The seven deadly sins of investing

Time stamps:

• 0:00 – The seven deadly sins of investing
• 1:45 – Overconfidence: how good an investor are you?
• 5:52 – The hot hand fallacy: chasing exceptional growth
• 8:08 – Loss aversion: the urge to break even
• 10:47 – Anchoring: when a price shapes your valuation
• 11:40 – Base rates: could this be the next Nvidia?
• 14:09 – Herding: the pull of the crowd
• 15:38 – Confirmation bias and company red flags
• 17:21 – Building a process to keep bias in check

Have you ever realised the extent to which you use patterns in life? Some patterns are protective and continue to be so even in modern times, while others may actually hold us back. Biology and evolution have trained us to recognise patterns, but these same biological drivers can lead us astray when it comes to investing.

For example, sticking with the tribe may have kept you safe in a time where sabre-tooth tigers prowled. Sticking with the tribe when it comes to stocks may mean you pay too much for a stock (or that it doesn’t actually fit your portfolio).

How can you keep these biases from influencing your investment decisions?

Part of the trick is understanding your biases and building your process to avoid slipping into bad patterns, according to Plato Investment Management’s Dr David Allen at Livewire Live 2026.

How can we avoid our mistakes if we don’t take the time to understand them, after all?

Consider this your guide to understanding your investment psychology, and managing the seven deadly sins of investing.

Deadly sin #1 – Overconfidence

Overconfidence is a universal challenge, repeatedly seen in cognitive psychology. For example, Allen cites studies showing that 93% of people believe they are better drivers than the median, while men trade 45% more than women and significantly underperform due to trading costs.

“Overconfidence is really a coping mechanism in many ways, and investing is almost perfectly designed to create overconfidence. 

Markets are noisy. The market goes up, we attribute it to our own skill and genius. The market goes down, well, that’s just bad luck. That’s just short-term noise,” Allen says.

Taking it a step further, humans are notoriously bad at probabilities – “statistically, when people say that they’re 90% confident, they’re actually only right 75-80% of the time. When they say they’re 100% certain, they’re actually right only 85-90% of the time.”

Avoiding the sin: Allen suggests hardwiring triggers into your process to avoid becoming overconfident. For example, Plato automatically closes a stock position when its price falls 80% from its peak.

Deadly sin #2 – Hot-hand fallacy

The hot-hand fallacy involves seeing patterns where none exist. For example, a basketball player makes several shots in a row, and the audience assumes they are on a roll and can’t miss.

“Statistically, they found even if you’ve made a run of shots, your chance of having a successful next shot is only ever so slightly higher than your base rate. But we’re hardwired to see patterns where none actually exist,” says Allen.

What this might look like in an investing sense is choosing to invest at the start of the year in the companies with the highest growth rate because we assume that growth will persist over time. Allen notes that if you put this strategy into practice, at the end of 30 years, you would have little to no money left.

“We systematically overestimate how long exceptional things can remain exceptional. Trees don’t go to the sky, but every successive generation of investors finds a new crop willing to see if they do,” he says.

Avoiding the sin: Don’t extrapolate short-term growth into long-term figures. Plato actually view extremely high growth projections as a red flag.

Deadly sin #3 – Loss aversion

People tend to favour a guaranteed gain over the chance of a larger gain. When facing a loss, they tend to take greater risks in the hope of avoiding it.

“It explains lots of things we see in the markets. For example, we cut our winners too early. Ok, we want to crystallise that gain, feel good about that. On the negative side, when a stock is underperforming for us, we often don’t cut that name. We want to believe that the stock is going to come good. We don’t want to recognise that we’ve made a mistake on that, and that can lead to things like momentum in markets,” Allen explains.

He notes that people might say they’ll sell stocks when they return to what they’ve paid for them – “but the market doesn’t know what you paid. Moreover, the market doesn’t care what you paid. It makes no bearing on the future trajectory of that stock price.”

Avoiding the sin: It all comes back to basics and the fundamentals of the stock you hold.

“If you had a clean sheet of paper and you didn’t already own that position, would you buy it? Because if you wouldn’t, that starting price, that’s not an investment thesis. That is merely history,” Allen says.

In short, cut your losses when the evidence shows your thesis doesn’t hold.

Deadly sin #4 – Anchoring

People use the first piece of information they receive as an anchor for subsequent judgements. For example, if you are told a company plans to list at a valuation of $50 billion, you may think that valuation is unreasonable. But rather than test it through fundamental research, you might choose another figure, such as $30 billion, that is still influenced by the original anchor.

Avoiding the sin: Do the fundamental research, rather than going by the noise. Look at peers, find out the company financials, look at the industry projections.

Deadly sin #5 – Base-rate neglect

We know that humans struggle with accuracy when it comes to probability, as mentioned earlier, so what happens when we are provided with statistical probabilities?

We tend to ignore the base rate within the likelihood – if a test detects 99% of cases of a disease but only 1% of the world’s population actually has a particular rare disease, receiving a positive result doesn’t actually mean you have a 99% likelihood of having the disease.

Consider the maths of this example from Allen:

• Sample size: 10,000
• Rare disease: 100 people
• Testing: 99 of the 100 tested positive, 1 tested negative despite having disease.
• False-positive rate among people without the disease: 5%
• Actual probability of having the rare disease given a positive result? About 17%

In an investment context, this happens when investors assume a company will be the next Nvidia because it has a large addressable market and a charismatic founder, without considering how often companies with those characteristics have historically succeeded.

Avoiding the sin: Think of the base rate when it comes to emerging and exciting companies and remember fundamentals. Every innovation produces winners and losers, and it isn’t always possible to predict which companies will succeed.

Deadly sin #6 – Herding

From an evolutionary perspective, sticking with the herd rather than stopping to check the facts would have kept you safer. Sticking with the herd on a stock? Not so much.

Social conformity can be a powerful thing, even where the answer should be obvious.

Allen highlights one study where 75% of participants in an experiment gave the wrong answer in line with actors deliberately giving the wrong answer – despite the correct answer being very clear.

Avoiding the sin: Just because everyone is buying a stock doesn’t mean it is actually valuable or has a solid thesis for your portfolio.

Deadly sin #7 – Confirmation bias

Humans tend to look for evidence they are right – gathering good news that matches with their views, ignoring bad news that doesn’t align.

Avoiding the sin: Have an automated system of red flags for investing.

“We have 150 red flags that are fully automated, fully systematic. I can bring up any company in the world and instantly see what are the risk factors lurking beneath the surface. If a company has 8 or more red flags, on average it underperforms by 20%,” Allen says.

You can also make a point of looking for information that would falsify your thesis and re-evaluate on that basis.

The biggest investment risk

“Ultimately, the biggest risk I think we all have as investors – it’s not the market, it’s not the economy, it’s not even the company – it’s almost always the person making the investment decision, and unfortunately that’s the one risk that we all have to take home with us today,” Allen says.

The solution to managing the deadly sins as a whole?

Understand your biases, make as much of your process systematic as possible and challenge your thinking and thesis in every investment.

Read the full ebook of The Seven Deadly Sins of Investing by Plato Investment Management here. 

For more from Livewire Live 2026, click here.