Behavioural Economics and Investment Decisions: Analyzing How Psychological Biases Influence Individual and Institutional Investments
DOI:
https://doi.org/10.61173/yqjgad58Keywords:
Behavioral Economics, Psychological Bi-ases, Investment Decisions, Overconfidence Bias, Loss AversionAbstract
The paper focuses on how psychological effects influence the ordering of investments with the help of the comparative analysis of the traditional and behavioral view on the matter. It analyses sentiments like overconfidence, herding, loss aversion, anchoring and confirmation both with the retail investor and the institutional investor. These biases complicate rational decision-making, hence destabilize markets, lead to inefficiencies and possible financial fiascos. The work also introduces ways to manage biases in the financial literacy process, such as financial education, technology-based interventions, and behavioral interventions. Studying the consequences of these biases, the paper stresses the necessity of employing a comprehensive approach to enhance investment and enhance the financial stability.
References
[1] Adelson, C., Kuller, C., Tompkins, C., Sarkar, E., Price, S., & Iansiti, M. (2023). How Wicked Problems Drive Business Performance: A Review of the Academic Literature. https:// www.hbs.edu/ris/Publication%20Files/23-064_f10377b2-89e6- 4752-ac42-456c0f42136f.pdf
[2] Aharon, D. B. (2023). Transparency and Information Asymmetry in Financial Markets: A Critical Perspective. Brill Research Perspectives in International Banking and Securities Law, 4(4), 1-65. https://doi.org/10.1163/24056936-12340012
[3] Albiston, C. R., & Fisk, C. L. (2021). Precarious work and precarious welfare: How the pandemic reveals fundamental flaws of the US social safety net. Berkeley J. Emp. & Lab. L., 42, 257. https://heinonline.org/HOL/LandingPage?handle=hein.journals/ berkjemp42&div=11&id=&page=
[4] Ali, M. (2023). Herding Effect in Online Buying: Consumer Decision Making under Uncertainty and Information Asymmetry for High versus Low Involvement Products. Available at SSRN 4543695.
[5] Alzoubi, H. M., & Aziz, R. (2021). Does emotional intelligence contribute to the quality of strategic decisions? The mediating role of open innovation. Journal of Open Innovation: Technology, Market, and Complexity, 7(2), 130. https://doi. org/10.3390/joitmc7020130
[6] Athota, V. S., Pereira, V., Hasan, Z., Vaz, D., Laker, B., & Reppas, D. (2023). Overcoming financial planners’ cognitive biases through digitalization: A qualitative study. Journal of Business Research, 154, 113291. https://doi.org/10.1016/ j.jbusres.2022.08.055
[7] Blake, D. (2022). The great game will never end: why the global financial crisis is bound to be repeated. Journal of Risk and Financial Management, 15(6), 245. Dean&Francis ISSN 2959-6130 https://doi.org/10.3390/jrfm15060245
[8] Bystranowski, P., Janik, B., Próchnicki, M., & Skórska, P.
[2021] . Anchoring effect in legal decision-making: A metaanalysis. Law and Human Behavior, 45(1), 1. https://psycnet.apa.org/fulltext/2021-26899-001.html
[9] Chang, V., Valverde, R., Ramachandran, M., & Li, C. S. (2020). Toward business integrity modelling and analysis framework for risk measurement and analysis. Applied Sciences, 10(9), 3145. https://doi.org/10.3390/app10093145
[10] Dopierała, Ł., & Mosionek-Schweda, M. (2020). Pension fund management, investment performance, and herding in the context of regulatory changes: new evidence from the Polish pension system. Risks, 9(1), 6. https://doi.org/10.3390/risks9010006
[11] Dunham, L. M., & Grandstaff, J. L. (2022). The value relevance of earnings, book values, and other accounting information and the role of economic conditions in value relevance: a literature review. Accounting Perspectives, 21(2), 237–272. https://doi.org/10.1111/1911-3838.12280
[12] Duxbury, D., Gärling, T., Gamble, A., & Klass, V. (2020). How emotions influence behaviour in financial markets: a conceptual analysis and emotion-based account of buy-sell preferences. The European Journal of Finance, 26(14), 1417- 1438. https://doi.org/10.1080/1351847X.2020.1742758
[13] Economou, F., Gavriilidis, K., Gebka, B., & Kallinterakis, V. (2023). Feedback trading: a review of theory and empirical evidence. Review of Behavioral Finance, 15(4), 429–476. https://www.emerald.com/insight/content/doi/10.1108/RBF-12- 2021-0268/full/html
[14] Farinha, A. C., & Maia, T. V. (2021). People exert more effort to avoid losses than to obtain gains. Journal of Experimental Psychology: General, 150(9), 1837. https://psycnet.apa.org/buy/2021-27045-001
[15] Faugere, C., & Stul, O. (2021). Harmful events and misconducts in financial organizations: Human biases and root causes. Research in International Business and Finance, 56, 101382. https://doi.org/10.1016/j.ribaf.2021.101382
[16] Ferro, G. M., Kovalenko, T., & Sornette, D. (2021). Quantum decision theory augments rank-dependent expected utility and Cumulative Prospect Theory. Journal of Economic Psychology, 86, 102417. https://doi.org/10.1016/j.joep.2021.102417
[17] Fischer, M., Imgrund, F., Janiesch, C., & Winkelmann, A.
