Emotional Biases in Investment Decision-Making

Michael and Sarah are both experienced investors who have been managing their investment portfolios for several years. Recently, the stock market experienced significant volatility, and both investors reacted differently to the uncertainty.

Michael, after observing a sharp decline in stock prices, decided to sell a large portion of his equity holdings out of fear that the prices would continue to fall. He felt anxious about potential losses and could not accept the possibility of losing money, which led to his emotional decision.

On the other hand, Sarah, who also witnessed the same market downturn, remained calm and refrained from making any drastic changes to her portfolio. Instead, she took this opportunity to review her investment strategy and focus on her long-term goals, avoiding impulsive actions driven by short-term market fluctuations.

Discuss the emotional biases that influenced Michael's and Sarah's decision-making during this episode. Include in your response an analysis of how these biases could impact their long-term investment outcomes.