Behavioral Finance: Why Smart Investors Still Make Emotional Decisions

When Investing Stops Feeling Rational

Between July 6, 2020, and May 10, 2021, well before I had developed any meaningful understanding of investment principles or considered a career in financial planning, I placed 25 separate buy and sell orders for the same investment in my brokerage account.

I wish I could say those decisions were driven by careful analysis, market research, or strategic timing. The truth is far less sophisticated. Most of those trades were driven by something else entirely — my emotions getting the best of me, repeatedly.

At the time, each decision felt justified. A headline would shift sentiment, a price movement would trigger concern, and a period of strength would create confidence that “this time is different.” I told myself I was being responsive and thoughtful. Looking back, I can see I was mostly reacting — not investing.

That distinction sits at the center of behavioral finance.

Most investors assume poor decisions come from a lack of knowledge. In reality, many of the most significant mistakes are made by disciplined, informed investors in moments where emotions quietly override long-term plans. Markets rarely test intelligence as much as they test behavior.

How Emotions Influence Investment Decisions

When markets are calm, investing feels logical. Portfolios are reviewed, allocations make sense, and long-term goals feel achievable. But when volatility enters the picture, that sense of stability can begin to shift surprisingly quickly.

Even investors with strong plans and clear objectives may begin to question whether they should be doing something differently.

That emotional tension tends to surface in predictable ways.

During market declines, fear becomes the dominant emotion. Account values fluctuate, headlines turn negative, and uncertainty increases. Investors begin asking themselves familiar questions: Should I reduce risk? Should I move to cash? What if this continues? Even when long-term goals remain unchanged, short-term volatility can create pressure to act simply to regain a sense of control.

During strong markets, the opposite challenge emerges. Confidence builds, optimism increases, and recent returns begin to shape expectations for the future. Investors may start to feel more comfortable taking on additional risk, concentrating positions, or assuming recent trends will continue indefinitely. What once felt aggressive may suddenly feel too conservative.

Neither of these responses is unusual. In fact, both are deeply human.

Understanding Behavioral Finance

This is where behavioral finance becomes helpful. Rather than assuming investors are purely rational decision-makers, behavioral finance recognizes that emotions, experiences, and cognitive biases all influence how people interpret financial events and make decisions.

Two of the most common behavioral biases are loss aversion and recency bias.

Loss Aversion

Loss aversion refers to the tendency for losses to feel more emotionally significant than gains feel rewarding. A temporary market decline can therefore feel disproportionately painful, even when it falls within the range of normal market behavior.

Recency Bias

Recency bias occurs when recent events begin to dominate expectations about the future. During strong markets, investors may begin to assume continued growth is more certain than it really is. During downturns, that same bias can create the feeling that negative conditions will continue indefinitely.

The challenge is that these reactions often feel rational in real time. Emotional decisions rarely announce themselves as emotional decisions. They usually feel prudent, responsible, and timely in the moment they are made.

But over time, reacting emotionally to short-term conditions can slowly pull investors away from long-term strategies that were originally built with thoughtful planning and clear objectives in mind.

Why Financial Planning Matters During Volatility

For many investors, the emotional challenge during periods of volatility is not necessarily making investment decisions themselves — it is living through uncertainty while remaining confident in the long-term plan.

That is one of the reasons financial planning matters beyond portfolio management alone.

At CooperDavis, much of the work we do centers around helping clients maintain perspective during periods where emotions, headlines, and market movement can make long-term goals feel less certain in the short term. While market fluctuations are inevitable, a well-structured financial plan is designed to account for uncertainty before it arrives.

This is one of the primary reasons planning conversations become especially valuable during volatile periods. In many cases, clients are not looking for dramatic portfolio changes as much as they are looking for reassurance that the strategy still aligns with their goals, income needs, and long-term priorities.

Sometimes revisiting the framework behind the plan can be more valuable than reacting to the market itself.

Bringing Decisions Back Into Context

Those conversations often involve stepping back from short-term performance and revisiting broader questions:

• Has your long-term time horizon changed?
• Have your retirement income needs changed?
• Has your comfort level with risk shifted?
• Are current market conditions affecting how you feel about your financial goals?

These discussions help separate temporary emotional reactions from meaningful changes that may actually warrant adjustments to the plan.

Over time, this process tends to reduce the mental load that comes with investing and financial decision-making. Instead of reacting to every headline or market movement independently, clients operate within a structured framework that has already anticipated periods of uncertainty as part of the journey.

That structure matters because uncertainty itself is not the problem. Volatility is a normal and expected part of investing. The greater risk is often allowing short-term emotions to drive long-term decisions.

The Real Goal of Financial Planning

In many cases, the value of a financial plan is not simply the investment strategy it produces, but the consistency and perspective it helps create during moments where clarity is hardest to maintain.

Looking back at my own period of frequent trading, the lesson was not really about the investment itself. It was about behavior — and how easily emotions can influence decisions when there is no structure guiding the process.

That is one of the most important roles of financial planning: creating a framework that helps investors remain grounded when markets, headlines, and emotions are all pulling in different directions.

The goal is not to eliminate emotion. That is neither realistic nor necessary. The goal is to ensure emotion does not become the primary decision-maker.

For clients who have found themselves feeling more emotionally affected by recent market volatility, this can be a valuable time to revisit the plan and ensure current investment strategies still align with long-term goals, income needs, and comfort levels.

Sometimes the most productive step during uncertain periods is not making a change, but having a conversation.