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QRFM
10,2
210
Received 7 April 2017
Revised 21 August 2017
Accepted 6 November 2017
Qualitative Research in Financial
Markets
Vol. 10 No. 2, 2018
pp. 210-251
© Emerald Publishing Limited
1755-4179
DOI 10.1108/QRFM-04-2017-0028
Do investors exhibit behavioral
biases in investment decision
making? A systematic review
Syed Aliya Zahera and Rohit Bansal
Department of Management Studies,
Rajiv Gandhi Institute of Petroleum Technology, India
Abstract
Purpose – The purpose of this paper is to study and describe several biases in investment decision-making
through the review of research articles in the area of behavioral finance. It also includes some of the analytical
and foundational work and how this has progressed over the years to make behavioral finance an established
and specific area of study. The study includes behavioral patterns of individual investors, institutional
investors and financial advisors.
Design/methodology/approach – The research papers are analyzed on the basis of searching the
keywords related to behavioral finance on various published journals, conference proceedings, working
papers and some other published books. These papers are collected over a period of year’s right from the time
when the most introductory paper was published (1979) that contributed this area a basic foundation till the
most recent papers (2016). These articles are segregated into biases wise, year-wise, country-wise and author
wise. All research tools that have been used by authors related to primary and secondary data have also been
included into our table.
Findings – A new era of understanding of human emotions, behavior and sentiments has been started
which was earlier dominated by the study of financial markets. Moreover, this area is not only attracting the,
attention of academicians but also of the various corporates, financial intermediaries and entrepreneurs thus
adding to its importance. The study is more inclined toward the study of individual and institutional investors
and financial advisors’ investors but the behavior of intermediaries through which some of them invest
should be focused upon, narrowing down population into various variables, targeting the expanding
economies to reap some unexplained theories. This study has identified 17 different types of biases and also
summarized in the form of tables.
Research limitations/implications – The study is based on some of the most recent findings to have a
quick overview of the latest work carried out in this area. So far very few extensive review papers have been
published to highlight the research work in the area of behavioral finance. This study will be helpful for new
researches in this field and to identify the areas where possible work can be done.
Practical implications – Practical implication of the research is that companies, policymakers
and issuers of securities can watch out of investors’ interest before issuing securities into the
market.
Social implications – Under the Social Implication, investors can recognize several behavioral biases,
take sound investment decisions and can also minimize their risk.
Originality/value – The essence of this paper is the identification of 17 types of biases and the literature
related to them. The study is based on both, the literature on investment decisions and the biases in
investment decision-making. Such study is less prevalent in the developing country like India. This paper
does not only focus on the basic principles of behavioral finance but also explain some emerging concepts and
theories of behavioral finance. Thus, the paper generates interest in the readers to find the solutions to
minimize the effect of biases in decision-making.
Keywords Overconfidence, Financial markets, Disposition effect, Behavioural finance,
Behavioural biases, Investment decisions
Paper type Literature review
1. Introduction Behavioral
Financial management popularly known as the art of wealth management has been the biases
lifeline of the economic system for decades. Several theories and assumptions have been put
forward by known scholars to explain the functioning of the finance models. The
individuals, companies and organizations in view of the associated risks and returns
consider finance with procurement and allocation of financial resources. Ironically, trading
and investing are considered as the interchangeable terms[1]. While trading is meant for
short term and quick returns, investing is for the long term that gives the investors an 211
opportunity to reap the optimum returns in the form of both cash flows and capital gains.
While investing is a complex procedure, these complexities are increased by the behavior of
the stock market. The primary reason for complexities in the investment decisions is the
presence of a large number of participants who exhibit varied emotions and behavioral
patterns while taking investment decisions. Efficient market hypothesis explains that stock
markets are efficient. It states that the share price incorporates all the available information.
In fact, the classical finance theory is built on the efficient market hypothesis.
Modern portfolio theory states that because there are uncertainties in the security
market, the investor preference cannot be quantified in terms of choices but with the help of
mean and variance of the returns, the tradeoff of modern finance is shown as follows:
 Expected utility theory (Bernoulli, Daniel; originally published in 1738; translated
by Dr Louise Sommer, 1954) is concerned with the choice among the alternatives
that have uncertain outcomes. The aim is to attain a tradeoff between risk and
return.
 Markowitz (1952) approach helps an investor to achieve his optimal portfolio
position and explains how the diversification reduces the risk.
 Capital asset pricing model (Treynor, 1961; William, 1964; Lintner, 1965; Mossin,
1966) model helps to ascertain the relationship between the systematic risk and
expected return of an asset. It can be used either to price a single security or an
entire portfolio of securities.

These theories considered the market to be efficient and investors to be rational. The
efficiency of the stock markets is questionable, as the various stock market anomalies
remain unanswered. These anomalies that are to be answered are as follows:
 Why there are bubbles in the market?
 Why does the market get crashed?
 How to prevent these bubbles and crashes?
 When do these bubbles and crashes actually arise in the market?
 What factors can be held responsible for these uncertainties?

The answers to these questions can be found if the psychology of the participants is studied
and understood properly. The perfect market conditions as those discussed in the economics
and finance books do not always prevail in the real stock markets. It was by the year 1980s
that the solution to this problem was searched. The result was in the form of behavioral
finance which is an emerging area in the field of finance. It has answered and explained
some of the reasons for the behavioral changes in the investors that deviate them from the
rational decision-making. The various reasons for the sudden and untimely changes in the
stock market and pricing of securities have been explained. It contradicts both the theory of
rational investors and efficiency of the markets. Kahneman and Tversky (1979) wrote a
QRFM paper titled “Prospect theory: An analysis of decision under risk”. This paper became a well-
10,2 known paper in the field of behavioral finance as the concept of prospect theory was
introduced. This theory explains how the investors make decisions based on the
probabilistic alternatives involving risk when the probable outcome of investment decision
is known.
Then another important contribution came from Thaler (1980) which explained the
212 prospect theory based on an alternative descriptive theory. Instead of considering investors
acting in a cold, irrational way, he argues that investors act under the influence of
behavioral biases often leading to less than optimal decisions. The theory and assumptions
of traditional finance and modern finance have been challenged by several scholars from
time to time. But the theories of behavioral finance have also been subject to various doubts
and challenges. Thaler (1999) explained in his paper, “The End of Behavioral Finance”,
several instances where the theories of modern finance give no answer and here the
assumptions of behavioral finance start working. He has selected five areas where
the behavior of the investors in the stock market differs from what have been proposed by
the finance theories. These are volume, volatility, dividends, predictability and equity
premium puzzle.
Shiller (2003) has proposed substantial literature with the aim of clearing doubts about
efficient market hypothesis. The answers to the various irregularities in the investing
patterns of the investors have been found with the help of behavioral finance. Caginalp and
DeSantis (2011) have extended the theories that further contradict the efficiency of the stock
market. According to him, the nature of the investments and the participants that trade or
invest in the market are the driving factors of the efficiency of the markets. In his paper,
Marchand (2012) identifies the irrationality in the human behavior in the form of biases and
compares the traditional and modern finance theories with the behavioral finance theories.
Nair and Antony (2015) view behavioral finance as not a replacement to classical finance
theories but as means to understand the irrational investor behavior and reasons for sudden
rise and fall in the market.
If the investors have complete information about the asset pricing, pricing of securities in
the market, the prospect of the company in the future, government guidelines for investment
in the securities, then also they are prone to make irrational decisions. This is because while
making any investment decision, they are influenced by both the potential outcomes and
emotional outcomes. Thy can get influenced by the perceptions of their peers, friends, family
or even their competitors. Such a behavior of the investors to act differently in different
situations makes it essential to combine the concepts of psychology with finance. This can
explain the reasons for varying investor behavior under different circumstances that they
face in the market. The strategies of the investment made keeping in view the principles of
behavioral finance can increase the profits of the investors. It can also guide investors to
invest in profitable securities and to withdraw from the loss-making securities. The rational
investors are able to attain the benefits by investing in those profitable securities and
beneficial opportunities that are not recognized by the irrational investors.

