The Impact of Behavioral Biases on Individuals’ Financial Choices under Uncertainty: An Empirical Approach

Abstract

All human beings are limited by their knowledge and interpretative abilities, leading them to rely on more simplifications to make the decision-making more tractable. Kahneman and Tversky’s landmark work recognized that individuals’ choices often systematically deviate from the neo-classical expectations of rationality, and such deviations are known as behavioral biases. This article aims to examining how the behavioral biases relate to each other and impact the investment decision of individuals. The relationships between behavioral biases may be used to develop certain profiles of financial behavior, which the finance agents can use to provide more custom choices to their clients. The population for this study was the individual investors of the Indian financial markets and any individuals who may be prospective investors. A research instrument was created, for the sake of studying such association, the pilot survey of which revealed the items which were most reliable, which were retained and used for the final round of data collection. The analysis of the collected data revealed that there are relationships between the behavioral biases themselves. Based on such relationships, the biases were categorized and investor decision-making profiles were proposed.

Decision bias: Consumer behaviour influenced by bias

“…Some of these psychological factors may introduce decision-making biases, and the decision-making biases of investors in the market are interrelated and may affect the financial market as a whole [2]. According to Banerji et al, different kinds of biases interact and correlate with each other, thus influencing human choices and behaviour [3]. For example, when companies have 'sales' or 'limited time offers', they know people don't want to lose out (this is called loss aversion), so they use this bias to sell more.…”