Bib. Henry Paul

BEHAVIORAL BIASES AND THEIR INFLUENCE ON INVESTMENT
DECISION-MAKING: A SYSTEMATIC LITERATURE REVIEW AND

FUTURE RESEARCH AGENDA
a Henry Infant Sebastian Paul, b Natarajan Sundaram
ABSTRACT
Objective: This study aims to systematically review the existing literature published
over the past 42 years on behavioral biases in investment decision-making. Therefore,
the current study concentrates on two biases: overconfidence and herding bias of
individual and institutional investors.
Theoretical framework: Kahneman and Tversky (1979) formulated prospect theory

and concluded that investors make decisions based on possible gains and losses, rather
than on final outcomes. Therefore, this study used this theory to understand the
influence of behavioral biases on investment decisions.
Methods: This study used a systematic literature review (SLR) and 109 selected
articles for review published between 1980 and 2022. Most importantly, this study
conducted a content analysis of behavioral biases in investment decision-making.
Result and Conclusion: The volume of research on behavioral bias has increased over
the past two decades. The existing literature shows limited research on institutional
investors’ overconfidence bias, limited studies on individual herding behavior,
ineffective direct measures of overconfidence, the majority of research showed that
institutional investors are more inclined to herd than individual investors, and the
maximum number of studies showed that individual investors are more susceptible to
overconfidence bias than institutional investors.
Implications of the research: This study highlights the influence of behavioral biases
in investment decision-making and suggests a future research agenda for future
researchers, as well as helpful to investment advisors enabling them to manage biases
and select purposeful stocks for their clientele.
Originality/value: This study delineates the behavioral biases of individual and

institutional investors. This first study encompasses relevant studies conducted
between 1980 and 2022 and lucidly summarizes the behavioral biases, including the
‘overconfidence’ and ‘herding’ tendencies of these different kinds of investors.
a Research Scholar, Department of Commerce, School of Social Sciences and Languages, Vellore Institute of
Technology, Vellore, Tamilnadu, India, E-mail: infant.sebastianpaul@vit.ac.in,
Orcid: https://orcid.org/0000-0002-8271-9339
b PhD in Commerce, Department of Commerce, School of Social Sciences and Languages, Vellore Institute of
Technology, Vellore, Tamilnadu, India, E-mail: nsundaram@vit.ac.in, Orcid: https://orcid.org/0000-0002-0801-0428

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Miami| v.11, n. 4| pages: 01-25| e0904 |2023. JOURNAL OF LAW AND SUSTAINABLE DEVELOPMENT
Paul, H. I. S., Sundaram, N. (2023). Behavioral Biases and their Influence on Investment
Decision-Making: A Systematic Literature Review and Future Research Agenda
Keywords: overconfidence, herding bias, behavioral biases, investment decisions,

systematic literature review, content analysis.
Received: 08/05/2023
Accepted: 03/08/2023
DOI: https://doi.org/10.55908/sdgs.v11i4.904
PRECONCEITOS COMPORTAMENTAIS E SUA INFLUÊNCIA NA

TOMADA DE DECISÕES DE INVESTIMENTO: UMA REVISÃO
SISTEMÁTICA DA LITERATURA E AGENDA DE PESQUISA FUTURA
RESUMO
Objetivo: Este estudo tem como objetivo rever sistematicamente a literatura existente
publicada ao longo dos últimos 42 anos sobre vieses comportamentais na tomada de decisões
de investimento. Portanto, o presente estudo concentra-se em dois vieses: excesso de
confiança e viés de rebanho de investidores individuais e institucionais.
Estrutura teórica: Kahneman e Tversky (1979) formularam a teoria da perspectiva e concluíram

que os investidores tomam decisões com base em possíveis ganhos e perdas, em vez de nos
resultados finais. Portanto, este estudo usou essa teoria para entender a influência de vieses
comportamentais nas decisões de investimento.
Métodos: Este estudo utilizou uma revisão sistemática da literatura (SLR) e 109 artigos
selecionados para revisão publicados entre 1980 e 2022. Mais importante ainda, este estudo
realizou uma análise de conteúdo de vieses comportamentais na tomada de decisões de
investimento.
Resultado e Conclusão: O volume de pesquisas sobre viés comportamental aumentou nas

