The unseen forces behind investment decisions: Ten observations from behavioural research

Investment decisions rarely fail for lack of information. They fail in how that information is understood.

This is well established. Decades of behavioural research show that investors do not assess risk in a purely rational way. What is less well understood is how these effects operate in practice - particularly when decisions are infrequent, large, and made in environments where experience and judgement carry more weight than data alone.

In that context, the most important influences on decision-making are not the familiar behavioural biases often cited - such as overconfidence, loss aversion and similar well-rehearsed concepts.

They can be more structural:

• Early outcomes shape how risk is perceived

• Past prices and prior successes become reference points

• Ideas are reinforced and repeated within trusted networks

Over time, these forces interact to produce decisions that appear consistent and considered but are often anchored in prior experience rather than current conditions.

This note draws on behavioural research to isolate a set of mechanisms that consistently shape investment judgement. Not as a catalogue of biases, but as a way of understanding how decisions are actually formed when the stakes are meaningful and the margin for error is low.

How early experience shapes risk judgement

1. Early success does not just build confidence. It changes how risk is perceived

A first major investment win - often a concentrated position or a private deal - does more than validate judgement. It becomes the internal benchmark for what a “reasonable” level of risk looks like, against which future opportunities are assessed. Deals that would once have felt exposed begin to feel familiar, because they resemble something that worked.

Research shows that early investment outcomes shape initial risk perception, and that this perception persists, influencing later decisions even as conditions change. Investors are not necessarily taking more risk - but they are experiencing less risk in situations that resemble past success.

The consequence is subtle. Decision-making still appears measured and consistent, but it is anchored to a prior experience that may no longer be relevant.

2. Losses persist because they are psychologically unresolved

Positions are not always held simply because the outlook remains compelling. Sometimes, they remain because selling would require accepting that the original decision was wrong. As long as the position is held, that judgement remains open.

Empirical evidence shows that investors delay realising losses and evaluate outcomes relative to internal reference points rather than absolute value. The effect is not just financial - it is cognitive. The decision remains “alive,” and therefore avoidable.

Across a portfolio, this leads to capital being anchored to past decisions rather than reallocated to current opportunities.

3. Inaction is often a way of managing regret, not a sign of discipline

Decisions are not always avoided because the outlook is unclear. They are often deferred because acting introduces the possibility of a visible mistake. Holding a position, even when conviction has weakened, preserves the option to be proven right. Acting forces a judgement that can be immediately tested.

Behavioural research identifies regret aversion as a consistent driver of decision-making. Investors weigh not only outcomes, but how those outcomes will feel in hindsight. When the emotional cost of a wrong decision is high, deferring action becomes the safer psychological choice.

What appears to be patience is sometimes a preference for avoiding regret.

The hidden reference points behind decisions

 

4. Investors talk about valuation. They act on reference points

Decisions are rarely made in isolation. They are framed against prior prices, previous valuations, or levels at which an asset once felt expensive or cheap. Even when analysis is rigorous, these reference points remain influential.

Anchoring is one of the most persistent features of investor behaviour. Individuals rely on salient, easily recalled values - entry price, peak valuation, last transaction - as a starting point, and adjust insufficiently as new information emerges. The judgement feels analytical, but the baseline has already been set.

Portfolios reflect not only forward expectations but remembered ones.

5. Realising gains is often about closing the decision

Selling a winning position is not always only a question of valuation. It often marks the point at which uncertainty is removed. The outcome is no longer provisional - it is confirmed.

Research shows that investors realise gains more readily than losses, in part because realised outcomes carry positive psychological value. Gains on paper remain uncertain, whilst gains realised provide closure.

The result is that portfolio turnover is shaped not just by changing fundamentals, but by the preference to convert uncertain outcomes into completed ones.

6. Familiarity is often mistaken for understanding

Investors can tend to concentrate capital in areas where they feel informed - geographies they know, sectors they have operated in, or assets they encounter frequently. That familiarity creates a sense of control, even when the underlying risks are no better understood than elsewhere.

Research shows that investors rely heavily on available and familiar information when making decisions, particularly under uncertainty. This reduces cognitive effort, but also narrows the opportunity set. What is easiest to recall or explain becomes what is most readily owned.

Diversification is rarely rejected. It is eroded quietly, by a preference for what feels known.

