Behavioral Biases in Investment Decision-Making

Abstract

This study delves into the profound impact of behavioral biases on investment decisions and provides valuable insights into methods for counteracting or surmounting these biases. Specifically, it focuses on four prevalent behavioral biases: loss aversion, endowment bias, framing bias, and overconfidence bias, examining how these biases can lead to potential investment mistakes or risks. To mitigate the influence of behavioral biases, the study proposes several strategies. Firstly, it emphasizes the importance of sourcing information from multiple perspectives and cross-referencing data to avoid reliance on biased or limited sources. Objective evaluation of one's skills and knowledge is also highlighted as a crucial step in reducing biases. Leveraging professional advice or feedback can provide an external perspective and help investors make more rational decisions. Furthermore, the study suggests that regular portfolio review and adjustments are essential to address biases and adapt to changing market conditions. Additionally, proactive visualization of potential outcomes can aid in mitigating biases by promoting a more realistic assessment of risk and reward. The study concludes that behavioral biases play a pivotal role in investment decisions. To bolster investment performance and satisfaction, investors are encouraged to comprehend and rectify these biases.