1.1 Behavioral biases

1.1.1 Overconfidence. It is the situation when people are highly optimistic about the trading
outcomes and they suppose that the information they have is adequate for them to take
sound investment decisions. Investors also relate the high performance of the market to their
own performance and ignore the fact that paying too much attention to their own
capabilities and ignoring other factors can make them incur huge losses in the future.
 1.1.2 Disposition effect. It was initially given by Shefrin and Statman (1985). Investors Behavioral
tend to sell superior selling stocks early to realize the gains and they tend to hold the losing biases
stocks for long to delay the losses. The tendency to avoid losses is much more than the
willingness to realize gains. The final decisions of the investors are based not on the
perceived losses but on the perceived gains.
1.1.3 Herding effect. It was identified by Shiller (2000) and Kahneman and Tversky
(1979). Herding in the stock market is the tendency of the investors to follow the decisions of
the other investors. This aspect of the investors is a subject of extensive research because 213
the investors rely on the collective information that they possess more than the private
information. This can result in price deviations from the fundamental values and the risk of
reduced returns.
1.1.4 Mental accounting. It was initially proposed by Thaler (1985). This theory implies
that investors divide their investments in various portfolios on the basis of a number of
mental categories they have. Then they separate investment policies for each mental
account in a way that each of them has a specific purpose to be attained and the aim is the
maximization of returns with the minimization of risk. This could result in the selection of
those portfolios that are not profitable yet they satisfy the emotions of the investors.
1.1.5 Confirmation bias. It was described by Dickens (1978). People generally have a
preconceived impression of something and they rely on this information. This makes them
adjust the future information to suit their opinion. This results in irrational decisions on the
part of the investors as they get skewed toward the information that they already have and
avoid the other information.
1.1.6 Hindsight bias. This bias (Fischhoff and Beyth, 1975) occurs when an investor
believes that the happening of some event can be predicted reasonably. But this belief can be
dangerous as the investor can form cause and effect relationship between the two events
even when the relationship is not associated at all and thus results in irrational decisions.
1.1.7 House money effect. It was given by Thaler and Johnson (1990). It means that when
gamblers are making profits then they become less loss-averse and more willing to take the
risk. So the investors who are making huge profits are willing to take more risk and vice
versa.
1.1.8 Endowment effect. It was originated by the paper of Kahneman et al. (1990). People
pay too much emphasis on what they currently hold and do not want to change their
position. This makes them forego even the most profitable investment opportunities. This
attitude makes the prices of some of the very profitable securities to remain at a very low
level; thus, the money lies in the market but suffers from the ignorance of the people.
1.1.9 Loss aversion. This bias was given by Benartzi and Thaler (1995); it occurs because
people react differently to assured losses and assured profits. When they are faced with sure
profits then they do not want to take any risk, while if there are any chances of losses, then
they are ready to take more risks. This means they value the certainty of losses more than
the uncertainty of losses.
1.1.10 Framing. This bias was given by Tversky and Kahneman (1981). When the
information is provided in the positive frame, investors avoid risk to make sure profits and
when the same information is provided in the negative frame, they are ready to take the risk
to avoid losses. Thus, the same information can be presented to the investors in either of the
ways to change their opinions.
1.1.11 Home bias. This was first introduced by French and Poterba (1991) and Tesar and
Werner (1995). The feeling of belongingness of the investors toward their domestic
companies makes them invest in the domestic companies even if their returns are lower than
those of the international companies. Thus, the investors become inclined toward home bias.
QRFM 1.1.12 Self-attribution bias. This was developed by Bem (1967, 1972). People attribute
10,2 their success to their own hard work and intelligence, while they blame their failure to the
action of others or to some outside factors.
1.1.13 Conservatism bias. It was originated by Edwards (1982). In this case, people stick
to their own beliefs and forecasts and are not willing to accept the information which might
be useful for their decision-making.
214 1.1.14 Regret aversion. It was invented in three different following papers, Loomes and
Sugden (1982), Bell (1982) and Fishburn (2013). When the people regret about some decision,
then it has a greater impact on their future decisions. They either become motivated to take
more risk or resist to take any risk at all. This is done to avoid any feeling of regret in the
future.
1.1.15 Recency. The decisions of the investors are based on some recent events that are in
news and they neglect the information that might be useful but have taken place quite a
while ago.
1.1.16 Anchoring. The investors make their judgments on the basis of the initial
information they receive and then base their subsequent decisions on the basis of the past
information. The successive decisions are anchored around some previous information. This
bias was introduced by Tversky and Kahneman (1981).
1.1.17 Representativeness. It means assessing the characteristics of an event/object and
considering them similar to other events/objects. This makes them to consider the event/
object more likely to happen which may or may not happen. It was given by Kahneman and
Tversky in the early 70s.
In the following paper, Section 2 shows the basic concepts, and discoveries in the field of
behavioral finance shall be explained through a systematic review of the literature. The
various biases, its impact on investment decisions and reasons for behavioral biases and
investment biases in behavioral finance shall be highlighted. Section 3 shows the existing
gaps in the literature. Section 4 will also present the methodology that has been adopted
both for the primary and secondary data. Section 5 present results and findings. Section 6
gives the conclusions and suggestions. Section 7 shows contribution of this paper to the field
of behavioral finance. Section 8 gives the future implications for research in behavioral
finance.

1.2 Research motivation

 The introduction of behavioral finance eases to study the investors in the stock
market as distinct from the expected utility theory. It marks a start of a new area
that meets an ideal way of assimilating the financial theories with that of the
psychological theory to find a new way exploring the dimensions of investor
behavior.
 Behavioral finance has been created as a full-fledged field that has its own
principles and theories backed up with strong experiments that have been
conducted with the actual investors. It is not arbitrarily supposed to be only a part
of the certain assumptions of perfect market conditions, complete financial
information and rationality of the investors.
 It has a separate code of conduct that provides an array of opportunities to find
various factors that could have a probable impact on the differing behavior of a
variety of investors.
  The issues and questions that were once a part of inappropriate evidence have now Behavioral
been backed up by strong proofs and the doubts are treated with extreme theoretical biases
support.
 It provides an easy answer to the ambiguity why only a small segment of the
investors are able to track the exact deviation of the prices from their fundamental
value.
 An inquiry into this area makes it possible to understand an entirely new subject 215
which was not studied before. It creates an interest in the readers to get to know
something about finance to which they were not familiar with.
 The fundamentals of behavioral finance work at the individual and corporate level.
The behavior of individual investors, professionals, brokers and institutional
investors can all be studied simultaneously as well as separately.
1.3 Research problems
 We desired to point out the biases that the investors should willingly or unwillingly
consider while they make any investment choices.
 There was a need to collect various types of biases which can ease the readers to get
acquainted with these biases.
 The paper has aimed to highlights the key factors which are creating a base for the
improvement to these biases.
 This research will review those papers which have studied one, two or even multiple
biases in their research.
 To find significant differences in the area of behavioral finance between the
developing and developed countries.
 To sort out the ways that may discard the discrepancies in the pricing of securities
in the stock market.
 To aid the future research to bring Indian stock exchange at par with the stock
exchanges of the other countries.

2. Literature review
One of the most significant and parental works done in the field of behavioral finance is by
the two psychologists Kahneman and Tversky (1979) who laid the foundation of the
prospect theory. Prospect theory was introduced as an alternative to the expected utility
theory, rational expectations theory and the efficient market hypothesis. Thaler (1980) has
given theories to apply the prospect theory to the financial markets. Being a finance theorist,
he argues that individuals don’t always behave rationally, but they often make mistakes
while taking investment decisions. Therefore, these three, Kahneman and Tversky (1979)
and Thaler (1980), are considered as the father of the behavioral finance (Hammond, 2015).

2.1 Literature on factors influencing investment decisions

Jagongo and Mutswenje (2014) explain that the investment decisions are rather
sophisticated and so it requires considerable brainstorming. Most of the investors are bound
to make mistakes in their investment decisions, as they desire to minimize their losses.
There are several factors that have an impact on the investment decisions. These include the
goodwill of the firm, benefits of diversification by investing in various securities, the
QRFM position and performance of the firm, return on investment (ROI), perceptions of investors
10,2 toward the firm. The investors should be able to study deeply and understand all the
variables that could affect the investments in the securities.
Adair et al. (1994) clarify that investment in property has recently been recognized as an
important decision for a multi-asset portfolio and investors are using it as a tool for hedging
against inflation as well as for diversification. Investors are focusing on the past
216 performance and the future prospects of the investments for decision-making. The investors
are risk averse and so they want to invest in those securities that promise a high return and
a low risk. They are suspicious about investing in those portfolios which offer both high
return and high risk. The high level of entry cost and differences in the culture acts as an
impediment to the investment for some investors. Property taxation, currency fluctuations
and exchange rate risk are some other constraints to an effective investment decision.
Investors invest in the markets they are familiar with and the markets which provide
sufficient information to its investors. The psychological biases were explained to describe
the reasons for the irrational behavior of the investors. Guler (2007) finds the reasons for the
firms continuing the investments in the venture capital despite the losses from the expected
returns. This happens both in the case of individual and organizational investors. If the
investors manage the sequential investment process properly, then they can terminate the
investment on the chances of failures and vice versa.
Feldman and Lepori (2016) used the agent-based modeling to examine whether
psychology has an impact on the asset pricing. The author has combined the regimes of
rational, irrational investors and a combination of the two. Behaviorists think that the
existence of the irrational investors along with the rational ones has a significant impact on
the asset prices. Efficient market hypothesis assumes that in the long run only rational
investors are left in the market because the irrational investors become insolvent and so they
withdraw from the market. The irrational investors are further segregated into introspective
and aggregating investors. The former are the ones those who associate the reason of their
irrationality to their own performance, while the later ones are influenced by the
performance of the other investors. The findings suggest that aggregating investors affect
asset prices but not the introspective investors. Therefore, only irrationally aggregating
investors should be modeled in the agent-based models. D’Acunto (2016) studies the effect of
anti-market ideology on a group of investors. The results show that the investors who are
exposed to anti-market ideology are more risk averse. The effects of anti-market ideology
give different results to different demographic variables. Women, educated and the people
who are not young reacted more to anti-market ideologies. Behavioral biases drive less
sophisticated individuals and anti-market ideology drives sophisticated investors away
from classical decision-making. Every investor is guided by different sentiments and so the
purpose of the paper by Hoffmann et al. (2015) is to study the different sentiments of the
investors which make them invest in certain portfolios. The final outcome of the investment
decisions is an important indicator of the position that an investor wants to take in a
security or investment.
The relatively higher temperature on Monday causes the irrational behavior of the
investors. This way, the weather forecast can predict the sensitivity of the market
(Brahmana et al., 2014). Abreu and Brunnermeier (2003) find the causes of manifestations
and timing of occurrence of bubbles in the stock market. It drafts the validity of efficient
market perspective. A bubble can burst when all the investors in the market begin selling
the stock. Arbitrageurs have an important role to play in the determination of the time of
bursting of the bubbles. Chaudhary (2013) has moved a step forward by clarifying certain
trading approaches to the investors to invest in the stocks and bonds, also explaining the
importance and application of behavioral finance in investment decisions. Chavali and Behavioral
Mohanraj (2016) found the relationship between demographic characteristics of investors biases
and their investment pattern. The findings suggest that gender is the most important
variable impacting the investment decisions of individual investors. The stronger
managerial incentives are a result of proper governance and it reduces the herding effect.
Thus, it is a good monitoring device to control the actions of the fund managers to minimize
the poor performance (Casavecchia, 2016). Chhabra and De (2012) find that there is a
significant impact of the result of the recent past failures on the current potential to invest. 217
The sign of the securities traded is stronger than the size of the trades. A positive sign is an
indicator of profitable trade and vice versa. There exists a natural tendency in the investors
that the past investment outcomes have a considerable impact on their future resource
allocation in the portfolio of assets. Papadovasilaki et al. (2015) tested the relationship
between early gains and losses of an investment and its effect on the subsequent investment
decisions. The relationship between early investment experiences and subsequent portfolio
investment decisions are positive and both the factors are strongly correlated.
Maung and Chowdhury (2014) suggest the right timing of equity issuances and other
investments in real fixed assets for the corporate investors. The thrust is to choose the value
enhancing equity backed projects for the investment. The market is divided into hot and
cold issue markets. The hot issue market is the one where the information asymmetry is
considerably low and so the information exchange between corporate managers and outside
investors is reasonably high, the cold issue market is where the information is highly
asymmetrical and, therefore, in high issue market, the firms have greater opportunities to
select the best investment. The equity issuances are less costly, so the firms can raise an
adequate amount of fund from the market for these projects. Therefore, investors should
choose equity-financed investment in hot issue markets to maximize their wealth. The
investors and participants inform other investors on the various issues for their investment
decision-making.

