Investors often leave money on the table, not because of poor market conditions, but because of their own instincts. Emotional biases like fear, greed, and herd mentality can lead to poor decisions, such as buying high and selling low. Recognising these traps and sticking to a disciplined investment strategy can help you avoid the behaviour premium and achieve better long-term returns.
It is one of the most frustrating puzzles in personal finance. In 2024, the S&P 500 delivered a powerful 25.05 per cent return, yet according to DALBAR’s latest report, the average equity investor earned just 16.54 per cent. This staggering 8.48 percentage point gap is not the result of bad luck or simply picking the wrong funds. The truth is far more personal.
The biggest obstacle standing between you and your investment goals is often your own mind. Hardwired psychological biases mental shortcuts shaped by fear, hope, and social pressure drive decisions that quietly sabotage long-term performance. This phenomenon is so consistent it has a name: the behavior premium.
Understanding the Behavior Premium
The concept of the behavior premium comes into focus when we examine the phenomenon of ‘timing the market’ that instinctive desire to buy at lows and sell at highs. As ideal as it sounds, this approach often leads investors astray.
Investors who attempt to time the market with precision often end up selling in a panic during market dips, locking in losses. On the flip side, they may re-enter the market too late, missing significant rebounds. This kind of decision-making is driven largely by emotion rather than data, and by short-term reactions rather than long-term strategy.
Returns achieved by investors who lack the discipline to stay the course are significantly lower than those who simply stick to their plans. For example, investors who redeemed their holdings during the 2008 global financial crisis or the Covid-19-induced bear market missed out on some of the most powerful rebounds in market history.
According to studies, over the past 20 years, equity markets have delivered around 8 per cent annually, yet many individual investors have earned only 4–5 per cent. The difference is behavior.
Does the Behavior Premium Exist in India?
As mutual fund investing gathers pace in India, an important question emerges: does the behaviour premium affect Indian investors as well?
The answer, supported by recent research, is yes—very clearly.
Evidence from India: What Recent Research Shows
Recent studies on investor behaviour in India provide a clearer picture of how emotional biases, financial literacy, and socio-economic factors influence investment decisions often leading to suboptimal outcomes.
A 2025 study on retail investor preferences in mutual fund selection in India, based on a survey of 103 retail investors, found that investor perception, financial literacy, risk tolerance, age, and income significantly influenced fund selection. The study highlighted a critical behavioural flaw: Indian investors tend to chase past performance, leading to buying at peaks and exiting during downturns.
The Investor Awareness and Behavioural Trends in Mutual Fund Investments (2024) study surveyed investors across multiple Indian states. It revealed that while risk tolerance, investment horizon, and expense ratios influenced decisions, many investors underestimated the long-term impact of high costs. When combined with poor timing driven by emotional biases, this significantly eroded returns.
Finally, the Behavioral Biases and Investment Decision-Making in the Indian Capital Market (2025) study identified the most common behavioral traps among Indian retail investors. It found that loss aversion, overconfidence, and herd mentality played a dominant role especially during periods of market volatility. Investors frequently overestimated their ability to pick winning stocks and followed market trends blindly, widening the gap between market returns and actual investor returns.
Bridging the Gap Between Market Returns and Investor Returns
This article reveals the most surprising and impactful behavioral traps that cause investors to underperform. By understanding these biases and adopting disciplined, long-term strategies, investors can begin to close the gap between market potential and real-world outcomes.
For deeper insights into long-term investing discipline and behavioral finance perspectives, follow thoughts and guidance shared by
👉 Ranjit Jha (CEO)
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