últimas duas décadas. A literatura existente mostra estudos limitados sobre o enviesamento de
investidores institucionais, estudos limitados sobre o comportamento individual de rebanho,
medidas ineficazes diretas de excesso de confiança, a maioria dos estudos mostrou que os
investidores institucionais estão mais inclinados a rebanhos do que os investidores individuais,
e o número máximo de estudos mostrou que os investidores individuais são mais susceptíveis
de enviesamento de excesso de confiança do que os investidores institucionais.
Implicações da pesquisa: Este estudo destaca a influência de vieses comportamentais na

tomada de decisões de investimento e sugere uma agenda de pesquisa futura para futuros
pesquisadores, bem como útil para consultores de investimento, permitindo-lhes gerenciar
vieses e selecionar estoques propositais para sua clientela.
Originalidade/valor: Este estudo delineia os vieses comportamentais de investidores individuais

e institucionais. Este primeiro estudo engloba estudos relevantes realizados entre 1980 e 2022
e resume de forma clara os preconceitos comportamentais, incluindo as tendências de "excesso
de confiança" e de "manada" destes diferentes tipos de investidores.
Palavras-chave: excesso de confiança, tendência de pastoreio, tendências comportamentais,

decisões de investimento, revisão sistemática da literatura, análise de conteúdo.
1 INTRODUCTION
Traditional finance supported rationality in the decision-making process,
justifying decisions based on available information (Fama, 1970). Traditional finance
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theories and principles include the Arbitrage Pricing Process of Modigliani and Millar,
the Markowitz Principle of Portfolio Management, the Capital Asset Pricing Model given
by Sharpe, Linter, and Black, and the Option Pricing theory of Black, Scholes, and Merton
(Kumar & Goyal, 2015). These approaches validate the concept of rationality in
investment decision-making, assuming investors to be rational decision-makers (Jain et
al., 2022).
After the energy crisis of the 1970s, the empirical study (Kahneman & Tversky,
1979) results were inconsistent with the Efficient Market Hypothesis (EMH) and
Expected Utility Theory (EUT). Kahneman and Tversky (1979) developed the renowned
concept of prospect theory, which is an alternative to EUT in explaining decision-making
under uncertain circumstances. The introduction of this theory instigated a swift and
profound transformation in the domain of traditional finance, leading to the emergence of
the behavioral finance field by combining the behavioral and psychological aspects of
economic and financial decision-making. The traditional concepts of the efficient market
hypothesis and expected utility theory capitulated on behavioral finance for inadequate
explanations of various irrational decisions. Thus, behavioral finance suggests that
behavioral biases are the reason for the irrationality of investment decision-making.
So far, various studies have been conducted to empirically investigate behavioral
biases in investment decisions (Bakar & Yi, 2016; Baker et al., 2019; Bhatia et al., 2020).
However, little effort has been made to systematically review these studies. This study
covers the period from 1980 to 2022 and this study focuses on the behavioral biases of
individual and institutional investors in investment decision-making. Here, we consider
two common biases: overconfidence and herding. Specifically, proper review procedures
have not been effectively followed, including identifying keywords, searching for
keywords, and using inclusion and exclusion criteria. In the traditional literature review,
there are several issues with openness and bias (Ibrahim et al., 2023).
Thus, this study employed a systematic literature review and content analysis to
answer the research questions. A systematic literature review entails identifying
keywords, searching for keywords, and determining the appropriate literature by stating
the inclusion and exclusion criteria (Kumar et al., 2020). Additionally, content analysis
has been used to provide the findings of previous research studies. The research questions
of this study are as follows:
• What are the key trends in publication over the past four decades in the
area of behavioral biases?
• What type of data most frequently used?
• Which country have more publication?
• Which studies have received the most citations?
• What are the effects of behavioral biases on both individual and
institutional investors' investment decisions?
• What are the predominant knowledge gaps and key ideas for further
research?
The outline of the review article is organised as follows. An overview of the
literature is followed by presenting and describing the material and methodology,
reporting the results and discussion, and concluding with a summary of the future research
agenda.
2 LITERATURE REVIEW
This section deals with the theoretical background of behavioral biases in
investors’ investment decision-making. “How do investors behave? Why do investors
behave in a specific manner? To answer these questions, a new concept of behavioral
finance emerged in the fields of economics and finance in the 1980s” (Kumar & Goyal,
2015). “Behavioral finance studies the psychological aspects of financial decision-
making and explains the irrationality of investors in investment decision-making” (Kumar
& Goyal, 2015). Kahneman and Tversky (1979) developed prospect theory and specified
that investors’ decision-making is based on possible gains and losses rather than on final
outcomes. This situation is driven by cognitive biases that affect the judgment of these
gains and losses (Kumar & Goyal, 2015). Different behavioral biases impact investors’
investment decisions, and we have reviewed two biases in the following sections.
2.1 OVERCONFIDENCE BIAS

Overconfidence bias is a well-known and common bias. Overconfidence causes
investors to overestimate their skills and talent and ignore the risk associated to the
investment. Some significant studies on this bias, Daniel et al. (1998) observed that
investors overreact to private information and underreact to public information, which
leads them to be overconfident. Odean (1999) found that overconfident investors tend to
trade too much. Moreover, significant empirical studies have been reviewed for this
study, for example, (Barber & Odean, 2000, 2001; Gervais & Odean, 2001; Odean, 1998).
2.2 HERDING BIAS

