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Performance perceptions: Minimize investor bias to improve outcomes 

Investing success is more than just numbers and math, it’s also about managing emotions, impulses, and natural tendencies. Given the complexity involved in investment decisions, it’s not surprising that investor bias can sometimes cloud decision-making. A myriad of investor biases exist. Three common biases, explored below, reveal how investors may think about, recall, and act on performance perceptions. 

Recency bias: Basing decisions on current events not historical patterns 

Recency bias leads investors to give more weight to recent events and less to historical patterns when making judgments and decisions. For example, our research shows that, when asked about their expectations for future market returns, investors are more bullish when markets have performed well over the last year, and more bearish when they haven’t. However, economists would argue that expected returns should rise as prices fall. A more balanced approach that considers both recent developments and historical context can lead to more informed investment decisions. 

Investor expectations typically rise and fall with the market 

Source: The Vanguard Investor Expectations Survey, a bimonthly survey of approximately 2,000 Vanguard personal and 401(k) investors. This survey has run every other month (February, April, June, August, October, and December) since February 2017. Data are for the period February 28, 2017, to June 30, 2023. Past performance is no guarantee of future returns. The performance of an index is not an exact representation of any particular investment, as you cannot invest directly in an index. 

Loss aversion: Losses hurt more than gains help

Loss aversion generally speaks to the phenomenon that losses are more painful than gains are pleasurable. This means investors may hold off on selling to avoid losses over achieving gains. Because loss aversion exists, some investors may fall victim to the disposition effect—selling assets that have gained in value and holding assets that have lost value. 

Using Vanguard Total Stock Market ETF as an example, our analysis shows that selling activity has been significantly higher among investors who broke even or experienced unrealized gains than among those who experienced unrealized losses. Investors should focus on ensuring their portfolio is consistent with their goals and risk tolerance. 

Disposition effect: Investors are reluctant to sell assets that have lost value 



Source: Analysis of a random sample of about 100,000 Vanguard investors who initiated a position in Vanguard Total Stock Market ETF (VTI) between January 1, 2018, and December 31, 2022. The Vanguard calculations use asset price data from Morningstar, Inc. Performance groupings are rounded to the nearest whole percentage number; i.e., the 0% cohort comprises those who realized returns between –0.4% and 0.4%.  

First impression bias: Enduring effects of early experiences 

First-impression bias refers to the long-lasting effects of early experiences in the market on long-term risk-taking. For example, investors who began their investment experience during down markets, such as the bursting of the bubble in the early 2000s, tend to continue to hold more conservative portfolios decades later. This is true even though they likely are younger and have a longer time horizon than those who started investing just a few years earlier, in the 1990s, when the stock market was generating strong positive returns.1 The consequence is that investors who started investing in down-market environments may miss out on excess returns while those who started during a strong stock market may take on too much risk. 


Source: Vanguard administrative data for about 2 million Vanguard Personal Investor clients with taxable accounts and/or IRAs as of December 31, 2022 who opened their first accounts between 1995 and 1999 or between 2001 and 2005. Past performance is no guarantee of future returns. The performance of an index is not an exact representation of any particular investment, as you cannot invest directly in an index. 

Greater attention to these and other biases can help investors think more broadly about risk tolerance, portfolio considerations and investment goals. Maintaining discipline and a long-term perspective are the keys to overcoming these and other investor biases. A financial advisor can help you minimize these risks and achieve your investment goals. 

Special thanks to Tom De Luca, Vanguard investment strategist, for his contributions to this article. 



Vanguard ETF Shares are not redeemable with the issuing Fund other than in very large aggregations worth millions of dollars. Instead, investors must buy and sell Vanguard ETF Shares in the secondary market and hold those shares in a brokerage account. In doing so, the investor may incur brokerage commissions and may pay more than net asset value when buying and receive less than net asset value when selling. 

All investing is subject to risk, including the possible loss of the money you invest. Diversification does not ensure a profit or protect against a loss. 

The sale of the VTI qualifies as a private placement pursuant to section 2 of Uruguayan law 18.627. Vanguard represents and agrees that it has not offered or sold, and will not offer or sell, any VTI to the public in Uruguay, except in circumstances which do not constitute a public offering or distribution under Uruguayan laws and regulations. Neither the VTI nor issuer are or will be registered with the Superintendency of Financial Services of the Central Bank of Uruguay to be publicly offered in Uruguay.” 

The VTI correspond to investment funds that are not investment funds regulated by Uruguayan law 16,774 dated 27 September 1996, as amended.