An Analysis of Behavioral Biases in Investment Decision-Making

Abstract

Individual investor’s behavior is extensively influenced by various biases that highlighted in the growing discipline of behavior finance. Therefore, this study is also one of another effort to assess the impact of behavioral biases in investment decision-making in National Stock Exchange. A questionnaire is designed and through survey responses collected from 243 investors. The present research has applied inferential statistics and descriptive statistics. In the existing study, four behavioral biases have been reviewed namely, overconfidence, anchoring, disposition effect and herding behavior. The results show that overconfidence and herding bias have significant positive impact on investment decision. Overall results conclude that individual investors have limited knowledge and more prone towards making psychological errors. The findings of the study also indicate the existence of these four behavioral biases on individual investment decisions. This study will be helpful to financial intermediaries to advice their clients. Further, study can be elaborated to study other behavioral biases on investment decisions.

Behavioral Bias in Individual Investment Decisions: Is It a Common Phenomenon in Stock Markets?

“…The evidence arrived at is mixed, some studies report no effect on trading decisions, while others document insignificant impact. Similarly studies on the impact of herding behavior (Demirer and Kutan (2006) Geetika and Singh, (2019), show no evidence and partial evidence of the influence of herding bias on the process of decision making by individual investors. Anchoring bias as proclaimed by Shah et al (2012) has a negative impact on the decision making process, whereas Geetika and Singh, (2019) suggest no effect of this bias.…”

“…Similarly studies on the impact of herding behavior (Demirer and Kutan (2006) Geetika and Singh, (2019), show no evidence and partial evidence of the influence of herding bias on the process of decision making by individual investors. Anchoring bias as proclaimed by Shah et al (2012) has a negative impact on the decision making process, whereas Geetika and Singh, (2019) suggest no effect of this bias. The evidence reported on availability bias varies; Shah et al (2012) document a negative effect, whereas Bakar and Yi (2015) find a significant impact.…”

“…Additionally, most of the studies examine the impact of a limited number of biases on the individual decision making process. For instance research on overconfidence reveals that this bias negatively affects investment decisions (Gervais et al 2001;Statman et al 2006;Chen 2007;Grinblatt and Keloharju 2009;Shah et al 2012;Bashir et al 2013;Oprean (2014); Kafayat 2014); Bakar and Yi (2015) and Geetika and Singh (2019). Representativeness bias as asserted by Irshad et al (2016) and Ikram (2016) positively affects the trading decisions of individual investors.…”

“…However other studies report a negative relationship between representativeness bias and investment decision making (Chen 2007; Shah et al 2012; Athur 2014; Onsomu 2014; Yaowen et al 2015 and Toma 2015. Disposition effect has been researched by Dhar and Zhu (2006), Frazzini (2006), Chen (2008), Barberis andXiong 2009, Toma (2015), and Geetika and Singh (2019). The evidence arrived at is mixed, some studies report no effect on trading decisions, while others document insignificant impact.…”

Impact of Behavioral Biases on Investment Performance in Pakistan: The Moderating Role of Financial Literacy

“…There are a few biases which do have more impact than other biases, so this study focuses only on the biases which are critical to the investors' decision-making. In one of the studies on the subject, Madaan and Singh (2019) found that overconfidence and herding bias have significant positive impact on investment decision. In this study, we are analyzing four biases based on an identified gap in the literature in the context of emerging economy of Pakistan.…”