Herding is a bias where investors imitate the decisions of others, usually a larger
group, while making decisions (Spyrou, 2013). Institutional investors follow herding
behavior than individual investors (Dennis et al., 2002; Hsieh, 2013). Chiang and Zheng
(2010) found that herding behavior exists in advanced stock markets, except for the US
and Asian markets. Chen (2013) observed that herding behavior is present in the global
markets.
3 METHODS
This study follows a systematic literature review, which is conducted based on
defined protocols that search across various databases using a predetermined search
strategy, which improves the quality of the work conducted by making it more
transparent, scientific, and comprehensive (Pittway, 2008). A comprehensive systematic
literature review reduces the possibility of including irrelevant studies but also improves
the reliability of the research (Tang, 2019).
3.1 DATABASE, KEYWORDS, AND INCLUSION CRITERIA

In this paper, the literature search focuses on the research conducted in the field
of behavioral finance. The study sample covers the period from 1980 to 2022. Scopus and
Google Scholar are used as databases to search the existing relevant literature. Scopus,
Google Scholar, and CSA Illumina, which offer citation indexing of social sciences,
found significant results. Scopus provides the best coverage of these databases and may
be used as an alternative to the Web of Science as a tool to measure research impact in
the social sciences (Norris & Oppenheim, 2007). Google Scholar can be used as an
advanced search (Sakka & Ghadi, 2023).
While conducting a systematic literature review, there is a possibility that certain
research work is ignored; Therefore, Tranfield et al. (2003), a three-stage search strategy
has been used to remove this uncertainty. The three stages were segmented into database
searching, reviewing abstracts, and checking references and citations.
This study focuses on restrictive words rather than a broader keyword search,
which further contributes to a better understanding of the specific literature search and
draws conclusions about what we know and do not know about a given question or topic.
The present study followed the suggestions of Chen et al. (2017) and Singh and Walia
(2002) to guarantee thorough coverage of the extant literature. Thus, keywords are
divided into two categories. The first set of keywords related to behavioral biases such as
"overconfidence", "herding" and "herding behavior". The second set of keywords
comprises the various components related to individual and institutional investors, such
as "investors", "institutional investors", "measures of overconfidence", "trading activity",
"gender differences in trading activity", "institutional investor herding", "individual
investor herding", "institutional herding", "individual herding" and "market
conditions". With the use of Boolean operators, authors merged each search term from
the first category with each search term from the second category to perform the search
queries. In addition to the combination search method indicated above, the study also
executed independent searches using keywords from two categories. This study included
only papers whose titles, abstracts, and keywords contained the above search terms. No
time restrictions were imposed by the authors. The search was conducted at one point
(December 2022) to prevent any potential bias caused by the ongoing update of the
Scopus database. (Jain et al., 2022). During the initial search, 175 research articles were
retrieved. Subsequently, the following inclusion and exclusion criteria were adopted to
select the research papers.
• Peer-reviewed English-language research papers are considered. This
study did not include any studies relevant to other languages (Saggese et al.,
2016).
• This study includes articles and book chapters and excludes conference
paper, erratum, and note.
• Articles published between 1980 and 2022.
3.2 SELECTION OF THE PAPERS

The inclusion criteria offer a broad, reliable, and informed foundation for studies
to be included (Bhatt et al., 2020). The inclusion criteria were implemented and
scrutinized based on the titles, abstracts, and keywords of research papers. A detailed
reading was performed to provide additional insights into the research conducted in this
study. After skimming through the full reading of research studies, a base of 45 papers
was shortlisted (Jain et al., 2022). However, there is a possibility that some papers
pertinent to the study's topic may not be included (Jain et al., 2022). To achieve this, the
snowball technique was adopted (Eduardsen & Marinova, 2020). Additionally, 64
research works from Google Scholar were included by referring to the forward and
backward citations. Figure 1 depicts the methodological process in detail.
Figure 1 Methodological approach
Source: Prepared by the authors (2023)
4 RESULTS AND DISCUSSION

In this section, we have systematically categorized the selected articles based on
trends in publication, type of data used, collection of sample data based on country,
citation analysis, and content analysis.
4.1 TRENDS IN PUBLICATION

Figure 2 illustrates the evolution of publication in behavioral bias research. 17
documents were published between 1980 and 2002, followed by 38 documents between
2003 and 2012. Finally, a significant increase occurred, with 54 articles published
between 2013 and 2022. Figure 2 depicts a noticeable rise in publication trends and an
increase in research output in the field of behavioral bias.
Figure 2 Publication trend of 109 articles

60
50
40
30
54
20 38
10
17
0
1980-2002 2003-2012 2013 - 2022
4.2 TYPE OF DATA

Table I illustrates that in the field of behavioral bias, the frequency of usage is
higher in secondary data, whereas the primary data are less frequently used. Therefore,
there is more scope to investigate investors' behavioral biases using primary data.
Table I Frequency of usage of data type

Type of data Number of articles used %
Primary 18 16.51
Secondary 91 83.49
Total 109 100.00
4.3 COLLECTION OF SAMPLE DATA BASED ON COUNTRY

