Investing and Emotion: Understanding the Hidden Motivations Behind Investor Behavior
Investing and Emotion: Understanding the Hidden Motivations Behind Investor Behavior
Why are you investing?
In my career I’ve asked that question many times, and it always catches people off guard.
“Well…to make money” is the most common answer, followed by a look that says ‘how did you not know that?’
People come to the stock market to invest and make gains, sure, but there are many other reasons we approach the market—psychological reasons we might not even be aware of. Investing is often framed as a rational process, one guided by numbers, valuation models, and risk assessments. Yet, time and again, it is human emotion that dictates market behavior.
We are not machines executing perfectly optimized strategies. We are humans with fears, desires, and deep-seated psychological needs. When we enter the market, we bring our entire selves with us—our past experiences, our insecurities, and our hopes for the future. If we fail to acknowledge the emotional forces driving our decisions, we risk making costly mistakes.
The Retiree’s Dilemma: Investing for Emotional Security
Consider a common story: a person retires after decades of working, enjoying the newfound freedom that comes with it. At first, everything is great—travel, hobbies, relaxation. Then comes that first payday without a paycheck. The sudden stop of a reliable income stream triggers deep feelings of insecurity and panic.
So what does the retiree do? Many turn to the stock market, seeking comfort in high-dividend, high-growth stocks. The rising account balance provides reassurance, a sense of financial control, even a feeling of being “paid” again. But this psychological fix comes with a dangerous hidden cost—taking on too much risk to soothe the emotional discomfort of losing a paycheck.
This story almost always has a bad ending. Markets are not linear; they fluctuate. When a downturn hits, high-risk investments fall harder, and suddenly, that comforting “paycheck” disappears. Now, the retiree is hit with a double whammy: no paycheck, and a shrinking portfolio. What started as a way to ease financial anxiety has only intensified it.
This is the kind of mistake that can severely impact both financial stability and mental health. It’s not just about losing money—it’s about the emotional toll of making financial decisions based on feelings. I’d like to take a moment to recognize that feelings in the market aren’t a bad thing, they are normal. The issue only comes when an emotion gets you to act impulsively, or avoidantly, or against your best interest. Emotions aren’t bad, but when intense emotions control you things can get bad, easily.
Risk Tolerance: It Changes More Than You Think
Risk tolerance is often treated as if it’s a fixed trait, like eye color or height. But the truth is, risk tolerance is fluid. It shifts with life’s ups and downs.
The amount of risk you’re comfortable taking at a peak point for your family and career is very different from the risk you can handle when things are uncertain, stressful, or going poorly. Yet the industry often assumes that investors will stick with the same risk profile no matter what.
This is a dangerous assumption. Bear markets test investors in ways theoretical questionnaires never can. The quickest and easiest way to fail in long-term investing is to let short-term fear or excitement drive your decisions.
So, how do you guard against this? Know your investments.
- How did your portfolio perform in the last recession?
- What is its standard deviation (a more forward-leaning measure of volatility)?
- What expectations should come with this investment?
- How does this investment or portfolio fit into my long term strategy?
Arming yourself with this knowledge allows you to opt into risk rather than blindly accepting it. Ignorance about your portfolio’s behavior in volatile times is not a recipe for success.
The Truth About Outperformance: It’s Overrated
Many investors chase outperformance, thinking they need to beat the market to succeed. But we all invest in the same market.
This means outperformance can only occur by taking higher risks. The industry knows this, which is why advertisements and sales pitches try to convince investors that high risk is noble or even expected. Every day, we are bombarded with messages telling us to “aim higher,” to “go big,” to put our money into something that will take us to the moon.
But the truth is: you likely don’t need that level of risk to be successful.
Market performance is often good enough. Investing is about growing and shrinking with the global economy, not chasing unrealistic gains. Slow, steady, diversified growth is often the best path forward. The temptation to take big bets is real, but often those bets don’t pay off the way investors hope.
Investing vs. Gambling: Know the Difference
Some people say the stock market is like gambling—and they’re right, but only if you approach it like a gambler.
Many investors unknowingly take casino-style risks by putting too much money into just a couple of stocks. This exposes them to business risk, meaning their fate is tied to just one or two companies. That’s gambling.
Diversification is the answer. Just like in statistics, where larger sample sizes smooth out variability, the more stocks you hold, the less likely all of them are to fail.
But diversification goes beyond just stocks:
- Bonds CAN provide more stability.
- Real estate CAN offer a way to diversify stock holding.
- Commodities are often used hedge against inflation.
- Cash reserves provides liquidity in downturns.
- The list goes on…
Despite this, many investors avoid diversification. Why? Because some aren’t investing for financial success—they’re investing for the thrill.
For some, the market provides a dopamine rush—the excitement of a big win, the adrenaline of high-stakes bets. They may tell themselves they’re investing, but they’re just gambling in a different venue.
This mindset can be incredibly destructive. Worst of all, those who treat the market like a casino often internalize losses as normal. They come to believe that losing everything is simply part of the game. It’s not. The market is not a casino—it’s a tool for long-term wealth creation. But only if you use it correctly.
What Brings You to the Market?
So, I ask again: what brings you to the market?
Whether the market excites you, scares you, or is just a necessity, there are likely deeper emotional reasons behind your investing decisions.
- Are you seeking comfort, like the retiree?
- Are you chasing an adrenaline rush, like the gambler?
- Are you making decisions based on fear or excitement, rather than long-term strategy?
These emotional motivations are valid—but unless you recognize them, they may cause you to act against your own best interest.
Successful investing isn’t just about knowledge—it’s about self-awareness. The best investors understand not just how the market works, but how they themselves react to it.
Invest wisely, invest intentionally, and most importantly—invest with a clear understanding of your own emotions. That is the key to long-term financial and emotional well-being.
DISCLOSURES:
Investing involves risk, including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining values. There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.
Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise and bonds are subject to availability and change in price.
Investments in real estate may be subject to a higher degree of market risk because of concentration in a specific industry, sector or geographical sector. Other risks can include, but are not limited to, declines in the value of real estate, potential illiquidity, risks related to general and economic conditions, stage of development, and defaults by borrower.
The fast price swings in commodities will result in significant volatility in an investor’s holdings. Commodities include increased risks, such as political, economic, and currency instability, and may not be suitable for all investors.
