Why We Buy High and Sell Low: Behavioural Lessons From Every Market Crash

If you've ever looked at your investment portfolio during a market crash and wondered if you should sell everything before it gets worse, you’re not alone. Most people have the same reaction. On the other hand, during market highs, it’s common to feel like you should invest more for the fear of missing out on gains.

This pattern of buying when prices are high and selling when they drop is surprisingly common. It feels right at the moment, but it’s often the exact opposite of what strategic investing looks like.

In this article, we’ll explore why this happens and what we can do to make better investment choices during tough times.

• Table of contents

• Understanding the ‘buy high, sell low’ phenomenon
• The role of cognitive biases in investing
• Historical market crashes and investor reactions
• Why rational thinking fails during market crashes
• Long-term vs. short-term thinking in investing
• Behavioural finance lessons for retail investors
• How SIPs and asset allocation can counter emotional investing

Understanding the ‘buy high, sell low’ phenomenon

Traditional investing wisdom says one should buy low and sell high – that is, buy a security when it is trading at a lower price and sell when its value potentially rises. That’s how an investor can make a profit.

However, what happens in real life is often the exact opposite. This happens for the following reasons:

• When the market is going up, everyone is excited. You see news stories, friends talking about their profits, and social media posts celebrating wins. It feels like everyone around you is making easy money. News channels are filled with market highs and success stories. This creates a sense that if you're not investing, you're missing out on something big.
• You want to join in, so you invest at a market high. This fear of missing out, popularly known as "FOMO", pushes people to jump into the market without thinking long-term. By the time many retail investors join, prices are already near their peak. You end up buying when stocks are expensive.
• Over time, prices start dipping from their peaks and in some cases, the market crashes. Prices fall, and fear takes over. Suddenly, all the positive news turns negative. The same media that celebrated the highs now talks about doom and gloom. You see your portfolio drop in value. Fear starts to cloud your judgement.
• You worry that you’ll lose even more money. Panic sets in. Instead of riding out the downturn, you sell your investments to avoid what you believe will be further losses. But this often means that you lock in your losses – turn what could have been temporary dips in value into permanent real losses.

This is the classic buy high, sell low trap, which is driven by emotion rather than financial prudence. Behavioural finance offers insight into this gap between logic and action. It shows how emotions and cognitive biases can overpower rational thinking, especially during moments of extreme market movement.

The role of cognitive biases in investing

Cognitive biases are mental shortcuts that the brain takes, often based on misconceptions and emotions. This can often lead us to make sub-optimal decisions. Here are some common biases that play out in the market.

• Herd mentality: If everyone is buying or selling, we feel we should do the same, even that investment does not suit our risk appetite, vision or goals.
• Loss aversion: This is a common tendency where people tend to fear losses more than they enjoy making equivalent gains. This can drive investors to sell quickly during a fall, just to avoid the pain of loss, rather than ride out the fluctuation to potential gains.
• Recency bias: We tend to believe that whatever is happening now will keep happening. If the market is falling, we think it will keep falling forever.
• Overconfidence: After a few wins, we think we can predict the market. Then, when we’re wrong, we panic.

These biases are central to market crash psychology and help explain why investors panic sell, even if they’ve been told to stay calm.

Also Read: Exploring behavioural finance and understanding its basics

Historical market crashes and investor reactions

Let’s look at some real-life examples of instances where emotional decision-making spurred or aggravated market crashes.

1. The 2008 global financial crisis

• The stock market dropped sharply. Investors who sold in fear locked in huge losses.
• Many who stayed invested saw a strong recovery over the next few years.

2. The COVID-19 crash in 2020

• In March 2020, the market fell rapidly due to fear of the pandemic.
• Many investors sold out of panic.
• Markets bounced back faster than expected.

These crashes show how emotional investing mistakes can cost people money. The fear is real, but it often leads to poor decisions.

Why rational thinking fails during market crashes

So, even when investors may know better, why do market crashes see the same patterns being repeated? Some reasons include:

• Stress hormones like cortisol spike during moments of fear, affecting our decision-making.
• News channels and social media create a sense of urgency and doom.
• You feel like you must do something, even if doing nothing would be wiser.
• Family, friends, or neighbours might also influence you with their panic.

This is where understanding behavioural finance in stock market crashes becomes important. It helps us realise that such biases and behaviours are natural and human – but recognising them is the first place to start the process of mindful and rational decision-making.

Long-term vs. short-term thinking in investing

A big reason people sell during crashes is that they’re thinking short-term. They want to stop the pain right now. But this approach can backfire in many ways:

• Long-term investing means accepting some ups and downs along the way. No investment journey is smooth. Temporary losses are normal.
• Short-term thinking makes us react to every dip as if it’s permanent. This leads to panic selling and jumping in and out of investments, which can result in lower returns over time.
• Markets go through cycles. Historically, crashes have been followed by periods of recovery and further growth (Past performance may or may not be sustained in future).

Behavioural finance lessons for retail investors

There are some powerful lessons we can learn from market crash psychology and behavioural finance:

1. Know your emotional triggers

• Ask yourself: Do I check my portfolio too often? Do I follow the crowd?
• Being aware of your habits helps you control them.

2. Understand that fear is normal

• Even experienced investors feel fear during crashes.
• Feeling scared doesn’t mean you should sell.

3. Focus on your goals, not emotions

• Why are you investing? For retirement? A house? Your child’s education?
• Keeping your goals in mind can help you stay focused when markets fall.

4. Learn from past mistakes

• If you’ve sold during a crash before, reflect on what made you panic.
• Try to plan ahead so you don’t repeat it next time.

By following these principles, investors can avoid buying high and selling low psychology and make more confident decisions.

Also Read: How does investor behaviour impact market conditions?

How SIPs and asset allocation can counter emotional investing

Even if we understand the risks of emotional investing, it’s still difficult to stay calm. That’s where certain tools and strategies help.

1. Systematic Investment Plans (SIPs):

• SIPs enable you to invest fixed amounts regularly.
• This helps you buy more when prices are low and less when they are high.
• It removes the need to “time the market,” and helps reduce panic.

2. Asset allocation:

• This means spreading your money across different types of investments (stocks, bonds, gold, etc.).
• When one asset class falls, another may stay steady, rise, or show lower volatility.
• This can help mitigate overall portfolio risk.

Both these strategies support risk management and reduce the urge to make emotional decisions. Over time, they also improve the chances of building wealth steadily.

Conclusion

Understanding behavioural finance in stock market crashes helps us realise that most investment mistakes are more about emotions than money. From past crashes, we’ve seen how common it is for people to panic sell, even though they know staying invested usually works better. Our brains are wired for stability, not long-term thinking. But with the suitable tools, like SIPs, proper asset allocation, and goal-based investing, we can train ourselves to make informed choices. The next time the market falls and fear creeps in, remember that you don’t have to act. Sometimes, the ideal move is to stay still.

FAQs

Why do investors tend to buy at market highs and sell during crashes?

This happens because of emotional reactions like fear and excitement. When markets are high, people feel confident and want to join in. When markets crash, they panic and sell to avoid more losses.

What psychological factors lead to poor investment decisions during market crashes?

Herd mentality, loss aversion, recency bias, and overconfidence. These biases cause us to follow the crowd, fear losses more than gains, and react based on recent events.

How can I avoid emotional investing during a market downturn?

Stick to a plan, use SIPs, spread your investments (asset allocation), and remind yourself of your long-term goals. Avoid checking your portfolio too often.

What lessons can we learn from past stock market crashes?

That markets recover over time, and those who stay invested usually do better than those who panic sell. History shows that emotional investing often leads to poor outcomes.