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Behavior biases and
investment decision: theoretical
and research framework
Satish K. Mittal
Behavior
biases
213
School of Management, Gautam Buddha University, Greater Noida, UP, India
Received 11 September 2017
Accepted 3 January 2018
Abstract
Purpose – This paper developed a theoretical and research framework by identifying the behavioral biases
in investment decision and by presenting a review of the available literature in the field of behavior financerelated biases. This paper aims to present a compressive review of the literature available in the public
domain in past five decades on behavior finance and biases and its role in investment decision-making
process. It also covers insights on the subject for developing a deeper understating of the behavior of investor
and related biases.
Design/methodology/approach – The work follows the comprehensive literature review approach to
review the available literatures. The review carried out on different parameters such as year of publication,
journal of publication, country, type of research, data type, statistical technique used and biases identified.
This is a funnel approach to decrease the number of behavior biases up to six for further research.
Findings – Most of the existing works have summarized behavior finance as an emerging area in finance.
This indicates the limited valuable research in developing economy in this area. This literature review helps
in identifying major research gap in this domain. It helps in identifying the behavior biases which work
dominantly in investment decision-making. It would be interesting to explore the area of behavior biases and
their impact on investment decision of individual investors in India.
Originality/value – This paper worked on literature prevailing on the subject and available on various
online research data source and search engines. It covers a long time frame of almost five decades (1970-2015).
This paper is an attempt to look at the impact of behavior finance and biases and its role in investment
decision-making process of the investor behavior. This study builds up a strong theoretical framework for
researchers and academicians by detailed demonstration of available literature on behavior biases.
Keywords Investment management, Behavioural finance, Behavioural bias
Paper type Literature review
1. Introduction
Traditional economics and financial theories are built on the key assumption that human
beings are rational; they take all available information into consideration while making
investment decision. Proponents of efficient market hypothesis and modern portfolio theory
believed that all known information is priced into a stock or investment product. Regardless
of disciplined investment, people often make errors when they pick their stocks.
A bulk research indicates that investors’ behavior differ from their hypothetical rational
investors. Many investors either hold under-diversified portfolio or trade frequently to avoid
the risk without taking into account: transaction cost, tax, hidden charges, etc. Behavior
finance uses insight from psychology to explain why investors behave the way they do.
Investors do not always make choice in a rational way. Most investor’s decision-making use
through process that is intuitive and automatic rather than deliberative and controlled.
Behavior finance-identified investors’ financial decisions are imparted by human
psychology and use the term “Quasi-rational” to describe how, when and why we sometime
behave irrationally. Behavior finance identifies two primary reasons which make investors
Qualitative Research in Financial
Markets
Vol. 14 No. 2, 2022
pp. 213-228
© Emerald Publishing Limited
1755-4179
DOI 10.1108/QRFM-09-2017-0085
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14,2
214
behavior quasi-rationally. First, investors are human beings and experience a range of
emotion while making an investment decision, and second, outside factors such as news
clips, media and research report.
Traditional finance theories explain what one should do, whereas behavior finance explains
what one really does. Traditional finance theories such as EMP and MPT are a hypothetical
situation but human decision-making process influenced by a number of determinants and
biases which can be truly explained by behavior finance. Generally it is assumed by the
researchers that stock prices movements are fixed by rational investors’ anticipations and
reactions. Rational investor means an investor who have access of all kind of information pertain
to that particular stock which in itself is an unrealistic assumption. Because of its simplicity and
its success to capture the stock price movements, this famous investor’s rationality hypothesis
was for a long time supported by the academic researchers in finance. Researchers in behavior
finance were motivated to break with the rule of rationality hypothesis. They take into account
some behavior biases on the investors’ decisions and subsequently measure the effect of such
influenced decision or reactions on the stock price movements.
2. Conceptual framework
Behavioral finance relaxes the traditional assumptions of financial economics by incorporating
these observable, systematic, and very human departures from rationality into standard models
of financial markets. The tendency for human beings to be overconfident causes the first bias in
investors, and the human desire to avoid regret prompts the second. (Barber and Odean, 1999).
