Investor behavior leads to market underperformance

Research indicates that psychological factors and behavioral errors frequently cause retail investors to underperform the broader market. According to the Quantitative Analysis of Investor Behavior (QAIB) by the US-based firm Dalbar, individual investors trading single stocks often see returns that are between 1.11 and 4.5 percentage points lower than the market average.

Several cognitive biases contribute to these losses. Loss aversion leads investors to sell solid assets during minor downturns while holding onto losing positions too long to avoid realizing a loss. Herd mentality, exemplified by the 2021 GameStop hype, drives investors to buy into peaks due to social pressure. Additionally, confirmation bias causes individuals to seek out information that supports their existing beliefs while ignoring contradictory evidence. Experts suggest that consistent holding of globally diversified ETFs may help mitigate these emotional decision-making errors.