Investor’s financial behavior in Albania – The case of real estate market

Abstract

Decision-making in economics is a delicate process, requiring specialized individuals, capable of interpreting and understanding all available information. May often, people make wrong decisions, and this is attributed to many causes. Finance, since its origins, is built on theories that explain economic events and activities through measurable and manageable factors. Nowadays, modern finance suggests that psychological factor must be taken into consideration, when not finding a rational explanation for certain investors’ behavior. What should be understood anyway is the fact that no theory is perfect, and it is not expected to be supported by everyone, or to produce a successful implementation in all cases. Financial theories evolve, improve, expand and include more aspects. The role of individuals in this equation is to evaluate and use the information, in an optimal way, to obtain the expected returns from a potential investment. This paper focuses on real estate market in Albania as the best "measure" of irrationality and the way how it is affected by emotional decisions of investors. The analysis of all factors showed that Albanian individuals are generally inclined to decide irrationally, especially when they perceive losses and overestimate the assets they own, based on generalizations not necessarily related to the asset, whereas they are also influenced by the herd instinct and choose to invest based on the group’s examples they are part of.