Therefore, behavioral finance can be defined as a field of finance that proposes explanation
of stock market anomalies using identified psychological biases, rather than dismissing
them as “chance results consistent with the market efficiency hypothesis” (Fama, 1998).
The role of behavioral finance is not to diminish the primary work that has been done by
proponents of efficient market hypothesis. Rather, it is to examine the importance of calm
unrealistic behavioral assumptions and make it more realistic. It does this by adding more
individual aspects of the decision-making process in financial markets. A large number of
empirical research shows that real individual investors behave differently from investors.
2.1 Behavior biases and individual investment decision
The first dictionary definition of biases is consistent with faulty cognitive reasoning or
thinking, while are more consistent with impaired reasoning influence by feeling or emotion.
Behavioral bias is defined as a pattern of variation in judgment that occurs in particular
situations, which may sometimes lead to perceptual alteration, inaccurate judgment,
illogical interpretation or what is largely called irrationality. As defined by Shefrin (1985),
bias is nothing else but the inclination toward error. Understanding the effect of behavior
biases on the investment process, investors and their advisors may be able to improve
economic outcomes and attain stated financial objectives. Simply identifying behavioral
biases at the right time can save client from potential financial disaster (by Michael M.
Pompian, Book: Behavior Finance and Wealth Management, second edition, Wily
publication). Figure 1 shows the factors from different dimensions which affect the
investment decision of an individual.
Investors are influenced by various types of behavior biases, and here, we have identified
following six biases which affect the investment decision of individual investors for further
research.
Demographic Factors:
Age, gender, marital
status, educaon,
income, occupaon
Risk bearing Capacity:
Risk averse, Risk taker,
Neutral Liquidity
Stock fundamentals:
Past return, beta, EPS,
Firm size, share price
Psychological influence:
Desire, Goal, Biases and
emoon, Heuriscs
FACTORS
INFLUENCING THE
INDIVIDUAL INVESTORS
BEHAVIOUR
Expert advice: Advice
from broker/ family
members/ friends etc
Behavior
biases
Personal value: Social &
religious impact, atude,
Lifestyle, personal ability,
confidence level
Personal Financial need:
Need to minimize risk &
maximize return
Others like press
release, accounng
informaon, Govt.
policy impact
2.1.1 Overconfidence. Investors often overly over-estimate themselves and consider
themselves smarter than other investors. This biased sense and the resultant erroneous stockpicking often reduce the return on their assets. This fact was propagated by Odean (1998).
2.1.2 Disposition effect. Investors tend to retain losing securities for too long a period. On
the contrary, they tend to sell off profitable securities too soon. Shefrin and Stateman (1985)
developed a theoretical framework related to selling of winning stock and holding of lossmaking stock.
2.1.3 Herd instincts. Investors often blindly follow the action of a larger group without
judging the rationality of such an action. This behavior is inbuilt in human nature. Such an
instinct is attributable to the natural inclination in human beings to desire to be better
accepted by a group he/she belongs to. Few important studies have been conducted by
Grinblatt et al. (1995) and Wermers (1999) on the herd behavior in investment decisionmaking.
2.1.4 Hind sight biases. Shiller (2000) describe hindsight bias as “the tendency to think
that one would have known actual events were coming before they happened, had one be
then or had reason to pay attention.” The investor believes that some past event was
predictable, though in fact it was not. Such faulty belief or bias may lead to establishing
false causal relationships, which may end up in incorrect oversimplifications.
2.1.5 Availability biases. Investors tend to allot more importance to recent information
than on relatively past information. Thus, they focus on the short-term perspective and miss
out on the long-term picture. Thus, they are willing to assume more risks after a gain. On the
contrary, they are willing to assume less risks after a loss. Odean and Barber (2002) tested
the proposition that individual investors buy stocks that happen to catch their attention.
2.1.6 Self-Attribution biases. Investors who suffer from self-attribution bias tend to
attribute successful outcomes to their own actions and bad outcomes to external factors.
