Identification of Behavioral Biases in Financial Advisors and Investors

Abstract

This study aimed at identifying the behavioral biases causing irrational behavior of financial advisors and investors. For this purpose and based on the results of literature research various behavioural biases causing irrational behaviour of financial advisors and investors were identified. This study tested nine behavioural biases which are overconfidence bias, self-attribution bias, illusion of control bias, hindsight bias, endowment bias, availability bias, self-control bias, confirmation bias and conservatism bias. And the effect of these behavioural biases on the financial decision making of financial advisors and investors is also investigated. Data was collected through questionnaire from a sample size of 400 respondents consisting 200 financial advisors and 200 investors. Different statistical tests were applied such as correlation, Independent sample T-test, Chi-square for association and regression analysis to analyse the presence of behavioural biases and how these behavioural biases affect the decision making of two sample groups. The results of the study revealed that the financial advisors are more prone to the behavioural biases than the investors at the Pakistan stock exchange and these behavioural biases affect significantly different the financial decisions of financial advisors and investors. A confirmation bias is common between the financial advisors and investors.