In the past year, market volatility has seemed to be the rule rather than the exception. The constant threat of tariffs and geopolitical instability might make you feel like you’re riding solo on an emotional roller coaster, but you’re not alone.
Plenty of investors get jittery when the news cycle is a revolving door of disasters, opinions and sound bites. A survey from 2021 found that 66 percent of investors have regretted making an emotionally-charged investment decision.
The key is not letting those gut reactions guide your investment behaviour, especially when corporate CEOs, political leaders and media personalities can weigh in and cause momentary market rallies or drops. That’s where behavioural finance comes in.
The idea behind behavioural finance is that our brains tend to jump to conclusions based on specific and subconscious rules of thumb that humans developed to survive at one point in our evolutionary history. Those rules, called biases or heuristics, operate from “fight or flight” emotions like fear, anxiety and excitement, and they prevent us from making rational decisions in the heat of the moment.
Since anxiety and fear seem to be the rule, rather than the exception, these days, here are three ways to keep your feelings in check when things get bumpy.
Beware of herd mentality
Whether it’s the company stock that everyone wants to offload after a CEO scandal breaks or the investor frenzy you might see around some new revolutionary, but untested, AI technology, herd behaviour is challenging to avoid. Our natural bias toward following what the majority is doing is rooted in our survival instinct rather than logic, and while it helped our ancestors escape predators, it doesn’t serve us in moments of complexity.
When you feel the pull to follow the crowd of investors, the best thing to do is take a moment to ask why. The effect of this action alone is twofold: first, it takes you off autopilot and acting impulsively and second, by giving yourself time, you can better examine the facts before forming an opinion.
Plenty of research has been conducted on the effect of herd mentality on the stock market, as it can increase volatility and destabilize financial markets worldwide. But you don’t need to go far back to see it operate firsthand. The markets swung wildly in April 2025, in reaction to the U.S. administration’s threats to impose tariffs on allies and enemies alike. Investors worldwide followed the crowd, but by the end of the month, equities had returned to prior levels and are now at all-time highs. Although there’s been more stability this summer than there was in the spring, the U.S. president’s ever-changing trade policy with Canada has made it difficult for economists to predict the fallout. Instead of reacting with panic to a tariff-related market dip, investors are giving things time to play out.
Stop telling yourself stories
For many of us, storytelling is part of how we see the world. As a society, we tend to develop tidy little narratives to explain things that have happened, even when we don’t have all the facts. For example, when inflation surged between 2021 and 2022, some Canadians blamed the prime minister instead of the confluence of events like the COVID-19 pandemic, supply chain disruptions and the war in Ukraine.
This preference for a good, often oversimplified story, rather than looking at the series of events leading up to something happening as a combination of random and intentional factors, is called narrative fallacy. It’s a common pitfall for investors, financial pundits and news sources alike as they search for easy ways to explain movements in the stock market that are actually caused by a laundry list of reasons.
As with other biases and heuristics, the key to avoiding or moving beyond narrative fallacy is by using your rational mind to step back and examine the facts, rather than falling for the story. Let data-driven market analysis fuel your decisions and stick to your long-term investment goals when you’re tempted to change course because of a good tale.
Don’t rely on your memory
If you’ve ever heard or read a news story about a violent incident in a neighbourhood and later thought twice about going there, you may have fallen victim to the availability heuristic. This term, coined by Amos Tversky and the late Daniel Kahneman, considered by many to be the grandfather of behavioural finance, refers to a mental shortcut we sometimes make when predicting whether something might happen.
The brain will base its prediction on whatever example or piece of information comes to mind the quickest, or whatever is “available” to us in the moment. In the case of that neighbourhood, you’re more likely to recall the news story about the violent incident than a more recent report about low crime rates in the area, simply because it made a bigger impression.
For investors, that translates to making investment decisions based on the most memorable or sensational news rather than the most relevant. During the first half of 2025, it seemed like planes were falling out of the sky at an unheard-of rate. The Air India crash on June 12 caused Boeing’s stock to drop 4.9 per cent overnight. However, monthly data from the National Transportation Safety Board in the U.S. indicates that plane crash numbers worldwide have remained roughly stable in recent years, including year-to-date data from 2025.
In an era of countless headlines, the best thing you can do to avoid falling for the availability heuristic is to seek out a wide range of information sources – from multiple news outlets to government-vetted statistics – rather than relying on your memory or the rumour mill.
Although world events can be unpredictable, understanding what motivates us to invest in the way that we do will help us make better decisions in volatile times.