They often exhibit this bias as a means of self-protection or self-enhancement. Investors
afflicted with self-attribution bias may become overconfident, which can lead to overtrading
and underperformance. A famous work “Learning to be overconfident” by Gervais and
Odean (2000) explained the phenomena.
215
Figure 1.
Factors influencing
investors’ behavior
compiled from
various studies
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14,2
216
3. Research methodology and data
A comprehensive literature review approach has been used to review the papers available in
public domain on behavior biases and its role in investment decision-making process. To
conduct the search of paper, we used the key works such as behavior finance, behavior
biases, individual investor decision-making, overconfidence, herd biases, availability biases,
disposition effect, hind sight biases and self-attribution biases. We used databases such as
Emerald, JSTOR, INSTEAD, ELSEVIER, Science Direct, Google Scholar and others to find
the relevant literature on the subject. We selected the time horizon of almost five decades
(1970-2015) which cover the literature from the origin of basic theory to number of empirical
and descriptive research to available literature review and analytical research paper. The
year 1972 was considered are origin year for new paradigm shift of financial theory with the
publication of a paper titled “Subjective Probability: A judgement of Representativeness”
published in COGNITIVE PSYCHOLOGY, authored by Kahneman and Tversky, also
known as Father of Behavior Finance. First empirical research paper was published in the
year 1977 titled “Pattern of investment strategy and Behavior among individual investors”
by Leweller et al. in JSTOR: The journal of business, Vol.50, Issue.3 (Jul.1977). Following
criteria have been used for identification and selection of paper for this study:
paper published in different journals and available on online database;
paper published in English and having full content;
different paper type, including theoretical, analytical, literature review, case study,
working paper and conference paper; and
paper having the search key word in title and abstract.
After intensive research based on above criteria, we selected 117 papers for review. The
objective of this study is to prepare and comprehensively review studies on behavior biases
and their impact on investment decision.
4. Analysis of literature
In this section, we comprehensively review the selected research papers based on criteria
such as year of publication, journal of publication, country, type of research, data type,
biased identified and statistical technique used for the study. Thus, it helped in analyzing
the previous work done in the area and development of framework for future research.
4.1 Year of publication vs number and type of study
Table 1 shows the distribution of research paper based on its year of publication and
number and type of study.
It can be seen from the table that there has been a drastic increase in number of papers
during the past decade, i.e. 2010-14. Very few number of research papers are available on
behavior finance and biases up to year 2004. Graph (1) indicates that increasing number
of research papers show that researchers and academicians in this area accepted the key role
of behavior factors and biases in investment decision-making process. Now, the domain of
research is gradually shifted toward the unit of analysis, i.e. individual investor and the
factor affecting their investment decision.
4.2 Country vs number and type of research
Table 2 shows the location where the research was conducted and different types of research
done in that location based on their data type. The data show that research on behavior
biases was done in 29 locations, and around nine research papers were either conducted in
Year
Theoretical
Lit. review
Type of study
Analytical
Empirical
Descriptive
Total
1970-74
1975-79
1980-84
1985-89
1990-94
1995-99
2000-04
2005-09
2010-14
2015
Total
3
1
2
2
2
2
0
1
1
1
15
Location
Type of research
Total no. Theory Lit. Empirical/ Empirical/ Descriptive/ Descriptive/
of paper based review Primary Secondary Primary
Secondary Analytical
Australia
Britain
California
China
Europe
Finland
France
India
Iran
Israel
Istanbul
Jena
Kenya
Korea
Lagos
Malaysia
The Netherlands
New York
Pakistan
South Africa
Spain
Sweden
Taiwan
Tehran
Tunisia
Turkey
UK
US
Vietnam
Not mentioned
Total
2
1
5
8
2
2
1
23
1
3
1
1
4
1
1
2
2
2
7
1
1
1
2
2
2
1
4
23
5
9
120
2
3
8
2
10
4
7
1
1
1
10
33
2
49
9
25
4
39
3
3
2
2
4
2
4
20
71
9
120
Behavior
biases
217
Table 1.