Table II highlights the frequency of sample data collection from different
countries; it is evident that the majority of research articles were conducted in developed
nations, primarily the United States of America, followed by developing nations such as
Taiwan and China.
Table II Frequency distribution of sample data collection based on country

Country Number of studies %
Austria 1 0.92
China 13 11.93
Dutch 1 0.92
Finland 1 0.92
Germany 3 2.75
Greece 1 0.92
India 6 5.50
Indonesia 2 1.83
Italy 1 0.92
Japan 2 1.83
Korea 1 0.92
Malaysia 3 2.75
Pakistan 1 0.92
Portugal 3 2.75
Russia 1 0.92
Saudi Arabia 1 0.92
Spain 2 1.83
Taiwan 14 12.84
Thailand 1 0.92
Turkey 1 0.92
UK 4 3.67
USA 28 25.69
Vietnam 1 0.92
Multiple countries 16 14.68
Not mentioned 1 0.92
Grand total 109 100.00
4.4 CITATION ANALYSIS

We analyzed the selected articles with respect to their citations to identify the most
important papers on behavioral biases. These articles have 60212 cited references, with
an average of 552 per article. To avoid a long list of articles, we have identified the
citations for the top 10 most cited research articles for overconfidence and herding bias,
respectively. This is presented in Tables III and IV. The following research articles were
found to be the most cited on overconfidence bias: Daniel et al. (1998), which contains
total citations of 7363, followed by Barber and Odean (2001) with 6765 citations, and the
most cited papers on herding bias: Grinblatt et al. (1995), with 2807 total citations,
followed by Lakonishok et al. (1992), with 2780 total citations.
Table III Overconfidence bias articles listed based on their citations

SI.no Article No. of citations
1 Daniel et al. (1998) 7363
2 Barber and Odean (2001) 6765
4 Odean (1999) 3172
5 Odean (1998) 2664
6 Gervais and Odean (2001) 2379
7 De Bondt and Thaler (1995b) 1441
8 Barber (2009) 1089
9 Statman et al. (2006) 1083
Table IV Herding bias articles listed based on their citations

SI.no Article No. of citations
1 Grinblatt et al. (1995) 2807
2 Lakonishok et al.(1992) 2780
3 Wermers (1999) 2331
4 Nofsinger and Sias (1999) 2060
5 Chang et al.(2000) 1476
6 Christie and Huang (1995) 1363
7 Avery and Zemsky (1998) 1291
8 Sias (2004) 1266
9 Chiang and Zheng (2010) 847
10 Bali and Cakici (2008) 772
4.5 CONTENT ANALYSIS

Content analysis is used as a methodology to present the content of previously
conducted research in objective, systematic and quantitative manner (Berelson,1952).
Content analysis provides information about the empirical findings of previous research
studies. In this section, we systematically constructed a content analysis on behavioral
biases, such as overconfidence and herding in investment decision-making.
4.5.1 Overconfidence bias

This section illustrates the impacts and empirical results of overconfidence bias.
The empirical results are classified into six categories:
1. Table V shows overconfidence and trading activity
2. Table VI shows overconfidence and gender differences in trading activity
3. Table VII shows measures of overconfidence
4. Table VIII shows overconfidence and individual investors
5. Table IX shows overconfidence and institutional investors
6. Table X shows a comparative study of individual and institutional
investors.
4.5.2 Herding bias

This section shows the impacts and empirical results of herding bias. The
empirical results are divided into four categories:
1. Table XI shows institutional investor herding
2. Table XII shows individual investor herding
3. Table XIII shows a comparative study between institutional and individual
investors
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4. Table XIV shows herding and market conditions.
Table V Empirical results on overconfidence and trading activity

Impacts Empirical results
Overconfidence and De Bondt and Thaler (1995a) first proposed the impact of overconfidence on excessive
excess trading trading by individuals and observed that overconfidence is a crucial behavior factor to
understand the puzzle of trading. Odean (1999) concluded that overconfident investors
trade excessively. Due to excessive trading, the estimated trade earnings are insufficient
to pay transaction expenses. Similar findings were found in the previous studies (Chuang
& Lee, 2006; Hsu & Shiu, 2010; Khan et al., 2016; Meier, 2018; Statman et al., 2006).
However, the findings of Barber et al. (2009) are inconsistent with the excess trading
influenced by overconfidence.
Overconfidence and Daniel et al. (1998) stated that investors overreact to their private information while
information underreacting to publicly available information, which leads them to overestimate their
accuracy and make them overconfident. Similarly, Barber and Odean (2000) found that
investors become overconfident when they overestimate their private information, which
drives them to trade excessively and, subsequently, earn less in return. Furthermore,
information influences investors’ trading behavior and makes them overconfident and
non-overconfident. This evidence is supported by the findings of Abreu and Mendes
(2012) showed that when overconfident investors use information from their friends and
family, they trade less frequently. However, when they rely on specialized information
sources, non-overconfident investors engage in excess trading. Boussaidi, (2020) found
that investors’ overreaction to the level of private information increases and subsequently,
a rise in trading activity. Recently, it has been shown that information factors increase
trading and significantly reduce returns. These findings are consistent with those of Bregu
(2020). Ho (2011) observed that overconfident investors with private information, hold
loser stocks for a long time.
Overconfidence and Tekçe and Yılmaz (2015) revealed that investors who were male, young, had lower
demographic portfolio values, lower incomes, and lower levels of education showed more
variables overconfidence behavior. Moreover, they stated that overconfidence affects portfolio
wealth.
Table VI Empirical results on overconfidence and gender differences in trading activity

