Behavioral biases impeding investor’s decision making

Abstract

This research aims at indicating and testing the existence of selected behavioral biases in investors. This study confirms the existence of behavioral factors that are affecting investment decisions. Based on the review of literature, various behavioral biases affecting irrational behavior of investors were acknowledged. This research uses five behavioral biases which are selected mainly consisting of cognitive bias (overconfidence bias, illusion of control bias, confirmation bias and recency bias) and one emotional bias (optimism bias). Study gathered primary data through questionnaire survey. Sample population include 50 investors from six different institutions considered for analysis such as banks, insurance companies, stock exchanges etc. These results were obtained by using different statistical tests such as correlation and regression analysis, to analyze the presence of behavioral biases and how these behavioral biases influence the decision making. The reliability of the items used in the questionnaire is tested using Cronbach’s alpha. SPSS software was used to perform analysis. Statistical tools which are used to test the impact of behavioral biases on investor’s decisions includes regression analysis. Moreover, strength of the relationship between variables is tested through correlation. Correlation results indicate moderate relationship between behavioral biases and decision making of investor. Outcome of the research indicates that while making financial decisions investors are affected by behavioral biases.