Year of publication
vs type of study
2
1
5
1
1
1
1
5
1
1
1
1
1
1
1
7
5
4
3
1
2
2
1
1
4
1
1
1
1
2
1
2
1
5
1
1
1
1
1
1
1
2
1
3
2
1
16
1
2
3
12
1
6
2
1
29
2
4
1
18
2
1
1
24
3
3
1
14
1
7
Table 2.
Country vs number
and type of research
QRFM
14,2
more than one location or had not specified the place of research. It shows that majority of
basic work of behavior finance and biases have been done in developed countries in early
1980s. Now, during the past decade, developing countries like China, India and Pakistan
show growing number of research papers on this subject. The major factor behind this is
growing economy.
218
4.3 Journal of publication vs number and type of research
The objective of this analysis is to identify the important journal and publication in this
area. Table 3 shows that 117 research papers were collected from 20 journals and
publications and part of PhD thesis. Out of these, 15 journals had two or more than two
publications. Table 3 shows that ELSEVIER, Emerald insight and JSTOR together
published 22 research papers, Journal of Wealth Management published 6 research papers
and Review of Finance published 5 research papers. The important research paper in this
area is published in above-mentioned journal and publication. The remaining journal had
only limited number of research papers on the behavior biases and investment decision of
individual investors.
4.4 Type of research vs number of paper
We categorized the type of research into five categories, i.e. theoretical research, literature
review, analytical research, empirical research and descriptive research. In theoretical
research, we considered the paper that develops the conceptual theory or model related to
behavior finance and identified biases, whereas in analytical research, we considered the
paper that has analyzed a previously available model or facts. In empirical research, we
included studies based on observation or experiments, whereas descriptive research
included studies that are related to survey or fact findings. Table 4 shows that majority of
research is empirical, followed by descriptive research.
The data show that 53 research papers worked on primary data, which were collected
mostly through questionnaires. In total, 32 research papers used the secondary source of
data, which were collected from respective brokerage firms and stock exchange. Increasing
trend of survey method of data collection can be seen during the past decade onward.
4.5 Statistical technique vs number of paper
This parameter of review gives us insight about the statistical technique frequently used in
behavior finance and biases research. Table 5 clearly shows that descriptive analyses,
correlation and regression analysis are most frequently used statistical technique in this
area. It shows that 28, 21 and 14 of the 117 papers used descriptive analysis, regression and
correlation analysis, respectively. Probability is the most frequently statistical tool in early
decade. A few studies applied factor analysis, structural equation model, chi-square and
variant analysis.
4.6 Identified behavior biases vs number of paper
In this section, we analyzed the selected papers based on the behavior biases identified by
the researcher. Table 6 shows that 39 research papers found on overall behavior biases, its
concept, integrated work on more than one behavior biases identified. Mostly, these papers
prove the importance of behavior biases and its impact on investment decision of individual
investors. There are 27 research papers available on overconfidence biases, 17 papers on
herd behavior and 16 papers on disposition effect, whereas there are 6 research papers on
hind sight biases, availability biases and self-attribution biases.
Algorithmic Finance
Asian Journal of Finance and Accounting
Cognitive Psychology
Contemporary Economics
ELSEVIER
Emerald Insight
European Scientific Journal
Handbook of Economics and Finance
Indian Journal of Applied research
INSTEAD university publication
International Journal of Business and Management
International Journal of humanities and Social science
International Journal of multi-disciplinary and Academic research
International research journal of Applied and basic science
Journal of Business and Economics
Journal of Finance, Accounting and Management
Jounal of Risk and Uncertainity
JSTOR
Review of Finanace
Journal of Wealth Management
Part of P.Hd thesis
Others
Total
Name of Journal/Publication
1
2
2
1
10
8
1
2
1
2
6
1
6
3
3
2
3
6
5
6
17
32
120
2
16
1
1
2
5
1
1
1
2
3
2
12
1
1
1
1
3
4
13
33
1
1
1
2
3
1
4
1
1
1
5
4
17
2
1
4
1
3
7
20
1
4
1
1
1
1
1
3
10
3
2
1
1
3
2
1
12
1
1
2
2
Type of research
Theory Lit. Empirical/ Empirical/ Descriptive/ Descriptive/
Total no. of paper based review Primary Secondary Primary
Secondary Analytical
Behavior
biases
219
Table 3.