2.2 Literature on behavioral biases

The expected utility theory and efficient market hypothesis as explained by the traditional
finance theory is not able to clear the picture regarding the investing patterns and
preferences of the investors under certain circumstances. This has led to a further research
into the field of finance to pursue the reasons of varying individual behavior under different
circumstances.
The expected utility theory was challenged by a new theory: prospect theory by
Kahneman and Tversky (1979). The expected utility theory assumes that the investor
decides between risky assets by comparing the utility values weighted by probabilities of
their occurring and that utility is dependent on the current state of the wealth. On the
contrary, prospect theory describes that people decide between alternatives that involve risk
and return in terms of expected utility of returns. The utility of returns is based on the
potential value of losses and gains rather than the final outcomes and investors apply
certain heuristics while making decisions. Investors are willing to gamble less with profits
than with losses. They are risk averse toward gains and risk taking toward losses. An
alternative to efficient market hypothesis has been explained by Soufian et al. (2014), the
adaptive market hypothesis. The advantage is that this theory explains loss aversion,
overreaction and behavioral biases. It doesn’t assume the scenario of purely rational
investors who make the optimal capital allocation. It supposes that finance theory and its
various theories have the power to drive the entire economy and so any change in the
financial theory has an impact on the entire economy. The economy is ever changing and so
QRFM the same theories in all the scenarios can result in the wrong estimation of the operation of
10,2 the economy. Ultimately the market is able to adapt itself to its inefficiencies and then
quickly recover to function according to the functioning to its participants.
Benartzi and Thaler (1995) has propounded the concept of the “myopic loss aversion”
and has explained the equity premium puzzle through a series of behaviors. The term
“myopic” added to the loss aversion refers to those investors who have investments in the
218 longer horizon but prefer short-term gains and losses. Loss aversion is the tendency of the
decision-makers to weigh their losses heavily, i.e. double than their gains. The feeling of loss
aversion in the investors is studied by Godoi et al. (2005) through the deep qualitative
interview. The interview is conducted because loss aversion is an aspect of human
subjectivity and so shouldn’t be quantified. The results reveal that familiar influence,
investment objectives, risk dimension, the feeling of guilt, rationalization, fear and anguish
are the factors associated with the feeling of loss aversion. A qualitative approach has been
used by Kleinübing et al. (2005) to understand loss aversion its influence and meaning to the
investors. The loss aversion as a feeling involves the human emotions and desires. This bias
could not be studied extensively through quantitative methods. The interpretative paradigm
is used for the study, as it provides an epistemological base for the study of a given
phenomenon. It shows the ideal investor behavior apart from their actual behavior. It also
captures the hidden feelings of the interviewees that cannot be studied through other
methods. The feelings associated with the loss aversion are organized into various
categories like familiar influence on decision-making, financial investment and driving
investment, loss and risk, guilt, defense mechanism and rationalization, fear anguish and
aversion.
The herding behavior of investors on the Chinese stock markets has been studied by
Demirer and Kutan (2006). The Shanghai and Shenzhen Stock Exchanges are studied and
the results have shown the non-existence of herd behavior in these markets. It suggests that
when the market is extremely down, then the return dispersions are low and the stock value
also decreases during downside markets. The herd behavior and the investor behavior are
different in both the stock exchanges because of the size of market and types of firms
working there. Furthermore, a non-financial sector with lower rates of capitalization and a
small number of traders are more exposed to the herding bias. The results are based on the
assumptions that in the period of market stress, the investors are likely to follow the market
than to follow their private information. Both non-firm- and sector-level data provide
support for these results. The absence of herding behavior in the markets provides evidence
of a stabilized market and indicates that the investors in both the exchanges have complete
information about the market. Thus, it proves that if the market is efficient and investors
are well informed, then the same market information is communicated globally within a
short span of time. According to Messis and Zapranis (2014), the existence of herding is an
additional risk factor for the investors. So, the volatility measure is positively affected by the
presence of herding behavior.
Barber et al. (1999) study the presence of disposition effect in the individuals with
reference to the proportion of gains realized (PGR) and proportion of losses realized (PLR). A
large difference in PLR and PGR indicates a greater tendency in investors to acquire either
losses or gains. Linnainmaa (2010) finds the impact of the limit order on the trading
frequency of investors. He states that even if the limit orders of buy-sell are equal, a positive
news of the market behavior results in the execution of the limit order. So it gives an
impression of the disposition effect. Richards et al. (2011) investigate the impact of stop
losses on the disposition effect. The results indicate that the use of stop losses results in a
lower disposition effect. Jhandir and Elahi (2014) find the possible impact of investor type on
the investment decisions. He concludes that the investor type has a negative impact on the Behavioral
disposition effect and herding, while it has a positive effect on overconfidence. Aspara and biases
Hoffmann (2015) represent that the disposition effect can be minimized by generating an
inclination toward the overall saving goal in the investor.
The format in which the information is presented to the investors has a significant
impact on their choice of investments, which has been explained by Glenzer et al. (2014).
They further explain that the risk seeking abilities of the investors is effected when the
information is presented in absolute numbers rather than in terms of rate of return. This is 219
due to the framing effects in investor behavior. Nwogugu (2010) points out the inefficiency
in the net present value (NPV) and internal rate of return (IRR) models, as there is a
difference in the market values and present values. This is due to the presence of framing
and cognitive biases in the investors. The weighted average cost of capital doesn’t measure
the operational risk in the capital structure which further adds to the framing problems.
Regret theory finds a solution to the problems that are faced in the project selection in NPV-
IRR model. Mittal (2010), with the study of 330 investors, concludes that the salaried class is
more prone to framing effects than the business class investors. The results are drawn with
the help of a self-structured questionnaire.
The paper by Daniel et al. (1998) seeks to highlight the effect of the biases, i.e. investor
overconfidence and biased self-attrition on the security market under and overreactions. The
effects of these biases have been identified by its impact on autocorrelations, volatility
returns and pattern based on past and future returns. The economists are of the viewpoint
that there are various possibilities about the presence of several irrational behavioral
patterns that cannot be studied through a single theory. This paper shows that investors
overestimate their abilities in various ways under various circumstances. It defines that an
overconfident investor relies on the information that he gathers rather than the information
that is generated in the market. This paper thus explains that market has a tendency to
under-react to public information but overreact to private information. The investor
psychology has a direct impact on the functioning of the stock market. Fisher and Statman
(2003) find the possible association between the overconfidence in the investors and returns
on the company’s stock. The overconfidence in the investors is reduced on a negative stock
return. The low stock price doesn’t result in low stock returns, but surprisingly, it results in
high stock returns.
Glaser and Weber (2007) study the overconfidence in online stock broker and concludes
that overconfidence is not related to the trading volume when measured by calibrated
questions. The heterogeneous agent model is used by Fischer (2012) to study the impact of
overreaction and under-reaction of investors in the financial markets. The efficiency of the
financial markets can be increased if the investors have a high degree of rationality and
critical thinking. Glaser et al. (2013) measures overconfidence through interval estimates.
This method measures overconfidence at an individual investor’s level. The results show
that expertise in professionals doesn’t mitigate the losses. The investors can be both
overconfident and under confident, depending on the task they have to perform. They can be
confident toward some decisions, while they remain uninformed and under confident
toward other decisions. Duxbury (2015) presented a systematic synthesis of the
experimental studies is conducted to clarify the effect of heuristics and biases (under-
overreaction and overconfidence), the influence of moods and the emotions of the investors.
The experimental studies have been used because it increases the originality of the study by
isolating the impact of the previous studies and setting the result targets that has to be
achieved. The correlation between equity market returns and the moods of the investors has
emerged as a subject of great interest in psychology-based proxies. This relates to those
QRFM investor moods that have to be studied by experimenting on the relations among them and
10,2 to study its impacts on another. It is always assumed that biased managers can make
decisions having an adverse impact on the firm’s position.
Omondi (2016) explores the possible effects of optimism/pessimism bias on the reaction
of investors toward information collection, processing and decision-making. The ignorance,
peer influence, media information and broker’s recommendation has a significant impact on
220 the decision to invest. Mohlmann (2013) explains how the difference in behavior of investors
with regard to the different the tax collectors is associated with home bias. The investors
prefer to invest in domestic companies, as the tax collection is comparatively easier with
respect to the foreign country and the investors have a trust on the tax collection of their
own government. Additionally, Daly and Vo (2013) finds that capital control policies,
transaction costs, trade governance and market size determine the preference of investors
toward their domestic investment compared to the international diversification. The
presence of home bias is studied by Fellner and Maciejovsky (2003) using an experimental
study on 144 students in various disciplines. The social factors, group affiliation and
optimism toward domestic portfolio drive the investor behavior toward domestic securities.
Zhou and Pham (1984) investigate the possible reasons of investors’ different orientation
toward different investment opportunities. The investor makes separate investment
decisions keeping separate mental accounts for both profit and loss. The promotion and
prevention decisions act as separate stimuli in choosing the two options. This was tested
across four sets of experiments.

