Behavioral Biases in the Decision Making of Individual Investors.

Jain, Ravindra; Jain, Prachi; Jain, Cherry

In earlier research, it has been discovered that contrary to the assumptions and theories of conventional finance, many irrational behaviors related to investment judgment occur in real life. In this paper, we have made an extensive review of various behavioral biases that affect investment decision making of the individual investors. Extant research indicates that individual investor makes his/her investment decision under the influence of some combination of behavioral biases, which mainly include disposition effect, mental accounting, investors' overconfidence, representativeness, narrow framing, aversion to ambiguity, anchoring, availability bias, and regret aversion. Under the influence of some such biases or combination of the same, individual investors often make irrational investment decisions. And therefore, individual investors, in aggregate, earn poor long-run returns. These aspects have been highlighted in this paper. Potential solutions to mitigate the adverse impact of behavioral biases on decision making of individual investors have also been discussed. Finally, future research direction relevant to such an area has been indicated in this paper.

INDIVIDUAL investors; ECONOMIC decision making; MENTAL accounting (Economic theory); INVESTMENTS; AGGREGATE demand

IUP Journal of Knowledge Management, 2015, Vol 13, Issue 3, p7

2583-4592

Academic Journal