Journal of
publication vs
number and type of
research
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220
5. Finding
Researchers in the area of behavior finance analyzed the existence and role of behavior
finance in financial decision-making. It works on a funnel approach of research, where the
first step was to find the existence and importance of behavior finance, then its role in
individual decision-making process and further its implication on stock market return. It has
been observed during the review that now researchers are working on a single dimension of
behavior finance and establishing its impact of investment decision of an individual
investor. Above all, the results are consistent that there is a dynamic relationship between
individual investment decision and behavior biases. Few important reviews in the area of
behavior finance and biases are presented in Table 7.
Type of research
Table 4.
Type of research vs
number of paper
Table 5.
Statistical technique
vs number of paper
No. of paper
Theoretical
Lit. review
Analytical
Empirical
Descriptive
Total
15
10
7
49
39
120
S. no.
Name of technique
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
ANOVA
AHP
Chi-square
Factor analysis
KMO efficient
Descriptive analysis
Regression method
Sensitivity analysis
Dickey fuler test
Principal component analysis
Correlation analysis
Structured equation model
Mann Whitney U test
Cluster analysis
Simulation
Probability
Univariate and multivariate analysis
Identified biases
Table 6.
Identified behavior
biases vs number of
paper
Self-attribution biases
Availability biases
Hind sight biases
Disposition effect
Herd behavior
Overconfidence
Overall behavioral finance concept and biases
No. of paper
3
3
9
8
3
28
22
1
1
3
15
6
1
1
2
9
5
No. of paper
6
7
7
16
17
27
40
Behavior biases
Finding
Basic behavior biases
concept and research
Denial and Tversky (1974) described three heuristic that are employed in making
judgement under uncertainty representativeness, availability of instance or
scenario, adjustment from an anchor. These heuristic is highly economical and
usually effective which lead to systematic and predictable errors. During
1981reseracher published another work on psychological principles that govern
the perception of decision problems, evaluation and outcomes produce
predictable shifts of preference when the same problem is framed in different
ways. The effects of frames on preferences are compared to the effects of
perspectives on perceptual appearance
Daniel et al. (1998) developed a theory based on investor overconfidence and
biased self-attribution of investment outcomes. The theory implies that investors
overreact to private information signals and underreact to public information
signals
Fellner and Maciejovsky (2003) empirically reported the results of an experiment
in which they contrasted institutional with behavioral explanations by
comparing asymmetric information to social identity. Results show that social
forces, triggered by group affiliation, drive under diversified and domestically
biased portfolio allocations
Todd Feldman (2011) indicated that putting too much weight on the current
environment, anchoring, is the largest factor in explaining individual investor
underperformance. In addition, loss aversion is the largest factor to explain
excessive trading
Onsomu (2014) conducted descriptive research on impact of behavior biases on
investment decision and concluded that individual investors are affected by
number of behavior biases. There is no significant correlation between gender
and biases
This paper identified six behavior biases that affect the decision process in one or other way.
Few of them push the decision toward market portfolio and others deviate from efficient
market hypothesis. The factors that affect the investment decision is the most discussed
issue among researchers of this field. A large number of research papers are available
worldwide that discuss the behavior of individual investors. Most of the papers are available
from a foreign perspective, especially a developed economy, and very few but good research
papers are available from an Indian perspective.
5.1 Review of identified behavior biases
Based on the papers reviewed, six behavior biases have been identified for further research:
overconfidence, disposition effect, herd instinct, availability biases, hind sight biases and
self-attribution biases. The objective would be measure the impact of these biases on
investment decision-making process of an individual investor. Therefore, these biases have
been reviewed separately to get insight in the phenomena.
