Research: The Biggest Mistakes Investors Make And How Long Does It Take to Decide on a Stock?
Academic Studies from 2024-2025 Reveal the Exact Data on Mistakes That Cost Investors Capital
Hadar.Goldberg
Hadar Goldberg is a talented financial journalist with a strong passion for analyzing the stock market. She has a deep understanding of financial markets and is skilled at conducting research and analysis to uncover valuable insights for her readers. Hadar is known for her ability to explain complex financial concepts in a clear and concise manner.
Dec 06 2025
Individual investors spend an average of just six minutes researching before buying a stock, according to a study by NYU Stern and NBER. The result: an average return of 16.5% in 2024, compared to 25% for the S&P 500 index. This gap, which represents a loss of thousands of dollars for each investor, stems from psychological patterns documented in numerous academic studies in recent years.
Benjamin Graham, considered the father of value investing, wrote in The Intelligent Investor: "The investor's main problem, and even his greatest enemy, is probably himself" The new studies provide empirical support for this statement.
"The investor's main problem, and even his greatest enemy, is probably himself" Benjamin Graham
Fear and Greed as a Predictor of Returns
In a study published in November 2024 in Finance Research Letters, researchers Farrell & O’Connor examined CNN's Fear and Greed Index as a predictor of returns. The study used data from 2011 to 2024 and applied causality tests to examine whether investor sentiment can predict market movements.
The findings were clear: The index predicted the returns of the S&P 500, Nasdaq, and Russell 3000 at a 1% significance level. Moreover, the Fear Index was a better predictor of stock returns than the VIX, the traditional volatility index.
Farrell and O’Connor pointed out another finding: The index’s predictive power varies over time. Its predictive power was stronger before 2014, but has weakened in recent years. A possible explanation: Markets gradually adjust to psychological information, fear, and greed, so anomalies tend to weaken as they are revealed.
Graham wrote about this back in the 1950s: "In the short run, the market is a voting machine, but in the long run, it is a weighing machine" Farrell and O’Connor’s research confirms this insight: In the short run, emotions are the deciding factor; in the long run, business fundamentals prevail.
What Predicts Market Extremes?
A study by Ahadzie, Owusu Junior & Woode published in 2025 in the Journal of Risk and Financial Management extended the analysis to dimensions that most investors are unfamiliar with. The researchers examined how extreme sentiment affects skewness, which is the asymmetry of the distribution of returns, and kurtosis, which is the strength of the tails of the distribution.
The key finding: Extreme market sentiment, as measured by the Fear Index, is a significant predictor not only of higher volatility but also of a change in the nature of the distribution itself. In other words, during periods of extreme fear or greed, the risk of unusual events, so-called "Black Swans" is significantly higher.
Ahadzie and his team explain: "While traditional analyses have focused on mean and volatility, the importance of skewness and kurtosis in understanding market dynamics cannot be ignored, especially in explaining how fear, greed, and general market sentiment affect asymmetry and extremes in the market". In simple terms, the study examined the relationship between positive sentiment and returns and volatility, and between negative sentiment and returns and volatility. When the relationship is weak, for example when positive sentiment overreacts several times more than negative sentiment, there is asymmetry in returns, which indicates market danger. In this case, the market is overly biased toward optimism.
The biases revealed in the new studies are not theoretically new. Daniel Kahneman and Amos Tversky developed Prospect Theory in 1979, a study that became one of the most cited in the history of economics and earned Kahneman the Nobel Prize in 2002. Kahneman and Tversky presented participants with two scenarios. In the first scenario, a choice between a certain profit of $500 and a 50% chance of gaining $1,000. In the second scenario, a choice between a certain loss of $500 and a 50% chance of losing $1,000. Although mathematically identical, participants’ behavior was completely opposite: when it comes to gains, people prefer certainty; when it comes to losses, they are willing to gamble.