Overconfidence and gender Barber and Odean (2001) found that men trade excessively because they are more
differences in trading activity overconfident than women. Similarly, Shu et al. (2004) stated that, compared to women,
men trade more. Kumar and Goyal (2016) show that male investors are more prone to
limited information and private information and became more confident than female
investors. Kufepaksi (2011) observed that female investors are more likely to behave
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overconfidently than male investors when the market provides positive news, which is
inconsistent with the findings of Kumar and Goyal (2016).
There is no evidence of differences in gender and trading activity (Biais et al., 2005; Cueva
et al., 2019; Deaves et al., 2009; Fellner-Röhling & Krügel, 2014). These findings are
inconsistent with those of Barber and Odean (2001) and Kumar and Goyal (2016).
Variable asymmetric information has been studied previously (Biais et al., 2005; Cueva et
al., 2019; Deaves et al., 2009; Fellner-Röhling & Krügel, 2014). Interestingly, Yang and
Zhu (2016) used symmetric information and found that overconfidence and gender have no
impact on trading volume.
Table VII Empirical results on measures of overconfidence

Measures of overconfidence Glaser and Weber (2007) assessed overconfidence through measures that are better than
average effect, volatility estimates, and miscalibration and found that trade volume has no
relation to miscalibration. Similar conclusions have been reported in previous studies (Biais
et al., 2005; Fellner-Röhling & Krügel, 2014). Fellner and Krügel (2012) showed that
perception of signal precision and miscalibration is not significantly related to overconfidence.
Khan et al. (2019) examined whether overconfidence manifested as better-than-average,
miscalibration, and illusion of control mediates the relationship between perception of past
portfolio returns and investment behavior and found that through the mediating channel of
better-than-average. Kirchler and Maciejovsky (2002) applied two measurements of
overconfidence, subjective confidence intervals, and differences between objective accuracy
and subjective certainty, and observed that participants were classified as overconfident based
on the comparison of objective accuracy to subjective certainty. Huisman et al. (2012)
proposed a new measurement for overconfidence namely the Parkinson volatility measure and
found that investors exhibit overconfidence bias. Grežo (2020) used a meta-analysis to
examine the relationship between overconfidence and financial decision-making, and the
results showed that indirect measures of overconfidence have a stronger effect than direct
measures on financial decision-making (overestimation, over-precision, and over-placement).
Table VIII Empirical results on overconfidence and individual investors

Overconfidence and Barber and Odean (2002) online trading reinforces the investors’ overconfidence and thereby
individual investors increases trading, more speculative and less profitable. Chen et al. (2004) studied brokerage
account data in China and found that Chinese individual investors show overconfidence.
Similarly, Huisman et al. (2012), using survey data, found that individual investors exhibit a
significant overconfidence bias. Gervais and Odean ( 2001) revealed that overconfident
investors trade very aggressively, thus, causing the anticipated trading volume to rise. Glaser
and Weber (2007) observed that the greater the investors' overconfidence, the greater the
trading volume. Significant empirical studies have been conducted on overconfidence and
trading volume (Chen et al., 2007; Grinblatt & Keloharju, 2009; Merkle, 2017).
Overconfidence leads to an increase in trading volume and causes lower expected utility
(Odean, 1998). Overconfident investors underestimate the noise variance in private signals
and tend to overestimate the expected returns (Chen et al., 2019). Abreu and Mendes (2020)
showed that overconfident investors trade warrants more than stocks. Naveed and Taib (2021)
examined the association of overconfidence bias and information acquisition with individual
decisions, and found that overconfidence bias with individual decisions is greatly influenced
by information acquisition. In contrast to the above-mentioned findings, Kirchler and
Maciejovsky (2002) tested individual overconfidence in an experimental asset market and
concluded that participants are not vulnerable to overconfidence.
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Table IX Empirical results on overconfidence and institutional investors

Overconfidence and Menkhoff et al. (2013) evidence showed that
institutional investors institutional investors are less likely to be overconfident.
Table X Empirical results of overconfidence tendency on individual versus institutional investors

