 2026 • Updated on Jun 23, 2026
This article was written by Adem Tumerkan
Content Editor, Dunham | 2025 ThinkAdvisor Luminary Award Winner | 2026 Wealthies Finalist — Thought Leader of the Year | Macroeconomics, markets, geopolitics & global trends
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Markets and investing are often described in terms of numbers, charts, and models - but at their core, markets are social systems driven by human behavior.
In other words, prices reflect a series of interrelationships between individuals, groups, corporations, institutions, and financial markets that together form a coherent social structure. All of these systems have one thing in common: they begin with people.
Because markets are social systems, it’s essential to understand how people influence them. Nowhere is this more evident than in behavioral finance and investor psychology, where emotions and biases show up directly in market prices.
Think of prices as the collective information of all inputs - from fear and greed to information processing and irrationality:
Thus it’s clear that emotions and biases are critical drivers in market prices.
In fact, investors are influenced by dozens of predictable behavioral biases - many of which shape our decisions without us even realizing it. We break down 10 of the most common behavioral biases investors face in more detail here.
The point is, It’s literally in our DNA - hence the repeated cycles of boom and bust; fear and greed.
And these persistent flaws and biases influence our decision-making, often resulting in our irrational choices.
Compounding the issue, scientific findings1 indicate that there are over 150 of these factors affecting us daily.
But not all hope is lost. . .
By taking the time to recognize and identify these biases, we can take the initial step in mitigating their impact on our financial decisions and potentially enhancing economic outcomes.
With that said, let’s take a closer look at the four emotional biases and cognitive flaws I believe you should look out for.
The endowment effect is the tendency to overvalue something simply because you own it. Ownership itself creates an emotional attachment that distorts how you perceive value.
Everyday examples:
Thus - in simpler terms - the endowment effect arises when there's a disparity between what a buyer is willing to pay and what a seller is willing to accept. This gap often occurs because buyers reference the lowest available price, while sellers focus on the highest prices when determining a fair value.
Now, I am sure you can see how this affects markets.
Sellers always want a higher price for their investments, and although buyers may be skeptical of paying, they will sometimes overpay for fear of missing out.
Then once they buy stock XYZ, they’ll only part with it at a higher price. And on and on.
This bias can help push prices both higher and lower than what fundamentals justify.
Thus to try avoiding this bias, you can:
This isn’t exactly a bias, but an inherent issue in any transaction between individuals or groups.
In short, asymmetric information ccurs whenever one party in a transaction has more or better information than the other. While not a “bias” in the strict psychological sense, it creates systematic disadvantages and distorted decisions.
Here are some examples of information asymmetry:
Asymmetric information exists virtually everywhere, making win-win business agreements and transactions almost impossible to come by.
That shouldn’t come as a surprise though, right? You live in the real world. I’m sure you’ve seen this firsthand.
Well, the problem arises in economics and finance because models and theories use the assumption that all buyers and sellers have complete and instantaneous knowledge of all market prices and their utility.
Thus, if the model makes these unrealistic assumptions, then the entire model is potentially flawed.
How to help overcome it?
Recency bias is the tendency to give too much weight to recent events and assume they will continue indefinitely. In markets, it shows up as “what just happened will keep happening.”
Examples:
This ties closely to the hot hand fallacy - the belief that a streak of recent successes means more success is likely, when in reality, short‑term streaks are often just noise.
For example, imagine observing a stock portfolio where five consecutive investments yield positive returns. The assumption might be that the investor is on a "hot streak" and will continue succeeding. This belief relies on a small sequence of random events, overlooking the chance nature of the initial gains.
Thus, the hot hand fallacy in stock markets can lead to the misconception that a short-term pattern predicts future success, neglecting a more accurate assessment.
Making matters worse, this can create false confidence in the continued streak, so individuals pile into the trade expecting further success.
That is, until it doesn’t. And things quickly unwind.
How to help overcome it?
Present bias - often described in research as hyperbolic time discounting - is our tendency to favor smaller, immediate rewards over larger, delayed rewards. In plain English: “now” feels much more real than “later,” even when “later” is clearly better.
Such bias affects people at many levels - from eating and addiction to finances and risk-taking - where the immediate pleasure outweighs long-term concerns.
In short, people tend to discount how they’ll feel in the future.
For example, consider having extra funds available. A prudent choice would be to invest for retirement. However, the allure of immediate gratification by buying a new video game or car today feels better.
The individual knows what the logical choice is, but that little voice in their head says, “Don’t worry, we can always save for retirement next time.”
But then next time comes, and the cycle repeats itself. . .
Another example is how investors often grapple with the decision between pursuing high short-term yields (which come with more risk) and opting for long-term investments that typically offer lower risk and returns.
The high-flying stock offers immediate gratification, but it can also be destructive if those risks reveal themselves.
How to help overcome it?
So next time you feel the urge to discount your future self, think about hyperbolic time discounting (a mouthful of a word).
Markets are driven by human psychology, and biases distort investment decisions.
By understanding the endowment effect, information asymmetry, recency bias, the present bias, and many many more - investors can:
This communication is general in nature and provided for educational and informational purposes only. It should not be considered or relied upon as legal, tax, or investment advice or an investment recommendation, or as a substitute for legal counsel. Any investment products or services named herein are for illustrative purposes only and should not be considered an offer to buy or sell, or an investment recommendation for, any specific security, strategy, or investment product or service. Always consult a qualified professional or your own independent financial professional for personalized advice or investment recommendations tailored to your specific goals, individual situation, and risk tolerance.
Information contained in the materials included is believed to be from reliable sources, but no representations or guarantees are made as to the accuracy or completeness of information. This document is provided for information purposes only and should not be considered as investment advice
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