Kahneman and Tversky summarized the phenomenon in a sentence that has become classic "Losses seem bigger than gains". According to estimates, the pain of a loss is twice as strong as the pleasure of an equivalent gain.
A global study published in 2022 by Kai Ruggeri of Columbia University replicated the original experiments in 19 countries and 13 languages. The result: 90% of the original findings were successfully replicated. Ruggeri concludes: "Our study offers compelling evidence to continue to consider prospect theory as a valid explanation of individual behavior".
Cognitive Biases and US Market Volatility
A study published in March 2024 in Behavioural Public Policy, Cambridge University Press, analyzed ten years of data on the S&P 500, real interest rates, consumer confidence, market volatility, and credit spreads. The researchers applied time series analysis while accounting for the effects of behavioral biases. The findings revealed significant correlations: rising real interest rates negatively affect stocks, with the relationship largely explained by loss aversion and sentiment. The researchers note "While behavioral finance has made significant progress in explaining the relationship between human behavior and financial markets, a deeper exploration of the nuances of these behavioral aspects in the context of market volatility is needed".
Richard Thaler, Nobel Prize laureate in 2017, extended Kahneman and Tversky’s work to the area of "mental accounting" which is the tendency to treat each investment individually rather than view the portfolio as a whole. Thaler said in his Nobel lecture "I believe in something called mental accounting, which is exactly what people do when they put labels on money".
Thaler's study of New York City taxi drivers demonstrated the phenomenon. Drivers behave as if they are trying to achieve a revenue target every day, and therefore suffer from loss aversion if they do not reach their target. Each workday constitutes a separate "mental account". The result: Drivers work less on days with high demand and more on days with low demand, which is the opposite of rational behavior.
The Main Biases: What Makes Investors Lose
Loss aversion: Investors hold losing stocks too long and sell winning stocks too quickly. The fear of losing causes people to make decisions that are harmful in the long run.
Overconfidence: According to a study by Kansal & Singh, investors overestimate their ability to predict market movements. The six-minute research window before buying is a prime example. Graham warned “People who invest make money for themselves; people who gamble make money for their brokers.”
Herding: A 2025 study found that investors follow trends even when the data contradicts them. Graham previously wrote: “The market is a pendulum that swings forever between optimism that makes stocks too expensive and unwarranted pessimism that makes them too cheap. The wise investor is a realist who sells to the optimists and buys from the pessimists”.
An international study analyzing data from nearly 388,000 traders in 83 countries over the past two years examined the relationship between culture and investment behavior. Cultural characteristics such as long-term orientation significantly influence the disposition effect, which is the tendency to sell winning stocks too early or hold losing stocks too long. Another finding: higher risk-taking was observed in collective-supporting companies. Researchers explain this by the “pillow hypothesis” which suggests that a social safety net encourages financial risk-taking.
A survey of 184 retail investors in India found significant links between behavioral biases and demographic characteristics. Biases such as anchoring, overconfidence, and herding were linked to age, income, education, and market experience.
Younger investors showed higher levels of overconfidence; older investors were more sensitive to loss aversion. The study highlights the need for financial advice tailored to the investor’s psychological profile, not just their financial profile.
Practical Conclusions
Warren Buffett, Graham's famous disciple, summed up the central insight "Be a coward when others are greedy, and be greedy when others are fearful".
Graham himself added "Most of the time, stocks are subject to irrational and excessive price fluctuations in both directions, as a result of most people's ingrained tendency to gamble and their surrender to fear and greed".
These quotes summarize the insights of studies on human behavior in financial markets. Reading the research can only help: it contains many insights, and those who constantly remind themselves of these principles make fewer mistakes. In investing, the one who makes the fewest mistakes often wins.
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Please note that the article should not be considered as investment advice or marketing, and it does not take into account the personal data and requirements of any individual. It is not a substitute for the reader's own judgment, and it should not be considered as advice or recommendation for buying or selling any securities or financial products.