Overconfidence tendency in Chuang and Susmel (2011) showed that compared to institutional
individual versus institutional investors, individual investors are more vulnerable to overconfidence
investors bias. Liu et al. (2016) observed that individual investors tend to be
more overconfident in their trading behavior compared to institutional
investors. Khan et al. (2019) conducted a survey and found that
individual investors tend to be overconfident, whereas institutional
investors are not inclined to it. Similarly, Li et al. (2020) documented
that overconfidence is much more dominant among individual
investors than institutional investors. Both individual and institutional
investors are overconfident (Lai et al., 2013; Lin & Chiang, 2015).
Table XI Empirical results on institutional investor herding

Institutional investors Lakonishok et al. (1992) used the US tax-exempt funds, with the help of LSV, examined the
and herding behavior herding behavior and found that pension fund managers are less inclined towards herd
behavior when trading with large stocks. Grinblatt et al. (1995) studied that US mutual funds
of momentum investors and their herding behavior are inconsistent. Wermers (1999) found
insufficient evidence of herding behavior in mutual fund trading with average stocks;
however, herding behavior exists in trading with small stocks and growth-oriented funds.
Wylie (2005), using data from the portfolio holdings of 268 equity mutual funds, found that
in the largest and smallest individual UK stocks, fund managers exhibit a reasonable amount
of herding. Furthermore, herding behavior is less pronounced in other stocks. Apart from the
LSV measure, Sias (2004) employed a cross-sectional correlation to measure herding,
revealed that the demand for security among institutional investors, the demand in the current
quarter is favorably related to the demand in the preceding quarter and also showed that
institutional investors herd infer information from one another's trades. Similarly, Choi and
Sias (2009) found that institutions followed the same industry-trade strategy, resulting in
institutional industry herding.
Herding behavior and Li and Yung (2004) found a strong association between institutional ownership changes and
market returns ADR returns, and concluded that the correlation is still positive, even when the impact of
momentum trading is considered. Dasgupta et al. (2011) observed that institutional herding
accurately predicts short-term returns but inaccurately predicts long-term returns.
Institutional herding Kim and Nofsinger (2005) documented that, comparatively, in Japan, institutional herding is
in the global market less prevalent than in the USA. However, this significantly impacts price movements.
Furthermore, economic conditions and the regulatory environment affect the consequences
and behavior of institutional herding. Choi and Skiba (2015) studied the herding behavior of
institutional investors in international markets and found that in markets with low information
asymmetry, institutional investors are more likely to herd.
Effect of institutional Walter and Moritz Weber (2006) found that German mutual fund managers engaged in
herding on the stock herding and positive feedback trading. Gutierrez and Kelley (2008) found that institutional
price investors suffer from buying and continue to gain returns from selling. Moreover, buying herd
destabilizes the prices. Whereas, selling herd stabilizes it. Lu et al. (2012) examined the price
impact of foreign institutional investors’ herding and found that investors are more likely to
have large-size stocks. As a result, there is a subsequent increase in the stock price.
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Institutional herding Chang and Dong (2006) found that institutional herding and firm profitability are both
and idiosyncratic positively related to idiosyncratic volatility.
volatility
Herding behavior of Chang (2010) analyzed the herding of qualified foreign institutional investors (QFIIs) and
foreign institutional concluded that they increase /decrease their holdings in particular sectors. Bowe and Domuta
investors and (2004) studied both foreign and domestic investors in the Jakarta stock exchange and found
domestic investors evidence for herding before, during, and after the Asian crisis of 1997. Fang et al. (2017)
revealed that investigative herding is the major cause of herding among FIIs in the Taiwan
stock market. Tayde and Nageswara Rao (2011) found that FIIs were involved in herding as
well as positive feedback trading in the Indian stock market. Garg and Mitra (2015) revealed
that in the Indian stock market, FIIs participate in inadvertent herding, resulting in short-term
volatility. Similarly, studies on the Indian stock market have also been conducted (Choudhary
et al., 2019; Garg et al., 2016; Madaan & Shrivastava, 2020).
Herding based on Holmes et al. (2013) found that institutional herding is influenced intentionally. Gavriilidis et
intentional and al. (2013) found that institutional herding behavior in the Spanish market is intended for both
spurious the market and the sector. Guo et al. (2020) showed that spuriousness has an impact on
institutional herding.
Mutual fund herding Hung et al. (2010) revealed that mutual funds in the Taiwan stock market exhibit herding.
Caglayan et al. (2021) found that mutual fund herding considerably reduces return co-
movement in Chinese equities. revealed that Wang et al. (2021) documented that herding is
evident in all types of funds other than income funds, and that non-fundamental factors
primarily influence herding behavior. Hudson et al. (2020) examined the role of investor
sentiment that affects institutional investor herding, and found that they tend to herd based on
market portfolio, size, and value factors.
Institutional herding Bohl et al. (2014) analyzed short-selling restrictions impact on herding behavior and found
and short selling that restrictions have no impact on herding behavior. Moreover, it showed a higher
dispersion of returns across market.
Institutional herding Lin et al. (2013) found that institutional investors show herding rationally based on superior
and Information information.
Herding and robust Lu et al. (2022) empirically tested the relationship between herding behavior and robust return
return efficiency efficiency (RRE) and found that fund managers' herding behavior benefits the RRE of their
(RRE) funds.
Table XII Empirical results on individual investor herding