2.3 Literature on multiple biases

The investor psychology has a direct impact on the functioning of the stock market. The
paper by Daniel et al. (1998) seeks to highlight the effect of the biases, i.e. investor
overconfidence and biased self-attrition on the security market under and overreactions. The
effects of these biases have been identified by its impact on autocorrelations, volatility
returns and pattern based on past and future returns. The economists are of the viewpoint
that there are various possibilities about the presence of several irrational behavioral
patterns that cannot be studied through a single theory. This paper shows that investors
overestimate their abilities in various ways under various circumstances. It defines that an
overconfident investor relies on the information that is he gathers rather than the
information that is generated in the market. This paper thus explains that market has a
tendency to under-react to public information but overreact to private information. The
perceptual errors have an important effect on the investors’ financial decisions, while they
buy and sell the stocks.
Chen (2008) studied the pattern of poor trading decisions of investors in China and finds
them to be affected by disposition effect, representativeness bias and overconfidence. The
study also makes a contrast between the individual and institutional investors.
Additionally, the paper investigates whether one bias leads to another bias, but any
conclusive remarks cannot be given. Chandra (2008) has pointed that the behavioral factors
that affect the investment decision-making should be considered as risk factors. These
consists of heuristics, cognitive dissonance, greed and fear, anchoring and mental
accounting. The research is helpful for the investment advisors and other finance
professionals to know the investors’ sentiments in a better way that would enable them for
better decision-making strategies. He explains behavioral finance as the point of study
where psychology meets up with finance. The findings show that investors are risk seeing
when they are exposed to the loss. The greed is the prime feeling that overpowers an
investor’s risk-seeking behavior. They separate their investments into separate mental
accounts and the investment decisions are made to satisfy different mental accounts. Proper Behavioral
care has to be taken to involve these emotional factors when designing the portfolio of biases
investment for the investors.
Sadi et al. (2011) recognize the important perceptual errors and its effect on their
personality. It is essential to know the deviations of investors from the rational decisions
because of their personality factors. So the paper tries to bridge the gap between the
personality and the perceptual bias of the investors and guide them to take the best
decisions for their long-term financial goals. The investors can get affected by their 221
emotions and cognitions and so their financial decisions and investment strategies get
affected by these behavioral factors. The perception is the ability of the investors to organize
and explain the environmental stimuli to get the desired results. The perceptual errors are
described as overconfidence bias, availability bias and escalation of commitment, hindsight
bias, and randomness bias. The personality of investors has been explained through the Big
Five model. These include extroversion, agreeableness, conscientiousness, neuroticism and
openness to experience. Four hypotheses are developed to study the relationships between
the perception bias and personality factors. The results show that there is a strong
relationship between the perception bias and personality factors. The relationship between
extroversion and hindsight bias is positive which means that the stock market should
provide all the necessary information to reduce the errors and to help investors to take
timely decisions. Second, there is no relationship between investors’ agreeableness and
perceptional errors. Third, there exists a reverse relationship between dutifulness
and randomness bias, so the output of the investors can be improved by holding workshops
and improving their knowledge and skills. Fourth, a strong relationship exists between
neuroticism and randomness bias and between hindsight bias and availability. Finally,
there is a direct relation between openness and hindsight and overconfidence bias, and there
is an inverse relation between openness and availability bias.
Chandra (2008) has also studied certain behavioral factors such as financial heuristics,
self-regulation, prudence and precautious attitude, financial addiction and informational
asymmetry and the extent of their impact on the investor decision-making. He finds that
heuristics have a greater impact on investor decisions than the biases. Lakshmi et al. (2013)
gave an interesting addition to the existence of biases on the basis of the time period of
holding investment by the investors. The result shows that the long-term investors tend to
exhibit the lower tendency of overconfidence and are less prone to herding bias. They search
for those decisions that can benefit them in the long run. The short-term investors can easily
follow the herd behavior and the gains of short-term investors are generally low because of a
majority of investors following the same investment decisions. Brundin and Gustafsson
(2013) stated that the decisions of the entrepreneurs are highly influenced by the emotional
feelings of the investors. The emotional reactions of investors to various conditions are the
basis of deciding to continue the investment or not. He conducted an experiment with 101
entrepreneurs by giving them a chance to take 3232 investment decisions. The dependent
variable was the propensity to allocate their investments into various decisions, while
independent variable was the experienced emotions of the entrepreneurs. The uncertainty
was used as a moderating variable for making the investment decisions. The test was
conducted on the entrepreneurs of the small and medium-sized enterprises to test the impact
of emotions like challenge, hope, strain and embarrassment on their investment decisions.
The main thrust is to study the emotions of the entrepreneurs to decide about investing in an
underperforming asset. Thus, entrepreneurs are more willing to continue their investments
if they experience the positive emotions. The negative emotions reduce the inclination of
entrepreneurs to invest.
QRFM By their study, Kengatharan and Kengatharan (2014) have highlighted the individual
10,2 investor’s behavior on the Colombia Stock Exchange. Anchoring and herding bias,
respectively, have the most and the least impact on the investment behavior. The results are
summarized and tested on the basis of three hypotheses. The first hypothesis explains that
heuristics, market, prospect and herding have an impact on the investment decisions of
individuals; the second hypothesis explains that behavioral factors have an influence on
222 investor decisions; and third that behavioral factors have a positive influence on investor
performance. The results of the findings support the first hypothesis but reject the second
hypothesis. The third hypothesis is again tested through four factors. The result shows that
herding, heuristics, market and prospect do not have a positive influence on investor
performance and so the third hypothesis is rejected. Kafayat (2014) finds out whether the
investors on the Islamabad Stock Exchange are exposed to certain dilemmas such as self-
attribution bias, overconfidence bias and over-optimism bias. The main purpose is to show
if these biases have an impact on the rational decision-making of the investors. It also
discovers the interrelationship of all biases with one another. The sample was collected from
220 respondents by means of a questionnaire and structured equation modeling (SEM) was
applied to analyze the hypothesis. The results show that the investors who suffer from these
biases are not able to take rational decisions and ultimately their return is less than what
they expect it to be. So, the investors who are not affected by these biases are able to enjoy
favorable outcomes. The attribution bias results into overconfidence and overconfidence
results into over-optimism. As a result, the different biases can be studied in isolation as well
as in relation to each other.
Bakar and Yi (2015) have explained the impact of various biases and their effect on
the investor decision-making. The results are in the context of the Malaysian Stock Market,
and it has proved that overconfidence, conservatism and availability bias have a significant
impact on the investor decision-making, while herding bias doesn’t have any significant
impact. Furthermore, it also revealed that gender differences have a significant impact on
decision-making. Such that, 1 per cent increase in overconfidence increases decision-making
by 0.466 and when conservatism increases by one unit decision-making increases by 0.247.
When herding increases by one unit, investor decision-making changes by 0.07 and when
availability bias changes by one unit, then investor risk taking increases by 0.0568. The
study focuses on the behavioral factors of Malaysian investors and the impact of these
factors on their decision outcomes. The studies tried to integrate the results of Malaysian
investors with the other investors in The Association of Southeast Asian Nations, Middle
East and other Western countries. Hayat and Anwar (2016) find the impact of financial
literacy on the biased behavior of investor. The results show that financial literacy reduces
the herding behavior but increase the overconfidence in the investors. Aren et al. (2016) have
evaluated published institutional investors research in recognized journals. It studies
herding, disposition effect and home bias. They also suggested that the home bias is
associated with information and culture, disposition effect arises because of overconfidence
and experience and herding effect is affected by published information and protection of
reputation and career.
Several papers have reviewed the different types of biases that exist in individual and
institutional investors, these include Wolf (2005) who explained herding, house money
effect, confirmation bias and its impact on investor’s decision. Suresh (2013) explained that
hindsight bias, loss aversion, endowment effect, mental accounting, disposition effect and
anchoring indeed help to take sound investment decisions. Mokhtar (2014) explained
conservatism bias, confirmation bias, representativeness bias, hindsight bias, anchoring and
adjustment bias, mental accounting bias, framing bias, availability bias, loss-aversion bias,
overconfidence bias, regret-aversion bias and endowment effect. Paul (2014) found Behavioral
representation, overconfidence, herding, anchoring and framing as irregularities in financial biases
markets. Joo and Durri (2015) explained biases such as herding, loss aversion, disposition
effect, overconfidence, framing, hindsight bias and representativeness. Sukheja (2016)
reviewed mental accounting bias, representativeness, overconfidence, anchoring,
availability bias, confirmation bias, disposition effect and framing. Mallick (2015) reviewed
anchoring bias, mental accounting bias, confirmation bias, hindsight bias, gambler’s fallacy,
herd behavior, overconfidence, prospect theory, etc. 223

2.4 Literature on academics understanding of behavioral finance

Some interesting papers have been found that have a focus on some new strategies, refined
from the old ones and that are in use by the academicians to get a better understanding of
emerging concepts in behavioral finance. These papers give a better understanding of the
important papers that can be referred by the researchers and scholars in behavioral finance.
These are as follows: Ricciardi and Simon (2000) targeted at new and young researchers by
explaining the prospect theory, the theory of regret, financial cognitive dissonance and a
checklist of numerous important terms in behavioral finance. Subrahmanyam (2008) also
provided some basic synthesis of related literature on the existing theories in behavioral
finance.
Ricciardi (2006) provided useful insights for the scholars and academicians who are new
in the area of behavioral finance as it gives an introductory definition of the areas in which
the work has been done, some useful books to be studied, PhD thesis and dissertations that
have been completed in this area in the past. Kumar and Goyal (2015) provided a systematic
literature review on the four types of biases focusing on the individual investors and
providing information about the papers with most citations, active researchers and journals,
type of data and tools studied and countries where behavioral finance is frequently studied.
Huang et al. (2016) gave a summary of the papers that have been published in the past 20
years to give a detailed view of some active authors, publications and the universities doing
substantial work in this area. This is aimed at new researchers, industry professionals and
other professionals who are interested in this field.

