GUIDESINVESTMENTS
Investor Psychology: How Emotions Impact Decisions
4 MIN • 
LAST EDITED BY NISHA SHARMA ON OCTOBER 14, 2025.
LAST EDITED BY NISHA SHARMA ON OCTOBER 14, 2025.
GUIDES LAST EDITED BY NISHA SHARMA ON OCTOBER 14, 2025.
“₹1,00,000 credited to your account.” You receive an annual bonus, woohoo! Your phone's abuzz with Social Media messages: Japan trip with friends, stock tips from coworkers, neighbours sharing crypto-success Whatsapp stories, and your Dad insisting on another fixed deposit.
Meanwhile, markets are hitting new highs. The FOMO is real. Despite being 'reasonably' financially aware, you notice that you're paralysed by choices one day and making hasty decisions the next. Caught like a deer in headlights; between rational knowledge and emotional impulses.
As unlikely as it seems, these 'psychological money traps' are remarkably predictable. Such tendencies can derail entire investment journeys, often with devastating consequences.
Let's follow the story of three investors. From the infamous 2020 market crash to present day; their psychological mistakes and road to recovery.
Priya, Kavitha, and Amina worked at the same IT company. In March 2020, all three watched markets crash by 30%, but their reactions couldn't have been more different.
Priya got lucky. She had a 'gut feeling' and sold 60% of her portfolio before the crash. When markets cratered, she felt vindicated. 'I knew this was coming,' she told herself, reframing her emotional response as analytical foresight.
Kavitha panicked. As markets crashed, she convinced herself, 'This is never going to recover,' and sold everything. When markets began recovering weeks later, her regret was crushing. She had sold at literally the worst possible moment.
Amina felt overwhelmed. There was too much market noise, and she fell into the herd mentality. WhatsApp tips, YouTube finance gurus, neighbour uncle's pharma stock picks; she bought them all. Zero research. Her portfolio became a collection of other people's convictions, not her own analysis.
Six months later, as markets recovered spectacularly, their psychological biases/tendencies created new issues.
Priya's lucky escape inflated her ego. 'I predicted the crash,' she kept telling colleagues. By 2021, convinced she could time markets, she concentrated 80% of her portfolio in small and mid-cap stocks. 'I can spot the next multibagger,' she told herself, confusing luck with skill.
Kavitha's regret spiral deepened. Every market gain felt like salt in her wounds. This mental stress was so intense that it led to 'regret aversion', where she made conservative investment choices and swore off stocks entirely, only parking everything in fixed deposits. This 'safe choice' guaranteed underperformance while inflation was ~7%.
Amina turned into a trend chaser. Her zero-strategy approach yielded mixed results: some wins, few losses. She jumped from crypto to small caps to large caps, chasing whatever was popular. Her portfolio became a museum of market fads.
By 2025, each investor faced the consequences of their biases.
Priya's concentrated small/mid-cap portfolio crashed so hard that it made the broader market's crash feel like a minor tumble. Her overconfidence made her believe this was just a 'temporary correction.' Long story short, that lucky escape in 2020 set her up for much larger losses later. Trapped by overconfidence.
Kavitha's 'safe' FDs were slowly dwindling her wealth. Inflation had quietly munched away at her purchasing power. Her fear of volatility led to continuous wealth erosion, day by day.
Amina's story took a different turn. The market correction forced harsh self-awareness: she couldn't explain why she owned anything. It changed everything. Instead of following random tips, she worked with a financial advisor. Plus, she used AI-powered investment platforms to identify her behavioural patterns around money.
Technology helped her recognise emotion-driven decisions while her advisor kept her focused on long-term goals. Gradually, Amina transformed from a reactive tip-follower into a level-headed, systematic investor.
Historically, the average investor underperforms markets by 3-4% annually. Yet this is not due to picking bad stocks but to buying and selling at emotionally driven moments.
Consider our examples: Priya's journey shows how premature success may be more dangerous than failure. Kavitha's choices demonstrate how past mistakes can paralyse future decisions.
Meanwhile, Amina proves that self-awareness, the right tools, and qualified help can break troublesome patterns.
The solution isn't to eliminate emotions. That's humanly impossible. Instead, build a comprehensive mindset and defence system; one that works with your psychology, not against it.
Here's the harsh truth: Markets don't care about feelings, but feelings impact your long-term returns. Every investor who builds lasting wealth isn't necessarily the smartest one. They recognise investing is as much about managing psychology as analysing companies.
The market is ultimately a wealth transfer mechanism. It shifts from the impatient to the patient, from the emotional to the systematic, from those who fight their psychology to those who work with it.
Disclaimer: This article is for educational purposes only. Please consult with a financial advisor for personalised advice.