How investment decisions spread across dinner tables

7. Risk changes character when it is widely shared

An asset held by a small number of investors is scrutinised closely. The same asset, once widely owned within a peer group, begins to feel less exposed. The underlying risk has not changed, but the perception of it has.

Behavioural evidence shows that investors are influenced by the actions and beliefs of others, particularly under uncertainty. Herding emerges through observation, discussion and repetition, gradually shifting what feels acceptable.

Risk is not reduced - it is redistributed across a network. What appears to be conviction is often alignment.

8. What gets discussed becomes what gets owned

Investment ideas do not circulate evenly. Winners are shared, losses are quietly omitted, and narratives tend to follow what has worked. Over time, this creates a filtered view of opportunity, where certain assets appear repeatedly across conversations while others are rarely mentioned.

Research shows that investors rely heavily on social information when forming judgments. In practice, capital follows visibility rather than completeness. What is discussed becomes what is familiar, and what is familiar becomes easier to own.

Portfolios can begin to reflect the visible part of other people’s success, rather than the full distribution of outcomes that produced it.

9. Investment beliefs are often inherited before they are examined

Within families, views on risk, concentration and what constitutes a “good” investment are rarely formed independently. They are absorbed over time - across conversations, shared decisions and observed outcomes - and often persist across generations. What begins as a set of individual judgements becomes a family framework, applied with confidence even when it has not been explicitly tested in current conditions.

Behavioural research shows that decision-making is shaped by social environment and repeated exposure to shared beliefs. Investors do not form views in isolation - they adopt and reinforce them within trusted groups, where familiarity substitutes for independent validation. Over time, these assumptions become the default lens through which new opportunities are assessed.

The effect is persistent. Portfolios can come to reflect inherited patterns of thinking as much as current judgement, making it difficult to distinguish between decisions that are actively formed and those that are simply carried forward.

The personal consequences of investment decisions

 

10. Performance quietly reshapes the way decisions are made

Investment outcomes do not simply change wealth. They alter how risk is perceived and how new opportunities are interpreted. After strong performance, exposures that once felt uncertain begin to feel more manageable. After losses, the same exposures are judged more cautiously, even when underlying conditions are unchanged.

Research shows that experience shapes risk perception and that this perception evolves with feedback over time. Decisions are not made independently - they are conditioned by recent outcomes, creating a feedback loop in which perception and behaviour reinforce each other.

That shift rarely remains confined to the portfolio. It influences how risk is discussed, how opportunities are framed, and how consistently decisions are applied across the household.

Performance does not just reflect judgement. It changes how judgement is formed in the first place.

Conclusion: The objective is not better information. It is preserving clarity of judgement as conditions change

These are not isolated behaviours. They are structural features of how investment decisions are made when experience, judgement and social context matter. Most are internally consistent, often reinforced by past success, and difficult to detect in real time. Over time, they shape portfolios in ways that are not always aligned with current opportunity or risk.

For those allocating significant capital, the challenge is not access to better information. It is recognising when judgement has become anchored - to prior outcomes, familiar reference points, or widely shared views. That shift rarely feels like a loss of discipline. – it often just feels like continuity.

This is where an external perspective matters. Not to replace judgement, but to test it. To challenge the assumptions that no longer move, to separate current opportunity from past experience, and to ensure that decisions are grounded in today’s conditions rather than yesterday’s outcomes.

That is a different role from traditional advice. It is the imposition of discipline on the decision-making process itself.

The objective is not to eliminate these forces. It is to recognise them early enough that they do not become the strategy.

Nick Perryman is Vice Chairman and Partner at Clarus Global Capital, and Chairman of its Investment Committee. Previously, he spent nearly two decades at UBS where was a Managing Director. He is co-author of the book, Leadership in Wealth: Mastering the Opportunities of Wealth in your Family, Firm and Society. He holds master's degrees from Durham and London universities, including in finance and organizational psychology, and is a doctoral researcher at Durham in financial services leadership, risk and governance. He is a Chartered Fellow of the Chartered Institute for Securities and Investment.

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Important notice

This article is provided for general information, discussion and educational purposes only. It reflects the views of the author at the date of publication and is not intended to constitute, and should not be relied upon as, investment, financial, legal, tax, accounting or other professional advice. It does not constitute an offer, solicitation, recommendation or invitation to buy, sell or hold any investment, financial instrument or service, nor should it be regarded as a personal recommendation or as taking account of the objectives, financial circumstances or needs of any particular person.