When stories move markets

At a glance

• Investment decisions aren't driven by facts alone: emotions, headlines and fear of missing out can influence markets and investor behaviour. 
• A good story doesn't always make a good investment: popular themes can become overpriced when excitement starts to outweigh fundamentals. 
• Sticking to a plan can help avoid costly mistakes: recognising common behavioural biases may help investors make better long-term decisions.

Markets are driven by people as well as fundamentals, but traditional finance assumes rational participants. Behavioural investing is about recognising when a persuasive story, recent performance or the fear of missing out starts to outweigh valuation, risk and long-term goals, creating a level of irrationality.

Behavioural investing: the risk hiding in plain sight

Investing is often presented as a numbers game: earnings, interest rates, inflation, valuations and expected returns. But markets are also shaped by things like emotion and social influence, especially during periods of stress or excitement.

Behavioural investing isn’t about assuming markets are irrational. It’s about spotting when prices may have moved too far because a compelling story, recent performance or herd behaviour has taken over. Understanding investor behaviour can be as important as understanding the market.

Common behavioural biases in action

• Herd behaviour: buying into a popular theme because many others are doing the same, rather than because the price still looks attractive.
• Confirmation bias: focusing on information that supports an existing view while ignoring evidence that challenges it.
• Loss aversion: feeling the pain of losses more strongly than the benefit of gains, which can lead to selling after markets have already fallen.
• Overconfidence: assuming a successful call was skill rather than luck, and taking on more risk as a result.
• Anchoring: fixating on a previous price or level, such as the amount originally paid, and refusing to sell until that price is reached again - even if the investment case has changed.

The power - and danger - of a good investment story

Every major market cycle has a story: a new technology, a changing world order, a structural shortage, a policy shift, or a once-in-a-generation opportunity. Narratives help investors make sense of complex information, but they can also make rising prices feel more justified than they are.

The danger isn’t that stories are always wrong. Some are grounded in real change. The risk is that a good story can make investors less demanding about the price they pay. The question shifts from ‘is this attractive at today’s valuation?’ to ‘what if I miss out?’.

Recency bias: when the latest trend feels like the new normal

Recency bias is the tendency to give too much weight to what’s happened recently. In investing, it can lead people to chase recent winners, sell recent losers or assume today’s market conditions will continue.

In a bull market, gains can start to feel normal and risk can look lower than it is. In a downturn, losses can feel permanent, tempting investors to abandon long-term plans after prices have already fallen.

How behavioural risks build across a cycle

Behavioural risks tend to build gradually. Early in a cycle, investors test the evidence. As returns improve, confidence grows, media coverage increases and the story becomes easier to believe because prices appear to confirm it.

Later, the process can become self-reinforcing: strong returns attract more money, which supports further price rises and more attention. Warnings about valuation, concentration or downside risk may then be dismissed as overly cautious.

When the cycle turns, confidence can fade quickly. Investors who bought the story rather than the price may find they have little margin of safety.

Warning signs to watch for

• A theme is described as inevitable, with little discussion of valuation or downside risk.
• Recent returns are treated as proof of future returns.
• Diversification is dismissed because one area has been outperforming.
• Commentary focuses on missing out rather than price, risk and time horizon.
• You feel pressure to act quickly, even though your long-term goals haven’t changed.

Making behaviour work for you

The best defence is a simple decision-making process that stops short-term noise from dominating long-term judgement.

• Write down your investment case. Include why you’re investing, what would prove you wrong and what price you’re prepared to pay.
• Separate story from valuation. A strong theme can still be a poor investment if too much optimism is already priced in.
• Rebalance regularly. Trim areas that have grown too large and add to areas that have become underrepresented.
• Look across a full cycle. Consider how an asset has behaved in different inflation, interest rate and growth environments.
• Seek challenge. Before adding to a popular theme, read the strongest argument against it.

The bottom line

Behavioural investing is a practical risk management tool. It helps investors recognise when a compelling story is shaping the decision more than the evidence is.

Market cycles will always produce fashionable themes, uncomfortable drawdowns and persuasive reasons to believe the recent past will continue. The investors best placed to navigate them are those who test the story, assess the price and stay anchored to a plan.