2.5 Reasons affecting differences in investment patterns

There are several factors that have an impact on the investment behavior patterns in
various countries. The literature review provides some interesting insights into these
factors. These are as follows:
2.5.1 Relationship between experience and investment. Gupta and Ahmed (2016) find the
existence of loss aversion, regret aversion and anchoring has been found to be more
prevalent in the experienced investors and less in the inexperienced investors. The result is
derived by gathering the first-hand information of the retail investors with the use of
questionnaires. Financial experts do not perform better than others; private investment of
fund managers performs at par with individual investors. Managers show disposition effect,
but mutual funds don’t exhibit disposition effect. Bodnaruk and Simonov (2015) found that
wealthy and experienced investors prefer to invest on their own rather than seeking the help
of advisors. Chen et al. (2007) conclude that inexperienced investors are less prone to the
biases. Hackbarth (2008) suggested that the managers with high-risk perception bias issue
more debt instruments compared to the unbiased managers. They take more risk and use
their experience to select the debt instrument. Feng and Seasholes (2005) said that
sophisticated investors are less prone to risk and experience can reduce the risk in investors
to 72 per cent. While the reluctance of investors to realize losses can be eliminated, there is
QRFM no amount of investor sophistication/experience that eliminates an investor’s propensity to
10,2 realize gains. Cronqvist and Siegel (2014) have conducted an experiment on the twins in
Sweden. It presents a different aspect of investment behavior on the basis of genetic
similarities among investors. Genetic predisposition to genetic biases is reduced by the
experiences of the investors.
2.5.2 Profession and education. Mirji and Prasantha (2016) tested the trend of investment
224 patterns based on the respective occupation and level of education of the investors. The
investments were divided into large, mid-caps and small caps. It was found that those who
are employed in the business and occupation have preferably inclination toward the large-
cap securities. Homemakers and people related to agriculture have less inclination toward
large-cap securities because of an inconsistent source of income. Also, the education level of
the investors has a strong influence on the investing patterns. Such that graduates and
postgraduates have great interest toward large and medium-sized securities, while
undergraduates and doctorates have a lesser inclination toward these securities. Mittal
(2010) explained that the investors that are of business class are more susceptible to
cognitive biases, while salaried class is more prone to biases explained in the prospect
theory.
2.5.3 Gender differences. Matsumoto et al. (2013) found that the group with both the male
and female investors gives more rational performance than when they acted separately.
Women are prone to more overconfidence than men and so group behavior (both men and
women working together) may help to reduce overconfidence in the investors. When both
the men and women work as a team to take investment decisions, then the decisions are
rational. Bogan et al. (2013) explained the portfolio choice decisions on the basis of the
gender composition of the team for decision-making. Thus, proving that a team consisting of
only men is prone to increase both the risk aversion and loss aversion. The team consisting
of both men and women is neither risk seeking and nor loss averse. Glenzer et al. (2014)
stated that the female participants make decisions that are less consistent compared to the
male participants and they choose alternatives that are less risky. Graham et al. (2002)
searched for the possible reasons for the differences in the investment behavior of male and
female investors. The information processing styles of both the genders are different from
each other. The risk-taking capabilities and confidence levels in female investors are lower
than the male investors.
2.5.4 Culture and performance of investors. The studies of Li et al. (2016) indicated that a
sense of responsibility toward the society and its culture increases the performance
sensitivity. It reduces the disposition effect when the decisions are taken with respect to the
societal trust on the investors. Howard (2014) found that the behavioral directed investors or
rational investors have a tendency to outperform the overall stock market. But the rational
investors resist outperforming the market as forming such a portfolio will make their
decisions against the emotional crowd or irrational investors. This action of going against
other irrational investors is not desired from the societal point of view.
2.5.5 Emotions of investors. The stock market volatility and stock market returns are
largely determined by the emotional sentiments of the investors (Howard, 2014). Agyemang
and Ansong (2016) have studied the impact of the personal values on the behavioral
decision-making and choices of the investors. A total of 137 values have been teamed up into
three guiding values and seven motivational values. The results have shown that honesty,
comfortable life and family security have a great impact on the investment decisions of
individual investors. Interestingly, Bellotti et al. (2010) have explained the reason for the
Chinese stock market bubbles by a new area in behavioral finance, i.e. emotional finance.
The depressive state of mind (D) as well as paranoid-schizoid (PS) state of mind are the
forms of mental states. Guler (2007) describe that the decisions to invest in the venture Behavioral
capital is to be taken by a group of managers, and this can result in some behavioral and biases
political influences in those decisions. Hughes et al. (2010) studies the reasons why the
market underreacts when the investment accounts’ details of Warren Buffet is revealed by
the Berkshire Hathaway. He explains that the overconfidence and emotional factors of the
market participants, financial analysts and institutional investors are the reasons for
downgrading the value of stocks after the disclosures of the transactions of Warren Buffet.
225
3. Research gaps in the existing literature
Kirchler and Maciejovsky (2002) studied the impact of overconfidence biases on the
investors with the experiment performed in Vienna. Results with a sample of 72 investors
show that people are not prone to overconfidence. There is a scope of study of
overconfidence bias with a sufficient number of investors in the context of several counties.
Fellner and Maciejovsky’s (2003) findings show that individuals are spuriously more
optimistic toward the performance of domestic firms. Social factors motivate home bias. The
company-specific and market-specific factors for home bias can also be studied in the
context of other countries. This will increase the scope of study. Demirer and Kutan (2006)
found the absence of herding in Chinese stock exchange by taking the individual and sector
specific stock return data. The cross-sectional standard deviation can be used to find the
existence of herding behavior in the context of other investors on different stock markets.
Kothari et al. (2006) contradict behavioral finance theories that the post earnings
announcement drift of companies is not capable of explaining the aggregate price returns.
This model explains the relation between the discount rate and earnings surprises. The
model need to be further studied to know the relations between market factors which affect
earnings apart from discount rates. Then only some concrete argument can be drawn to
support the theory.
Chen et al. (2007) identified the investors who suffered from disposition effect,
overconfidence and representativeness bias and if the investors who suffer from any one
kind of bias are prone to other biases subsequently. This is a unique study in itself and can
be explored to study the impact of more biases like disposition effect, home bias and loss
aversion and their effect on the investor’s behavior. Sayim et al. (2007) state that the
company fundamentals can have a significant impact on the investor sentiment in the US
auto, finance, food, oil and utility industries. Further, this study can be conducted to test the
impact of investors’ sentiments of different stock exchanges around the world with several
top-performing sectors. The inclusion of a variety of sectors will help to get a broader
outlook of several sectors altogether. Pak and Mahmood (2015) studied the financial
behavior of the students with regards to their personality characteristics and found that
investors with varied personality types show diverse risk tolerance behavior. The study was
conducted with regard to post-Soviet transition economies and the applicability of the study
seems questionable. The study can be further extended to include the cross-country
transitions of financial information targeting comparatively a wide range of investors. The
market performance of some of the major economies can have a significant impact on the
investment choices of a particular country.
Sadi et al. (2011) studied the impact of overconfidence, availability and hindsight bias on
a sample of 200 investors. Further, the study can be performed to find the additional biases
and their impact on investment preferences of the investors. The effect of financial education
on the level of risk aversion among male and female investors is studied by Marie et al.
(2013). The results conclude that the investors of both the genders, having the same level of
financial education, are equally liable to invest in the certain portfolio. The study can be
QRFM further extended to find the impact of family size, investment objectives, years of experience
10,2 in the financial market, peer influence, etc., as they may have a significant effect on the level
of risk aversion among male and female investors.
Kartasova (2013) identified the irrational behavior of the investors with the help of
certain biases like anchoring, mental accounting, confirmation and hindsight bias, herd
behavior, overconfidence, overreaction and availability bias. Besides this, emotions and
226 intuition like investor mood, financial crisis, weather conditions, sports events and
information availability also affect investor behaviors significantly. The prospective
reasons of these biases can be studied. The expected reasons can be found to quantify the
effect of these biases and to know the exact degree to which they are impacting the investor
behavior. Mohlmann (2013) results suggest that investors prefer domestic equity and invest
in riskier portfolios in case of a foreign tax rather than a domestic tax on foreign dividend
income. The willingness to pay taxes depends on the attributes of the tax collecting country.
The study can be conducted in other countries to find the difference in cultures and attitudes
of subjects, level of patriotism of investors and economic conditions of various countries on
the tax evasion behavior of investors.
Kafayat’s (2014) finding shows that self-attribution motivates overconfidence and
overconfidence causes over optimism in investor behavior which ultimately hinders the
rational decision-making of the investors. The significant effect of biases on decision-
making can be found, with the help of asset pricing, momentum in markets and corporate
finance. Oprean (2014) studies the rational and irrational behavior of the investors in the
financial markets. The study identifies the existence of optimism, pessimism, confidence
and rationale of the Brazilian and Romanian investors. The study confirms the irrational
investor’s behavior exist in stock exchanges. The study can be further used to find more
factors that can lead to identify irrational investor behavior and how these irrational
investors behavior exist in different economic conditions in different countries. Toma (2015)
studied the presence of overconfidence, representativeness bias and disposition effect, and
they tested how frequent trading and investor’s age affect these biases in Bucharest Stock
Exchange. The studies further tested to find the impact of market-related factors like foreign
exchange rate, the performance of various sectors, interest rates, gross domestic product,
etc., on the trading patterns of the investors. Tekçe et al. (2016) studied demographic factors
like gender and age affecting overconfidence, familiarity bias, representativeness heuristic
and status quo bias. The results found different levels of biases among Turkish investors on
the basis of gender and age. The further extension can be made by including additional
biases like disposition effect, home bias, financial education, current income levels and the
status of the business cycle of the country in the study.
Fochmann et al. (2016) conducted an experiment to test the effect of tax perception biases
of the investors. The participants were asked to choose regimes when they were given an
option of investment with the tax imposed on capital gains and the other with no tax
imposed on capital gains. The findings show that the investors are prone to invest in
securities with lower tax inclination. The study can be used to inform and educate investors
to minimize the impact of tax perception bias on the investors. The further extension may be
to study to find the factors, which are causing higher tax inclination on the investors. This
will help to study the effect of the tax burden on biases from the perspective of a variety of
factors like amount of investment, a portfolio of securities, company specific securities, the
amount of capital gain realized, etc. Ahsan and Malik (2016) found that the conservatism
bias has not played a moderating role in relationship between personality traits and the
investment management. The sample size was quite low and comprises graduate students
doing major in finance and some other professional investors. A research can be conducted
which would focus only on professional investors to make the study more relevant. Shusha Behavioral
and Touny (2016) found the presence of herding bias in Egyptian Stock Exchange. They biases
have found how the effect of attitudinal determinants differs with the different
demographics characteristics and how they have an impact on the investors’ herding
behavior. These factors can be studied to find the overall impact of these characteristics on
the investor’s in the different countries.
227
4. Research methodology
4.1 Research objectives
We constructed several research objectives based on the gaps in the existing literature.
These are as follows:
 to understand why and how the behavioral finance theories are significantly
different from the traditional finance theories;
 to explore the authors who have given their significant contributions to the field of
behavioral finance;
 to categorize prevalent biases that can affect the investors and also identify the
factors causing an increase in these biases;
 to study the impact of these biases in association with demographic factors like age,
experience, gender and education;
 to identify solutions to deal with the adverse effect of the biases on the investment
decisions and suggestions given by various authors to mitigate the effect of these
biases to the different investors like minimizing the effect of biases, to avoid
problems in investment decisions, application of analytical techniques in finance,
solution of cognitive biases, etc.; and
 to provide useful insights about the applicability of behavioral finance and to find
the appropriate area that could focus some prospect research to be conducted in the
field of behavioral finance.

