Cognitive biases in the behavior of nonprofessional investor

Abstract

The impact of cognitive biases on the financial behavior of investors is studied. In theory, an investor is a rational actor; in reality, his/her behavior is subject to systematic errors due to subjective beliefs, emotional and cognitive reasons. This creates barriers to making rational financial decisions, resulting in limited financial literacy in practice. The purpose of the study is to classify cognitive biases and identify the specifics of their manifestation among retail investors. A literature review of studies of cognitive biases in the financial market, as a result of which the investor’s actions deviate from rational financial behavior, is presented. A classification of cognitive biases is proposed taking into account their characteristics and the degree of influence on the behavior of professional and non-professional investors. An analysis of the role of financial literacy programs in overcoming imperfections in investment decision-making is given. The study’s findings suggest that financial literacy programs are not a panacea for ineffective decisions and justify the need to include practical tools to overcome manifestations of cognitive biases.