Individual herding in Chen and Zheng (2022) documented that individual investor herding behavior occurs in both
global markets the Chinese and US stock markets, and the Chinese stock market is predominantly influenced
by behavioral sentiment dynamics as a result of investor switching patterns, while
fundamental factors have an impact on the US market.
Herding behavior and Hsieh et al. (2020) found that the Google Search Volume Index can be used to predict the
Google Search Volume information needs of inexperienced individual investors. Moreover, they observed that in bull
Index markets, individual investors' buying herd tendency is greater for small-cap companies,
whereas selling herd behavior is stronger for large-cap companies. Wanidwaranan and
Padungsaksawasdi (2022) analyzed the Google Search Volume Index and revealed that
investors unwittingly follow the same trading patterns, which results in unintentional herding
behavior.
Effect of idiosyncratic Vo and Phan (2019a) analyzed the impact of idiosyncratic volatility on individual investors’
volatility on the herding herding behavior in the Vietnam stock market and found that herding exists in the market.
behavior
14
Table XIII Empirical results on the herding of institutional versus individual investors
Herding of institutional Nofsinger and Sias (1999) documented that institutional investors’ herding affects the stock
versus individual investors prices more than individual investors. Dennis et al. (2002) found that institutional investors
tend to follow herd behavior more than individual investors do when large market prices
swing. Similarly, Hsieh (2013) found that compared to individual investors, institutional
investors are more inclined to herd. Li et al. (2017) trading volume-based indicator was used
to analyzed the variations in herding between individual and institutional investors and
observed that less-informed individuals invest their money in a variety of stocks, whereas
better-informed institutional investors trade more selectively.
Table XIV Empirical results on herding and market conditions

Herding and market conditions Avery and Zemsky (1998) found that herding behavior exists, which leads to short-run
mispricing of assets. Christie and Huang (1995) stated that herding is most likely to
occur under an extreme down market. Similarly, Choi and Yoon (2020) revealed that
herding behavior occurs in the Korean stock market during downturns. Caparrelli et al.
(2004) documented that herding behavior occurs during extreme market conditions.
Zhou and Anderson (2013) found that herding occurs under unstable market conditions.
Messis and Zapranis (2014) documented that stocks showed more herding or adverse
herding exhibit high volatility. Litimi et al. (2016) found that herding behavior leads to
an increase in market volatility as well as excessive bubbles in the US stock market at a
sectoral level. Hwang and Salmon (2004) studied the herding behavior in South Korean
and US stock markets by using a cross-sectional dispersion of factor sensitivity of assets
and found a positive correlation between herding and significant market movements.
Tan et al. (2008) showed that herding exists in both A and B share markets in the Chinese
stock market. Lao and Singh (2011) examined herding behavior in the Indian and
Chinese stock markets and found that herding behavior exists in both markets. Bahadar
et al. (2019) analysed herding in leveraged exchange-traded funds and found that
herding is more widespread in bear LETFs in daily trading, asymmetric market
situations, and the global financial crisis period. Hong et al. (2020) showed that both
bull and bear markets exhibit herd behavior. Dhall and Singh (2020) documented that
herding exists post-COVID-19 in both bull and bear markets. Similarly, Mishra and
Mishra (2023) found that herding occurred during the COVID-19 Pandemic.
Jirasakuldech and Emekter (2021) showed that herding behavior occurs in a bear market
with high trading volume, and during an economic crisis. Wu et al. (2020) reported that
herding is dominant in bull market movement, low trading volume, and low market
volatility under COVID-19. Indārs et al. (2019) examined herding behavior through
fundamental and non-fundamental factors and observed that investors’ herding behavior
varied under different market environments namely, liquidity, market trends, oil price
volatility, the arrival of new information, and uncertainty. Gabbori et al. (2021)
documented that herding occurs on OPEC meeting days, and more importantly,
independent oil market volatility influences herding behavior. Mobarek et al. (2014)
stated that most continental nations experienced a strong herding effect during the global
financial crisis, and Nordic nations also experienced it during the Eurozone crisis.
Bekiros et al. (2017) observed that under extreme market conditions, herding becomes
highly pronounced. Ansari and Ansari (2021) stated that herding is absent in all market
conditions. Demirer and Kutan (2006) analyzed the formation of herding in Chinese
markets using return dispersions and concluded the absence of herding behavior.
5 CONCLUSION AND FUTURE RESEARCH AGENDA