4.2 Methodology
Review of the literature has been used as the basis of the research. Although the extensive
literature review could not be carried out because of the limit of various constraints, a
considerable number of literature has been reviewed. The literature has been provided
prominently by the Emerald Insight, Elsevier, JStor, EBSCOhost, Google Scholar and SSRN.
The keywords used for searching the papers were behavioral biases and investment
decisions, as the purpose was to correlate the effect of the biases on investment. The search
results included papers incorporating several biases and then those papers were further
divided on the basis of different biases. The result included not only the individual investors
but also institutional investors and mutual funds. The timeframe of the study consists of the
year 1979 (First proposed by Kahneman and Tversky, 1979) onward, as this was the year of
the phenomenal work in behavioral finance and continues till 2016. The results were then
summarized and analyzed using Excel. Several methodologies are used by the researchers to
review the existing literature, to collect some primary data for the study, or to conduct
empirical and restricted surveys to get the desired results.
The research is generally carried out for some specific study, for some specific country
or for a particular time period. The sampling usually consists of the choice from among
the convenience, simple random sampling, cluster sampling, quota sampling, etc.
QRFM (Kothari, 2009, pp. 60-65) as per the requirements of the study. Questionnaire and
10,2 interview methods have been used for the collection of primary data. Secondary data are
provided by databases of various companies, brokerage house data and data of
companies collected from the stock exchanges. The most prevalent tool used is the Likert
(1932) scale that categorizes questions into a scale, ranging from the least favorable to the
most favorable. This is used to help the respondents to choose their answers on some
228 specific range with respect to a series of statements. It also explains the psychological
emotions and reactions of the respondents through a single questionnaire. The most
prevalent tool to find the primary information from the investors is by the use of a
questionnaire. This is a flexible tool to modify the questions to find the hidden feelings of
the human behavior. Moreover, it works as a convenient source to reach to a variety of
target investors at the same time. Regression analysis (Mendenhall and Sincich, 1996),
Cronbach’s alpha (Glaser and Weber, 2007), multivariate analysis (Kothari, 2009,
pp. 60-65, pp. 315-340), factor analysis (Kothari, 2009, pp. 321-337), ANOVA (Kothari,
2009, pp. 256-275), ANCOVA (Kothari, 2009, pp. 275-279), t-test (Kothari, 2009,
pp. 160-196), F-test (Kothari, 2009, p. 196, pp. 225-228), Z-test (Kothari, 2009, p. 196),
Varimax (Kothari, 2009, p. 336) and chi-square test (Levin and Rubin, 2001, pp. 567-609)
are used for analysis of primary data. Besides this, cross-sectional standard deviation
(Demirer and Kutan, 2006), multivariate regression (Kothari, 2009, p. 130, pp. 318-319)
augmented dickey-fuller (ADF) test (Stock and Watson, 2004), Mann–Whitney test (Levin
and Rubin, 2001, p. 793, p. 801, p. 802, p. 839), Kolmogorov–Smirnov test (Levin and
Rubin, 2001, p. 793, p. 832, p. 839) and survival analysis (Chen et al., 2007) are some of the
tools for analyzing secondary data.
Different sampling methods have been used by different authors based on their research
objectives. Such as convenience sampling is integrated by numerous researchers like
Chandra and Kumar (2012), Sachse et al. (2012), Linh (2015), Kannadhasan (2015), Chavali
and Mohanraj (2016) and Asgarnezhad Nouri et al. (2017), as it seemed appropriate to reach
the target investors. Random sampling is used by Sadi et al. (2011), Jagongo and Mutswenje
(2014), Njuguna et al. (2016), Ishfaq and Anjum (2015) as the collection of data through. This
method ensures that the sample represents the entire population to be studied without basing
the selection on any single factor. However, Gustafsson and Omark (2015) had used cluster
sampling to form clusters of students with different academic backgrounds to find the level
of financial literacy in the young educated individuals. On the other hand, quota sampling is
used by Bakar and Yi (2015), as it enables to use control characteristics based on gender, race
and age as the basis of selection. Standard deviation is used by Barberis and Huang (2001),
Vissing-Jorgensen (2003), Demirer and Kutan (2006), Glaser and Weber (2007) and Cronqvist
and Siegel (2014) to measure the variability of scores within a set of factors to be studied.
Kolmogorov-Smirnov test is applied by Fernandes and Luiz (2007), Hibbert et al. (2013),
D’Acunto (2016) and Asgarnezhad Nouri (2017). Asgarnezhad Nouri et al. (2017) used this
test to measure the distribution of the data, to check whether the data are normally
distributed or not. Survival analysis methods are used by Guler (2007), Chen et al. (2007),
Richards et al. (2011) and Chhabra and De (2012). Chen et al. (2007) used survival analysis to
test the duration of holding stocks by the investors to check the disposition effect. Survival
analysis is easy to interpret and the data on those days when the investor does not buy or
sell is also found out by this method.
Chi-square test is applied by Reb (2008), Biais and Weber (2009), Sachse et al. (2012),
Kengatharan and Kengatharan (2014), Charles and Kasilingam (2016), Mirji and Prasantha
(2016) and Kubilay and Bayrakdaroglu (2016). Reb (2008) used chi-square to compare the
frequencies of the risky and riskless options both in regret condition and control condition,
while the relationships between psychological biases and personality traits was tested using Behavioral
chi-square by Kubilay and Bayrakdaroglu (2016). On the other hand, ANOVA technique has biases
been used by following authors: Lee et al. (2010), Lakshmi et al. (2013), Jhandir and Elahi
(2014) and Kumar and Goyal (2016). Lee et al. (2010) used ANOVA to study the significant
difference in the impact of background variables (age, marital status, education, occupation,
annual income, average quarterly investment and assets) on investment behavior and
decision factors. Jhandir and Elahi (2014) used ANOVA to study the willingness of investors
to sell or hold some stocks with an objective to study the disposition effect. ANCOVA is 229
applied by Zeelenberg and Beattie (1997), Nwogugu (2010), Philips (2012) and Guillemette
et al. (2015). Varimax is used by Sadi et al. (2011), Sachse et al. (2012), Jagongo and
Mutswenje (2014), and Charles and Kasilingam (2015). Charles and Kasilingam (2015) gave
information about all the abstracted factors and also the variance that is explained by these
factors. Cronbach’s alpha is used by Glaser et al. (2013), Jagongo and Mutswenje (2014),
Kafayat (2014) and Pak and Mahmmod (2015). The reliability of the survey measurement is
done with Cronbach’s alpha.
The multivariate regression is used by Demirer and Kutan (2006) to find the changes in
returns in extreme market conditions in the Chinese stock market; Glaser and Weber (2007)
used cross-sectional regression to show relation between trading volume measures and
several explanatory variables like gender, age and investment risk; and Cronqvist and
Siegel (2014) used linear regression model to regress the Investment Bias Index on various
socioeconomic characteristics like education. Zhang (2006), Feng and Hu (2014), Pak and
Mahmood (2015), Xu et al. (2016) and Casavecchia (2016) have used multivariate regression.
Xu et al. (2016) used it to find whether female chief executive officers (CEOs) have an impact
on bank loan contract based on various independent variables like gender and collateral
intensity. The following authors had applied “t” test: Cunningham (2002), Fernandes and
Luiz (2007), Hoffmann et al. (2010), Rostami and Dehaghani (2015) and Oehler et al. (2017).
Hoffmann et al. (2010) used “t” test to find the significant difference between the types of
investors on the basis of their investment behavior and return performance. Rostami and
Dehaghani (2015) used “t” test with a sample size of 302 to find the behavioral biases and
investment level in the stock exchange. The z test is used by Vissing-Jorgensen (2003),
Hoffmann et al. (2010) and Feldman and Lepori (2016). Reb (2008) used z test to find a
significant difference between the mean value of the regret condition and the control
condition. Feldman and Lepori (2016) used z test to find the significant differences in the
mean return between rational investors and a combination of rational and irrational
investors.
The ADF test is used by Schmeling (2007), Huang and Goo (2008), Volkman (2007)
and Hassan and Bashir (2014). Hassan and Bashir (2014) used it to check the
stationarity of the secondary data before applying any other test. Mann–Whitney test is
also used by Fellner and Maciejovsky (2003), Fernandes and Luiz (2007), Feldman and
Lepori (2016), Fochmann et al. (2016), and Feldman and Lepori (2016). Fellner and Sutter
(2009) used this test to find the differences in the return properties of irrationality
aggregating and rational investors.
Factor analysis is conducted by Nenkov (2009), Park et al. (2010), Sadi et al. (2011),
Jagongo and Mutswenje (2014), Kafayat (2014), Jagongo and Mutswenje (2014), and
Sashikala and Girish (2015). Riaz and Hunjra (2015) used factor analysis to convert a set of
interrelated variables into another set of unrelated variables and then further into
uncorrelated combinations. Sashikala and Girish (2015) used exploratory factor analysis to
identify the relationships among factors which influence the trading behavior of equity
investors in Indian stock market (Tables I to VI).
 10,2

230

Table I.
QRFM

aversion biases
Description of loss
Author Data type Journal Sample size and tools Country

Kengatharan and Primary Asian Journal of Finance & The sample was consisted of 86 male (67.2%) and 42 female (32.8%) investors. Cross- Sri Lanka
Kengatharan (2014) Accounting sectional design for questionnaire, convenience, stratified sampling, Likert scale, SPSS
Mirji and Prasantha Primary IOSR Journal of Economics 382 male, 118 female candidates, chi-square test Sri Lanka
(2016) and Finance
Mallick (2015) Secondary Journal of Advances in Review paper, qualitative data, journals, books and available data
Business Management
Godoi et al. (2005) Primary Managerial Finance Five investors belonging to the “Analyst Association of Capital Markets”, deep qualitative Brazil
interview
Suresh (2013) Primary and Journal of Finance, Source ICICI direct money manager’s records of investors, secondary data from financial India
Secondary Accounting and reports and primary data from researcher
Management
Hassan and Bashir Secondary European Journal of Trade records of 120 days relating to 50 stocks, Regression, Descriptive statistics like Pakistan
(2014) Scientific Research mean, SD, skewness, kurtosis and ADF test
Gupta and Ahmed Primary EPRA International Journal 380 retail investors segregated into two groups on the basis of investment experience, India
(2016) of Economic and Business discriminant analysis and chi-square test, SPSS 21.0, Wilks’ lambda and F test
Review
Wolf (2005) Secondary SSRN Electronic Journal Review paper
Mokhtar (2014) Secondary Journal of Finance and Review paper
Investment Analysis
Ofir and Wiener Primary SSRN Electronic Journal 122 investment advisor candidates, 104 executive MBA students at the Jerusalem School of Israel
(2009) Business Administration and 42 employees from various industries (other than the
financial services industry) for 268 subjects, chi-square statistic
Chavali and Primary International Journal of 101 respondents, descriptive and cross-sectional analysis questionnaire, SPSS and factor India
Mohanraj (2016) Economics and Financial analysis, chi-square, Kendall rank correlation test, risk tolerance scale by Grabble and
Issues Lytton. Principal component analysis and Varimax rotation method, Factor analysis
Fischer (2012) Primary Algorithmic Finance Heterogeneous agent model of a financial market with chartist and fundamentalist traders Germany
those who exhibit bounded rationality, control theory in the frequency domain
Barberis (2013a, Primary Essay on financial Two important factors are over-extrapolation of past price changes and belief United
2013b) innovation and crisis manipulation States
Chira et al. (2008) Primary Journal of Business & 68 students of Jacksonville University, Chi-square test, Pearson p-value USA
Economics Research
Author Data type Journal name Sample size and tools Country

