Behavioral Biases and their Influence on Investment Decision-Making: A Systematic Literature Review and Future Research Agenda

Abstract

Objective: This study aims to systematically review the existing literature published over the past 42 years on behavioral biases in investment decision-making. Therefore, the current study concentrates on two biases: overconfidence and herding bias of individual and institutional investors.   Theoretical framework: Kahneman and Tversky (1979) formulated prospect theory and concluded that investors make decisions based on possible gains and losses, rather than on final outcomes. Therefore, this study used this theory to understand the influence of behavioral biases on investment decisions.    Methods:  This study used a systematic literature review (SLR) and 109 selected articles for review published between 1980 and 2022. Most importantly, this study conducted a content analysis of behavioral biases in investment decision-making.   Result and Conclusion: The volume of research on behavioral bias has increased over the past two decades. The existing literature shows limited research on institutional investors’ overconfidence bias, limited studies on individual herding behavior, ineffective direct measures of overconfidence, the majority of research showed that institutional investors are more inclined to herd than individual investors, and the maximum number of studies showed that individual investors are more susceptible to overconfidence bias than institutional investors.   Implications of the research: This study highlights the influence of behavioral biases in investment decision-making and suggests a future research agenda for future researchers, as well as helpful to investment advisors enabling them to manage biases and select purposeful stocks for their clientele.   Originality/value: This study delineates the behavioral biases of individual and institutional investors. This first study encompasses relevant studies conducted between 1980 and 2022 and lucidly summarizes the behavioral biases, including the ‘overconfidence’ and ‘herding’ tendencies of these different kinds of investors.