5.1.1 Overconfidence. Overconfidence has been evident as a factor causing irrational
investment decision of an individual investor who is not much informed. Researchers in all
decades documented the significant role of overconfidence in investment decision-making of
individual investors. Few significant works on this bias are tabulated in Table 8.
5.1.2 Disposition effect. Scholars in this area empirically worked on this biases and stated
that disposition effect and experience of investors are related to each other. Investors who
have more experience in the trading of stock market are less affected by the disposition
Behavior
biases
221
Table 7.
Important review in
basic behavior biases
concept and research
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14,2
Behavior biases
Finding
Overconfidence
Daniel et al. (1998) developed a theory based on investor overconfidence and biased selfattribution of investment outcomes. It implies that investor overreact to private
information signals and under-react to public information signal
Stateman et al. (2006) tested the trading volume prediction for formal overconfidence
modal. A lead-lag relationship between market return and turnover confirms the formal
theories of investor overconfidence
Phan et al. (2012) determined four prominent behavioral biases of individual investors
that is Overconfidence, Excessive Optimism, Psychology of Risk and Herd Behavior. It
sent a caution about influence of behavioral biases in decision-making process
Rostami and Dehaghani (2015) worked on impact of overconfidence on investment
decision-making and result stated that there is significant role of biases and investing in
stock exchange
222
Table 8.
Review of
overconfidence
biases
effect, whereas less experienced investors trade more frequently because of the effect of
disposition. Some of the findings are listed in Table 9.
5.1.3 Herd instinct. Herd behavior is commonly evident among Indian investors.
Investors usually track the advices of investment firm, brokerage house and other peer
groups to save their investment and also to change their investment decision based on their
output. Number of researchers have documented the role of herd behavior in decisionmaking, which are listed in Table 10.
5.1.4 Availability biases. Availability bias was first studied by Kahneman and Tversky
(1974), who concluded that frequency events are easier to recall or imagine. People can
access the availability with reasonable speed and accuracy. Few important works on this
bias are presented in Table 11.
5.1.5 Hind sight biases. Researchers stated that young investors are more affected by
hind sight biases rather than experienced investor. Shiller (2000) describes hindsight bias as
“the tendency to think that one would have known actual events were coming before they
happened, had one be present then or had reason to pay attention.” Review of this biases are
tabulated in Table 12.
5.1.6 Self-attribution biases. Research on this biases documented that this bias is the
second step ahead of overconfidence biases. This works on an individualist approach where
investors are not only over confident about investment decision but also give credit to
themselves. It is an emotional biases and is inbuilt in the investor nature. Review is
presented in Table 13.
Table 9.
Review of
disposition effect
Behavior biases
Finding
Disposition effect
Stearns and Berkeley (2005) stated that trading experience in a financial market can
reduce the magnitude of the disposition effect
Ben-David and Doukas (2006) addressed the effect of disposition effect and the
result are consistent with overconfidence in trading driving the disposition effect
Goetzmann and Massa (2003) indicated a strong negative correlation between the
disposition effect and stock return, volatility, and trading volume
Lakshmi et al. (2013) indicated that long-term investors’ decision-making is
significantly and positively influenced by disposition effect
Therefore, it is clear from the review of literature in this arena that behavior factors and
biases play a key role in investment decision-making process at micro level. Individual
investor is the unit of study. Cognitive psychology of investor plays an important role in
investment decision-making process. “Behavioral Finance is becoming an integral part of
Behavior
biases
223
Behavior biases
Finding
Herd instict
Salamouris and Gulnur Muradoglu (2010) empirically stated that a positive and
significant relation is found between the accuracy of analysts’ earnings forecasts and
herding behavior
Patro and Kanagaraj (2012) summarized that the level of herding is more in Indian stock
market as compared to developed markets
Huei-Wen Lin (2012) showed that more impetuous investors would be prone to herding
bias directly, but rather exhibit higher risk tolerance
Luu Thi Bich Ngoc (2014) showed that individuals tend to consider the information of
stock market: general information, past trends of stock price and current stock price
changes carefully before making their investment
Behavior biases
Finding
Availability biases
Kahneman and Tversky (1973) first worked on Availability biases. Availaibility