Barber et al. (1999) Secondary Financial Analysts Journal Trading records of 78,000 households, PGR and PLR ratios California
Feng and Seaholes Secondary Review of Finance Data comprised 1,511 investors (accounts), survival analysis, first indicator variable China
(2005) is called the “Trading Loss Indicator” or “TLI”. Our second indicator variable is called
the “Trading Gain Indicator” or “TGI
Barber and Odean Secondary The Review of Financial Data of large discount brokerage - 78,000 households, small discount brokerage - California
(2008) Studies 14,667 accounts of individual investors, large retail brokerage - 665,533 investors with
non-discretionary accounts, professional money managers - 43 institutional money
managers
Chen et al. (2007) Secondary Journal of Behavioral Decision 46,969 individual investor accounts and 212 institutional investor accounts, Cross- China
Making sectional regression, Survival analysis, Mean monthly portfolio turnover, Regression
Ofir and Wiener (2009) Primary SSRN Electronic Journal 122 investment advisor candidates, 104 executive MBA students at the Jerusalem Israel
School of Business Administration and 42 employees from various industries, a total
of 268 subjects, Chi-square statistic
Linnainmaa (2010) Secondary Journal of Finance Finnish Central Securities Depository (FCSD) registry, Helsinki Stock Exchange Finland
(HEX) stock data, HEX microstructure data within some time period and consolidated
limit order book of the Helsinki Stock Exchange
Richards et al. (2011) Secondary Behavioural Finance and The brokerage company provided the trading data for 7,828 active investors who had UK
Economic Psychology: Recent made at least two trades per year
Developments
Chhabra and De (2012) Secondary SSRN electronic Journal Data consists of 2.45 million individual investors trading in 755 stocks during a total India
period of 18 months (374 trading days) from (January 2005 to June 2006)
Suresh (2013) Primary and Journal of Finance, Review paper
Secondary Accounting and Management
Lakshmi et al. (2013) Primary International Journal of 318 investors, SEM India
Economics and Management
Jhandir and Elahi Primary 20th National Research Target population is 37,000 investors. Cronbach’s alpha, t-test, Correlation analysis, Pakistan
(2014) Conference Ordinary least square (OLS) method
Bodnaruk and Primary Journal of Financial The mutual fund website provides details of all mutual fund investors from march Sweden
Simonov (2015) Intermediation 2006. Sharpe ratios, Multivariate analysis
Aspara and Hoffman Primary Journal of Behavioral and 97 students studying business at Finland university, Two-way ANCOVA Finland
(2015) Experimental Finance
Feldman and Lepori Secondary Review of Behavioral Finance 30 investors, testing on basis of rationality. Mann–Whitney test, Kolmogorov– USA
(2016) Smirnov test
Aren et al. (2016) Secondary Kybernetes 25 articles that focused on home bias, disposition effect and herding behavior
(continued)

disposition effect
Description of
231
biases
Behavioral

Table II.
 10,2

232
QRFM

Table II.
Author Data type Journal name Sample size and tools Country

Hayat and Anwar Primary SSRN Electronic Journal 158 investors on Pakistan Stock Exchange, Likert scale, Multiple choice questions, Pakistan
(2016) Regression, ANOVA
Sukheja (2016) Secondary International Journal of Review paper India
Marketing, Financial Services
& Management Research
Li et al. (2016) Secondary C.E.P.R Discussion Papers 2,621,450 investment accounts trading six equity funds from 2002 to 2011, in China China
Alghalith et al. (2012) Secondary The Journal of Risk Finance Data series of S&P 500 from January 2000 to March 2010, a simple percentage change USA
in the index value from time t-1 to time t
Cronqvist and Siegel Secondary The Journal of Financial 15,208 adult twin pairs, Co-variation metrics Sweden
(2014) Economics
Author Data type Journal name Sample size and tools Country
Behavioral
biases
Glenzer et al. Primary International Center for A total of 200 participants, most of Germany
(2014) Insurance Regulation them students. The experiment was
(ICIR) programmed and conducted with the
experiment software Z-Tree
(Fischbacher, 2007), Wilcoxon
signed rank test, Regression analysis 233
Nenkov et al. Primary Journal of Marketing 2,500 households, 102 students, 94 Boston
(2009) Research people were sent questionnaire
through mail and 183 undergraduate
students, Morningstar toolbox,
Confirmatory factor analysis
Hassan and Secondary European Journal of Trade records of 120 days relating to Pakistan
Bashir (2014) Scientific Research 50 stocks, Regression, descriptive
statistics like mean, SD, skewness,
kurtosis, ADF test, e-views
Mokhtar (2014) Secondary Journal of Finance and Review paper
Investment Analysis
Hayat and Primary Journal of Behavioral 158 investors, ANOVA, SD, Pakistan
Anwar (2016) Decision Making Correlation, Regression
Sukheja (2016) Secondary International Journal of Review paper India
Marketing, Financial
Services & Management
Research
Mittal (2010) Primary The IUP Journal of 428 investors, Pearson chi-square, India
Behavioral Finance Continuity correction, Fisher’s exact Table III.
test, Likelihood ratio and linear-by- Description of
linear association framing biases

5. Results and findings

Most of the papers on behavioral finance have pointed toward the existence of behavioral
biases in different countries and across various types of investors. Very few pieces of
literature have given solutions to reduce these biases. This paper has proposed an important
solution to this issue. The paper has already discussed some of the literature about the
causes of biases of investors when they make investment decisions. This section gives a
quick glimpse of few papers that have suggested some solutions for reducing the effects of
these biases.
A solution to the problem of biases of investors is given by Nenkov et al. (2009), who
suggest that a substantial improvement should be made in the type, form and mode of
communication of information of financial products given to the investors. This can
result in making consumers aware of the pros and cons of investment decisions and
subsequent alleviation of these biases in the investment decision-making. This is true
even with regards to that information that is same in content but their presentation is
quite dissimilar with each other. Cunningham (2002) shows how prices are formed,
integrating it into a model and how investor behavior can help to analyze corporate
governance. It comes out with the ways to minimize the effect of the cognitive biases.
Avgouleas (2008) proposes a framework that could help to remove the biases from the
investor decision-making process. It results in the reduction in framing, a check on the
herd behavior of fund managers and shifting the focus from the activities that can
cause the stock market bubbles.
 10,2

234
QRFM

Table IV.
Description of
herding biases
Author Data type Journal name Sample size and tools Country

Messis and Secondary The Journal of Risk Finance 41 stocks were selected, the OLS method, Cross sectional means and SD of betas, Australia
Zapranis (2014) ADF test, GARCH and TARCH test
Ofir and Wiener Primary SSRN Electronic Journal 122 investment advisor candidates,17,104 executive MBA students at the Jerusalem Israel
(2009) School of Business Administration, and 42 employees from various industries (other
than the financial services industry) for a total of 268 subjects, chi-square statistic
Demirer and Kutan Secondary International Financial Markets, 375 Chinese stocks on the Shanghai and Shenzhen Stock Exchanges, Cross-sectional China
(2006) Institutions and Money SD
Chen et al. (2007) Secondary Journal of Behavioral Decision 46,969 individual investor accounts and 212 institutional investor accounts, Cross- China
Making sectional regression, Survival analysis, Mean monthly portfolio turnover, Regression
Matsumoto et al. Primary Journal of International Finance & 92 students from the University of Brazil, 90% margin of confidence to check range Brazil
(2013) Economics of correct answers from Questionnaire
Suresh (2013) Primary and Journal of Finance, Accounting and Review paper
Secondary Management
Lakshmi et al. Primary International Journal of Economics 318 investors, SEM India
(2013) and Management
Kengatharan and Primary Asian Journal of Finance & 86 male (67.2%) and 42 female (32.8%) investors, Cross Sectional design for Sri Lanka
Kengatharan (2014) Accounting questionnaire, Convenience, Stratified sampling, Likert scale, SPSS
Bakar and Yi (2015) Primary Procedia Economics and Finance Sample of 200 respondents including lecturers, students of finance, bank officers, Malaysia
executives and managers, Likert scale, coefficient of multiple determinants (R
squared) and using F statistic
Paul (2014) Secondary SSRN Journal Review of existing bias
Jhandir and Elahi Primary SZABIST’s 20th National Research Target population is 37000 investors, Cronbach’s alpha, t-test, Correlation analysis Pakistan
(2014) Conference and OLS
Mallick (2015) Secondary Journal of Advances in Business Review paper
Management
Hayat and Anwar Primary SSRN Electronic Journal 158 investors, Likert scale, Multiple choice questions, Regression and ANOVA Pakistan
(2016)
Aren et al. (2016) Secondary Kybernetes 25 articles that focused on home bias, disposition effect and herding behavior,
systematic review
Gupta and Ahmed Primary ISI Impact Factor 380 retail investors who are segregated into two groups based on investment India
(2016) experience, Discriminant analysis and chi-square test. SPSS 21.0 is used, Wilks’
lambda and F test
Casavecchia (2016) Secondary International Journal of 1985: 588 investors; 1990: 958 investors; 1995: 2,714 investors; 2000: 2,295 investors; Australia
Managerial Finance 2005: 2,732 investors; 2007: 1,532 investors, OLS, Fixed-effect panel data models
Omondi (2016) Primary Journal of Insurance and Financial 104 teaching population, Descriptive statistics such as range, SD and variance Kenya
Management
Author Data type Journal name Sample size and tools Country

