Using Behavioral Finance to Set Investor Expectations
The last few years have been good to investors. Really good.
Strong market returns have lifted portfolios, strengthened financial plans, and created a sense of momentum. And while that’s something to celebrate, it can also quietly change how we think — and feel — about investing.
When markets perform well for an extended period, it’s easy to assume that’s just how things work. Expectations rise. Confidence builds. And without realizing it, we may begin to plan for a future that assumes markets will always cooperate.
But investing doesn’t happen in a straight line. It never has.
That’s where behavioral finance comes in — the study of how real people actually make financial decisions, especially during emotional moments. Decades of research show that even smart, experienced investors are influenced by psychological biases. The challenge isn’t eliminating those biases — it’s learning how to manage them.
When Recent Success Feels Like the New Normal
See Chart 1: Long-Term S&P 500 Annual Returns
One of the most powerful biases investors face is recency bias — our tendency to place too much importance on what’s happened lately.
After years of strong equity returns, it’s natural to start thinking of double-digit gains as “normal.” Some investors assume the trend will continue. Others feel uneasy, convinced a downturn must be right around the corner. Both reactions are understandable — and both can be unhelpful.
History tells a more balanced story. While the stock market has delivered attractive long-term returns, individual years can look wildly different from one another. Big gains, flat years, sharp declines — they’re all part of the journey.
The key isn’t predicting what comes next. It’s remembering that short-term outcomes don’t define long-term success.
Recency bias often shows up alongside herd mentality. When markets are rising, fear of missing out can push investors to chase hot sectors, increase risk, or drift away from carefully constructed plans. But market leadership changes, sentiment fades, and today’s favorite story eventually becomes yesterday’s news.
Strong returns should prompt reflection — not reaction.
Why Losses Hurt More Than Gains Feel Good
See Chart 2: Intra-Year Market Pullbacks
Another reason investing feels so hard at times is something behavioral scientists call loss aversion.
Psychologists Daniel Kahneman and Amos Tversky famously observed that “losses loom larger than gains.” In simple terms, losing money hurts more than making money feels good — even when the amounts are the same.
Looking at a long-term market chart, downturns may appear small and temporary. Living through them is a different experience entirely. Headlines grow louder. Volatility feels personal. Emotions take over.
And yet, market pullbacks are not unusual. In fact, they happen often — even in years that ultimately finish strong. Investors who react emotionally in these moments risk turning temporary declines into permanent setbacks by selling at the wrong time.
Staying invested through uncomfortable periods has historically been one of the most important drivers of long-term success.
Looking Beyond What Feels Familiar
See Chart 3: U.S. vs. International Market Leadership
Comfort also plays a role in where investors choose to allocate their money.
Home country bias — favoring domestic investments simply because they feel familiar — is common. Over the last decade, U.S. stocks have rewarded that comfort. But history reminds us that leadership rotates.
There have been many periods when international markets outperformed U.S. stocks, and valuations today reflect those shifting dynamics. Diversifying across regions, sectors, and styles isn’t about predicting winners — it’s about building portfolios that can weather change.
Because change is inevitable.
The Bottom Line
After years of strong market performance, optimism is natural. So is anxiety. Both emotions are part of investing.
The most successful investors aren’t the ones who avoid emotion altogether — they’re the ones who recognize it, plan for it, and avoid letting it drive decisions.
Markets will rise and fall. Headlines will come and go. What matters most is staying grounded in history, maintaining perspective, and sticking with a thoughtful, long-term plan — especially when it feels hardest to do so.
References & Disclosures
Source: Clearnomics, Inc.
Behavioral finance concepts are informed by research from Daniel Kahneman and Amos Tversky. Market data references include historical S&P 500 returns and MSCI index performance.
This material is provided for informational purposes only and should not be construed as investment advice or a recommendation to buy or sell any security. Past performance is not indicative of future results. All investing involves risk, including potential loss of principal.
The information contained herein has been obtained from sources believed to be reliable but cannot be guaranteed as to accuracy or completeness. Views expressed are subject to change without notice and may not reflect the views of all market participants.
© 2026 Clearnomics, Inc. All rights reserved. Used with permission.
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