[2020] . Strategy archetypes for digital transformation: Defining meta objectives using business process management. Information & Management, 57(5), 103262. https://doi.org/10.1016/j.im.2019.103262
[18] Frase, L. (2020). Refining Our Thinking about Thinking: Battling the Sway of Cognitive Biases in Negotiation. Cumb. L. Rev., pp. 51, 347. https://heinonline.org/HOL/LandingPage?handle=hein.journals/ cumlr51&div=16&id=&page=
[19] Gammon, B. L., Jaramillo, C., Riggan, K. A., & Allyse, M. (2020). Decisional regret in women receiving high-risk or inconclusive prenatal cell-free DNA screening results. The Journal of Maternal-Fetal & Neonatal Medicine, 33(8), 1412– 1418. https://doi.org/10.1080/14767058.2018.1519541
[20] Gershfeld Litvak, S., & Sush, D. J. (2023). Ethics and Legal Issues. In Handbook of Applied Behavior Analysis: Integrating Research into Practice (pp. 19-34). Cham: Springer International Publishing. https://doi.org/10.1007/978-3-031-19964-6_2
[21] Ghani, M. T. A., Halim, B. A., Rahman, S. A. A., Abdullah, N. A., Afthanorhan, A., & Yaakub, N. (2023). Overconfidence bias among investors: A qualitative evidence from Ponzi scheme case study. Corporate and Business Strategy Review, 4(2), 59-75.
[22] Grennan, M., & Town, R. J. (2020). Regulating innovation with uncertain quality: information, risk, and access in medical devices. American Economic Review, 110(1), 120–161. https://www.aeaweb.org/articles?id=10.1257/aer.20180946
[23] Hampsher-Monk, S., & Prieger, J. E. (2020). Investigating the Drivers of Smoking Cessation: A Role of Alternative Nicotine Delivery Systems?. BOTEC Analysis.
[24] Hanlon, M., Yeung, K., & Zuo, L. (2022). Behavioural economics of accounting: A review of archival research on individual decision-makers. Contemporary Accounting Research, 39(2), 1150-1214. https://doi.org/10.1111/1911-3846.12739
[25] Jain, J., Walia, N., Singla, H., Singh, S., Sood, K., & Grima, S. (2023). Heuristic biases as mental shortcuts to investment decision-making: a mediation analysis of risk perception. Risks, 11(4), 72. https://doi.org/10.3390/ risks11040072
[26] Karki, U., Bhatia, V., & Sharma, D. (2024). A Systematic Literature Review on Overconfidence and Related Biases Influencing Investment Decision Making. Economic and Business Review, 26(2), 130-150. https://doi.org/10.15458/2335-
[27] Labajova, K., Höhler, J., Lagerkvist, C. J., Müller, J., & Rommel, J. (2022). Illusion of control in farmers’ investment and financing decisions. Agricultural Finance Review, 82(4), 675-689. https://www.emerald.com/insight/content/doi/10.1108/ AFR-09-2020-0140/full/html
[28] Liu, H., Zhang, Z., & Zhang, T. (2022). Shale gas investment decision-making: Green and efficient development under market, technology and environment uncertainties. Applied Energy, 306, 118002. https://doi.org/10.1016/j.apenergy.2021.118002
[29] Loang, O. K., & Ahmad, Z. (2020). Social Factors and Herd Behaviour in Developed Markets, Advanced Emerging Markets and Secondary Emerging Markets. Journal of Contemporary Dean&Francis Xin Huang Eastern Asia, 19(1).
