Psychological Biases of Investors

Abstract

We review the field of behavioral finance as it relates to investors. Specifically, we examine common investment mistakes caused by an investor's cognitive and emotional weaknesses and group these mistakes into two categories: how investors think and how investors feel. Although most recent research deals with these psychological influences in investor decision-making, we also discuss social factors that affect financial decisions. We suggest five steps that investors can take to help overcome common investor mistakes. Finally, we present some thoughts on further behavioral research involv-ing investors.