Behavioral Biases in Investment Decisions: An Extensive Literature Review and Pathways for Future Research

Abstract

In the realm of investment decisions, the influence of behavioral biases has emerged as a captivating area of exploration. This article embarks on a comprehensive journey through the landscape of behavioral biases in investment choices, delving into their profound impact on financial markets. Contrary to traditional finance theories assuming rationality, a multitude of empirical evidence attests to the pervasive effects of cognitive and emotional biases. Through an extensive literature review, this article elucidates the intricacies of key biases such as overconfidence, loss aversion, anchoring, confirmation bias, herding behavior, disposition effect, framing effects, and regret aversion. By examining the distinct ways these biases distort investors' judgment and decision-making processes, we unveil the often unexpected deviations from rationality. Each bias, rooted in human psychology, can lead to suboptimal investment behaviors, portfolio misalignments, and heightened market volatility. However, recognizing the impact of these biases provides opportunities for transformative insights. As investment professionals, policymakers, and individuals alike comprehend the subtle nuances of behavioral biases, tailored interventions, educational initiatives, and adaptive strategies can be devised to mitigate their adverse effects. This article not only synthesizes the prevailing research but also charts a course for future investigations. The implications of understanding and addressing behavioral biases extend beyond financial realms, offering a bridge between finance and psychology. As interdisciplinary collaboration gains momentum, pathways for future research become evident, beckoning scholars to delve deeper into the uncharted territories of human behavior and its intricate relationship with investment decisions. Through the exploration of these biases and their potential remedies, this article illuminates the evolving landscape of investment decision-making in a world where cognitive fallacies intersect with financial choicest.