[30] Moore, B. J. (2024). Innovative Rate Design as a Free Market Solution to Climate, Resiliency, and Economic Challenges. https://scholarworks.uno.edu/td/3155/
[31] Otuteye, E., & Siddiquee, M. (2020). Underperformance of actively managed portfolios: some behavioural insights. Journal of Behavioral Finance, 21(3), 284-300. https://doi.org/10.1080/1 5427560.2019.1692210
[32] Otuteye, E., & Siddiquee, M. (2020). Underperformance of actively managed portfolios: some behavioural insights. Journal of Behavioral Finance, 21(3), 284-300. https://doi.org/10.1080/1 5427560.2019.1692210
[33] Philippas, D., Dragomirescu-Gaina, C., Goutte, S., & Nguyen, D. K. (2021). Investors’ attention and information losses under market stress. Journal of Economic Behavior & Organization, 191, 1112-1127. https://doi.org/10.1016/j.jebo.2021.09.040
[34] Phillips, P. J., & Pohl, G. (2021). Intelligence Sharing, Networks, Teams and Ambiguity: How Working Together Shapes Decision-Making Under Risk and Uncertainty. Networks, Teams and Ambiguity: How Working Together Shapes Decision- Making Under Risk and Uncertainty (October 26, 2021). https://dx.doi.org/10.2139/ssrn.3705073
[35] Puccio, G. J., Klarman, B., & Szalay, P. A. (2023). Creative problem-solving. In The Palgrave Encyclopedia of the Possible (pp. 298-313). Cham: Springer International Publishing. https://doi.org/10.1007/978-3-030-90913-0_41
[36] Schäfer-i-Paradís, M. (2022). Is there a (new) bubble in the US housing market? An empirical specification to identify rational housing bubbles. https://diposit.ub.edu/dspace/handle/2445/187983
[37] Sun, Q., Polman, E., & Zhang, H. (2021). On prospect theory, making choices for others, and the affective psychology of risk. Journal of Experimental Social Psychology, p. 96, 104177. https://doi.org/10.1016/j.jesp.2021.104177
[38] Svetlova, E., & Thielmann, K. H. (2020). Financial risks and management. International Encyclopedia of Human Geography, 5, 139-145. https://www.emerald.com/insight/content/doi/10.1108/JEAS-03- 2021-0047/full/html
[39] Tan, Y., Yang, W., Suntrayuth, S., Yu, X., Sindakis, S., & Showkat, S. (2024). Optimizing Stock Portfolio Performance with a Combined RG1-TOPSIS Model: Insights from the Chinese Market. Journal of the Knowledge Economy, 15(2), 9029-9052. https://doi.org/10.1007/s13132-023-01438-y
[40] Tanesini, A. (2020). Arrogance, polarization and arguing to win. In Polarisation, Arrogance, and Dogmatism (pp. 158-174). Routledge.
[41] Tang, R. W. (2021). Pro-market institutions and outward FDI of emerging market firms: An institutional arbitrage logic. International Business Review, 30(3), 101814. https://doi. org/10.1016/j.ibusrev.2021.101814
[42] Tarmo, C. G., & Issa, F. H. (2022). An analysis of groupthink and decision making in a collectivist culture: the case of a public organization in Tanzania. International Journal of Public Leadership, 18(1), 15-29. https://www.emerald.com/insight/content/doi/10.1108/IJPL-08- 2020-0072/full/html
[43] Teixeira Genta Maragni, F., Hsiao, J., Pereira de Castro Casa Nova, S., Dinoá Duarte Cardoso de Brito, N., & Luisa Aranha e Silva, A. (2021). Healthily crazy business! Solidarity economy and financial education as emancipation tools for the mentally ill. Innovar, 31(82), 203-221.
[44] Von Beschwitz, B., & Massa, M. (2020). Biased short: Short sellers’ disposition effect and limits to arbitrage. Journal of Financial Markets, 49, 100512. https://doi.org/10.1016/j.finmar.2019.100512 Dean&Francis ISSN 2959-6130 Appendixces Appendix A: Frequency of Overconfidence Bias in Individual and Institutional Investors Appendix B: Dataset: Impact of Loss Aversion on Investment Performance (2015-2023) Dean&Francis Xin Huang Appendix C: Dataset: Herding Behavior in Market Bubbles and Crashes (2000 – 2023) Appendix D: Dataset: Confirmation Bias and Portfolio Diversification
Downloads
Published
Issue
Section
License
Copyright (c) 2025 by the authors.
This work is licensed under a Creative Commons Attribution 4.0 International License.