biases are frequency events, easier to recall or imagine. People can access the
availability with reasonable speed and accuracy
Bian et al. (2014) indicated that the prior gains and losses of the stock that the
investor plans to sell have significant impact on the aggressiveness of the sell order
Kudryavtsev et al. (2013) analyzed the effect of availability heuristic on the
mechanism of stock market decision-making. Results revealed that stock market
investors are likely to run to extreme and affected by a few of behavior biases
Moradian et al. (2013) established the relationship between personality dimension
and behavioral biases and stated high impact of availability biases among the
investors in Tehran stock exchange
Behavior biases
Finding
Hind sight biases
Seppälä (2009) concluded in his thesis that people in general are exposed to the studied
behavioral biases but the degree and impact are affected by experience and other
characteristics. Investment advisors are generally less exposed to hindsight bias than
other people
Rahul Subash (2012) in his thesis revealed that the degree of exposure to the biases
separated the behavioral pattern of young and experienced investors. Hindsight biases
were seen to affect the young investors significantly more than experienced investors
Mary Metilda (2013) conceptually proved that hindsight bias may hinder rational
thinking in investors. One of the most obvious results of hindsight bias is
overconfidence among investors
Hussain, Muntazir et al. (2013) reported strong impact of hindsight bias in asset selection
effect that stock market investor are more exposed to the hindsight bias, whereas, in
sign of return effect the bank financial managers are more exposed to hindsight effect
Table 10.
Review of herd
behavior
Table 11.
Review of
availability biases
Table 12.
Review of hind sight
biases
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224
decision-making process because it heavily influences the investors’ performance”
(Banerjee, 2011).
As the investment environment of Indian financial system is open to all categories of
product and services, oversea players and customized product. Individual earnings are
doubled during the past decade and play an important role in investment market. Therefore,
it is important to know more about Indian individual investors, role of behavior biases in
their investment decision and how to improve the decision.
The above discussions coupled with an extensive literature review helps to identify the
following research gaps:
Identifying and confirmation of behavioral biases prevailing among Indian
investors is required to establish their respective role in behavior of individual
investors and their decision-making.
Measuring the significance level to which Indian individual investors tend to be
influenced by identified behavioral biases is required.
Finding the correlation among the biases is needed. If any relation exists, then it
would be easier to correct them vide single step.
Corrective remedial action required to take appropriate decision is necessary to
minimize the effect of biases and improve the investment decision.
6. Conclusion
Although this comprehensive review of literature is not enough to examine all aspects of
behavior biases, few identified biases have been reviewed. The presence of behavior
factors in investment decision-making is documented earlier by number of studies. The
individual decision to invest in the financial market, especially equity, is greatly
influenced by the variety of benefits each individual wants from owning a particular
stock. Now, it is important to identify them at the micro level and measure their effect on
individual and institution levels. The degree of deviation depends on expertise, skill,
knowledge and experience in the field of finance. If an investor identify these biases in
early stage of investment that would help in better investment decision and tends toward
market portfolio as described by Fama (1960’s) in efficient market hypothesis. It is also
suggested that understanding the behavior of individual investors could help explain the
stock market anomalies. Last but not least, considering the behavior aspect can lead to
some approaches that individual investors should put into practice when investing in the
financial market.
Table 13.
Review of selfattribution biases
Behavior biases
Finding
Self-attribution
Jain and Wadhwa (2013) indicated that presence of biases can be attributed to
whether a person is a broker or non-broker in case of self-attribution biases
Hoffmann and Post (2014) used ba unique combination of survey data and trading
record to demonstate how individual portfolio return actually affect investor score on
a survey measure of self-attribution biases
Shepperd et al. (2008) self-serving bias is neither wholly motivated nor wholly
cognitive. Self-serving attributions occasionally reflect a calculated attempt influence
audience perceptions or a desperate attempt to defend a desirable self-view
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Corresponding author
Satish K. Mittal can be contacted at: satishkmittal@gmail.com
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