From the findings of the systematic review, it is clear that research on behavioral bias
has emerged over the past two decades. The frequency of usage is higher in the secondary data
15
than in the primary data. Majority of the research was conducted in the United States of
America, followed by Taiwan and China. Daniel et al. (1998) and Grinblatt et al. (1995) have
produced the most cited articles in overconfidence and herding consequently. Most importantly,
behavioral biases in both individual and institutional investors’ investment decisions are
predominantly influenced, and thus, investment advisors should focus on this bias so that
individual investors can minimize their losses while making investment decisions.
This study identified various research gaps for future research to work on. Most studies
focus on institutional investors’ herding, but few cover individual investors’ herding (Chen &
Zheng, 2022; Vo & Phan, 2019b). Studies examining the overconfidence bias among individual
investors are the most frequent. However, overconfidence bias towards institutional investors
has received very little attention from researchers (Menkhoff et al., 2013). Researchers have
focused only on direct measures of overconfidence. However, direct measures of
overconfidence have a lower effect on financial decision-making than indirect measures (Grežo,
2020). Therefore, indirect measures may be useful in addressing this behavior. The majority of
studies revealed that compared to individual investors, institutional investors are more inclined
to herd (Dennis et al., 2002; Hsieh, 2013). On the other hand, the majority of research articles
concluded that, in comparison to institutional investors, individual investors are more probable
to be impacted by overconfidence bias (Chuang & Susmel, 2011; Liu et al., 2016; Khan et al.,
2019; Li et al., 2020). However, only these studies show that both individual and institutional
investors exhibit overconfidence (Lai et al., 2013; Lin & Chiang, 2015).
To sum up, the primary objective of this systematic review is to contribute to the body
of knowledge on behavioral bias and investment decisions. Significant academic research
conducted over the years was carefully scrutinized, selected, and evaluated. The analysis
compiled data on relevant studies to identify trends in publication, type of data used, collection
of sample data based on country, most cited papers, and content analysis employed.
First, the authors of this study opted for Scopus database to enrich scholars with an
overview of recent investigations as a base for further research. Second, this review is limited
to articles published in English language. Third, this study included articles and book chapters
but did not consider other scholarly outputs such as conference papers, erratum, and notes.
Fourth, this investigation is limited to only two behavioral biases. Despite its limitations, the
findings of this study highlight the importance of systematic review in improving our
understanding of behavioral biases and investment decisions. Future reviews can work on other
behavioural biases in investment decision-making.
16
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BEHAVIORAL BIASES AND THEIR INFLUENCE ON INVESTMENT

DECISION-MAKING: A SYSTEMATIC LITERATURE REVIEW AND

Theoretical framework: Kahneman and Tversky (1979) formulated prospect theory

Originality/value: This study delineates the behavioral biases of individual and

Technology, Vellore, Tamilnadu, India, E-mail: nsundaram@vit.ac.in, Orcid: https://orcid.org/0000-0002-0801-0428

Keywords: overconfidence, herding bias, behavioral biases, investment decisions,

PRECONCEITOS COMPORTAMENTAIS E SUA INFLUÊNCIA NA

Estrutura teórica: Kahneman e Tversky (1979) formularam a teoria da perspectiva e concluíram

Resultado e Conclusão: O volume de pesquisas sobre viés comportamental aumentou nas

Implicações da pesquisa: Este estudo destaca a influência de vieses comportamentais na

Originalidade/valor: Este estudo delineia os vieses comportamentais de investidores individuais

Palavras-chave: excesso de confiança, tendência de pastoreio, tendências comportamentais,

2.1 OVERCONFIDENCE BIAS

2.2 HERDING BIAS

3.1 DATABASE, KEYWORDS, AND INCLUSION CRITERIA

3.2 SELECTION OF THE PAPERS

Figure 1 Methodological approach

Source: Prepared by the authors (2023)

4 RESULTS AND DISCUSSION

4.1 TRENDS IN PUBLICATION

Figure 2 Publication trend of 109 articles

Source: Prepared by the authors (2023)

4.2 TYPE OF DATA

Table I Frequency of usage of data type

4.3 COLLECTION OF SAMPLE DATA BASED ON COUNTRY

Table II Frequency distribution of sample data collection based on country

4.4 CITATION ANALYSIS

Table III Overconfidence bias articles listed based on their citations

Table IV Herding bias articles listed based on their citations

4.5 CONTENT ANALYSIS

4.5.1 Overconfidence bias

4.5.2 Herding bias

4. Table XIV shows herding and market conditions.

Table V Empirical results on overconfidence and trading activity

Table VI Empirical results on overconfidence and gender differences in trading activity

Table VII Empirical results on measures of overconfidence

Table VIII Empirical results on overconfidence and individual investors

Table IX Empirical results on overconfidence and institutional investors

Table X Empirical results of overconfidence tendency on individual versus institutional investors

Table XI Empirical results on institutional investor herding

Table XII Empirical results on individual investor herding

Table XIV Empirical results on herding and market conditions

5 CONCLUSION AND FUTURE RESEARCH AGENDA

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from an emerging market. Journal of Behavioral and Experimental Finance, 5, 35–45.