Kengatharan and Primary Asian Journal of Finance & Accounting 86 male (67.2%) and 42 female (32.8%) investors, Cross-sectional, Convenience, Sri Lanka
Kengatharan (2014) Stratified sampling, Likert scale, SPSS
Mirji and Prasantha Primary IOSR Journal of Economics and Finance 382 male, 118 female candidates, Chi-square method India
(2016) (IOSR-JEF)
Mallick (2015) Secondary Journal of Advances in Business Review paper
Management
Feldman and Lepori Secondary Review of Behavioral Finance 30 investors, Mann-Whitney test, Kolmogorov-Smirnov test USA
(2016)
Kafayat (2014) Primary Theoretical and Applied Economics Sample size was 220 investors, CFA was utilized on the Questionnaire, and then Pakistan
SEM is used to analyze the final model, Chi-square, adjusted goodness of fit),
Tucker-Lewis coefficient, p-value, goodness of fit, comparative fit index and root
mean square error of approximation
Kaustia and Primary Review of Behavioral finance 123 Bachelor’s student at Alto University. 23 investors from large Scandinavian Alto
Perttula (2012) Bank. Second, debiasing experiment was conducted. 60 branch managers, 60
advisers from Finnish company, 29 participants in seminar from Finland,
multivariate analysis, Regression
Hayat and Anwar Primary SSRN Electronic Journal 158 Investors, Likert scale, Multiple choice questions, Regression, ANOVA Pakistan
(2016)
Suresh (2013) Primary and Journal of Finance, Accounting and Review paper
Secondary Management
Chen et al. (2007) Secondary Journal of Behavioral Decision Making Sample of 46,969 individual investor accounts and 212 institutional investor China
accounts, Cross-section regression, Survival analysis, Mean monthly portfolio
turnover, Regression
Mokhtar (2014) Secondary Journal of Finance and Investment Review paper
Analysis
Fisher and Statman Primary The Journal of Portfolio Management 3,500 investors, two measures of investor sentiment, one by Investor’s California
(2003) Intelligence (II) and the other by the American Association of Individual
Investors, use of correlation coefficient
Lakshmi et al. Primary International Journal of Economics and 318 investors, SEM India
(2013) Management
Hackbarth (2008) Primary Journal of Financial and Quantitative Assuming various aspects of a firm activities like default decisions, debt coupon Washington
Analysis choice and debt-equity mix and pecking order financing behavior
Kirchler and Primary Journal of Risk and Uncertainty 72 students of Business Administration, 2*3 factorial design Vienna
Maciejovsky (2002)
(continued)

overconfidence
Description of
Table V.
Behavioral

235
biases

biases
 10,2

236
QRFM

Table V.
Author Data type Journal name Sample size and tools Country

Matsumoto et al. Primary SSRN Electronic Journal 92 students from the University of Brazil, 90% margin of confidence to check Brazil
(2013) range of correct answers from questionnaire
Glaser and Weber Primary The Geneva Risk and Insurance Review The main data set consists of 563,104 buy and sell transactions of 3,079 Germany
(2007) individual investors, Data on the securities traded are obtained from
DataStream, Correlation, Regression
Barberis (2013a, Primary Journal of Economic Perspectives Review paper USA
2013b)
Barber and Odean Secondary Financial Analysts Journal Trading records of 78,000 households, using PGR and PLR ratios California
(1999)
Hughes et al. (2010) Secondary Science And Technology A sample of 2,252 observations, Regression, T statistics America
Jhandir and Elahi Secondary National Research Conference Target population is 37,000 investors, Cronbach’s alpha, correlation analysis, Pakistan
(2014) Ordinary least square method is used
Chira et al. (2008) Primary Journal of Business & Economics 68 students at Jacksonville University in Jacksonville, Chi-square test, Pearson USA
Research p-value
Glaser et al. (2013) Primary and Journal of Behavioral Decision Making 33 professionals of a large German bank, 75 advanced students, Kruskal–Wallis Mannheim
Secondary test
De et al. (2011) Secondary Proceedings of the 2011 Annual 50 stocks included in S&P CNX Nifty Index, Regression analysis India
Meeting of the Academy of Behavioral
Finance and Economics
Hassan and Bashir Secondary European Journal of Scientific Research Trade records of 120 days, Descriptive statistics were computed including mean, Pakistan
(2014) SD, skewness, kurtosis, ADF test, e-Views
Serial no. Biases No. of time studied
Behavioral
biases
1 Overconfidence 24
2 Disposition effect 20
3 Herding 17
4 Loss aversion 14
5 Mental accounting 06
6 Representativeness 06 237
7 Conformation 06
8 Framing 07
9 Hindsight 05
10 Anchoring 04
11 House money effect 03
12 Home bias 03
13 Self-attribution 02
14 Conservatism 01
15 Regret aversion 02 Table VI.
16 Endowment effect 02 Number of times
17 Recency 01 biases studied during
Total 123 the literature review

Chen (2008) has given a model to quantify the value of judgments generalized from the
entropy theory of information. While the rate of ROI can be quantified, there was no model
to quantify judgments before this model was developed. This mathematical theory can be
used to compare the value of human judgments with the investment returns. Lovric et al.
(2008) explain the implication of agent-based modeling to understand the behavior of
individual investor. Macroscopic simulation technique can be used for a broader application
of analytical models in finance. A cognitive model of investor is explained as a dual process
system in terms of risk attitude and time preference, personality, goals, strategy and
investment.
Otuteye (2015) finds a solution to the problem of cognitive bias by developing a
heuristic model (O S Heuristics) that will aid to avoid the problems in decision-making
and to avoid these issues in the future as well. Tipu and Arain (2011) find the six
success factors that help to improve the outlook of the entrepreneurs toward the
entrepreneurial actions. These findings will help to take steps toward improving the
actions that will generate the spirit of entrepreneurship. Jiang and Yan (2016) explain
financial innovation in the form of a regular and levered exchange-traded fund (ETF).
He suggests that those investors who want the short-term gains should go for levered
ETF, while those who are interested in diversification and maintaining liquidity should
choose for regular ETF. Zhang (2006) suggests that greater information asymmetry
gives rise to more forecast errors. The effect of uncertainty in information is increased
on the happening of some bad event. He examines the effect of stock prices on analyst
forecast revisions. When the information is complete, then it becomes easy to process
the information with certainty to take decisions.
Kaustia and Perttula (2012) showed that the number of years of working experience
reduces overconfidence in bank managers but not among financial advisers. The use of
these debiasing tests enables the use of written warnings and lecture methods on the
different group of investors. The written warning does not show any reduction in the ability
to pick mutual funds but reduces the self-assessment ranking on job-related activity. The
lecture method reduces the chances of picking inferior mutual funds and an improvement in
QRFM general job-related activity. But the probability estimates aren’t reduced by both the
10,2 methods.

6. Conclusion and suggestions

The worth of existence of behavioral finance lies in the fact that it makes possible to
enrich the understanding of the financial market by including the human elements into it. It
238 shows the investment pattern of the investors specifically those who exhibit under reaction
in the short run and overreaction in the long run. It could present a model of integration of
principles of psychology and economics.
The finance theories need to be understood and implemented in financial decisions to
gain profitable investments. It can increase the wealth of the shareholders and investors and
also increase their potential to invest more. The theory of behavioral finance gives a vivid
picture of actual investor behavior and the factors of the investor behavior in different
circumstances. The knowledge about these theories can restrain companies from issuing
those securities that can’t reap the desired benefits. The investors can take the advantage
from the profitable securities when others don’t have information about these opportunities.
Money has been referred to as idea in the book[2], Stocks to Riches: Insights on Investor
Behavior by Parag Parikh (2006), Seventeenth Edition. If properly planning is made then
money can grow into great opportunities. The existence of the biases in the financial
markets gives a momentum to the market. Investors can make their decisions on self-created
principles. This can result in quick decision-making and can even have severe impacts on
the future investment decisions.
According to Barberis (2013a, 2013b), financial innovations are one of the measures to
reduce the effects of psychological factors of the irrational behavior of investors. But care
has to be taken, as it can be a double-edged weapon. If financial innovations fail, then it
makes investors feel less competent about the ability to analyze the risk associated with
these products which leads to the reduction in the prices of these securities in the market.
Through the comprehensive literature review, Joo and Durri (2015) have concluded that,
although there is not any specific theory for the behavioral finance, there is a need to
understand the various behavioral anomalies that could help to form a portfolio and explain
the psychological traits of the investor. The aim of profit maximization and attaining
rational behavior is not complete till the time the investor is able to understand the
psychological biases inherent in the decision-making. The behavioral finance should
supplement traditional finance to help better understand the phenomena of the investor
choices.
There is a long list of benefits that behavioral finance can give. This can help not only to
the retail investors to justify their investment decisions but also to the issuing companies,
financial intermediaries and financial advisors to clear the doubts about understanding why
the market doesn’t behave as planned or desired. The entire process of understanding the
moods, emotions and motivations of human behavior and to find undervalued and
overvalued securities is the new competitive edge. Doesn’t it seem interesting to invest or
divest from the securities that are not adequately priced and then to benefit from any
subsequent rise or fall in prices?

7. Contributions to the field of behavioral finance

This paper provides an extensive review of the origination of the behavioral finance as a
separate field of study (Kahneman and Tversky, 1979; Thaler, 1980; Loomes and Sugden,
1982; Daniel et al., 1998; Thaler, 1999). This paper has explained the behavioral finance in
sharp contrast to the traditional finance theories. This paper is a summary into the vast
universe of the literature published in the area of behavioral finance. Up to this point, this is Behavioral
a single study in the literature extensively reviewed and collected seventeen different types biases
of biases into a single paper. These biases are overconfidence, disposition effect, herding,
loss aversion, mental accounting, representativeness, confirmation, framing, hindsight,
anchoring, house money effect, home bias, self-attribution, conservatism, regret aversion,
endowment effect and endowment effect.
Several biases like confirmation bias, hindsight bias, house money effect, endowment
effect, self-attribution bias, conservatism bias, recency and anchoring have not been studied 239
adequately in the Indian context. We have found that both the psychological biases (Feng
and Hu, 2014, Chira et al., 2008; Tekçe et al., 2016) and investment biases (Stracca, 2004;
Glaser and Weber, 2007; Moradi et al., 2011; Nguyen and Schuessler, 2013; Pak and
Mahmood, 2015) have a considerable impact on the financial decision-making of individual
and institutional investors.
The behavioral biases are an integral part of the investors’ behavior, their velocity can be
increased or reduced for some decisions, but the complete elimination of these biases (Grable
and Lytton, 1999; Fernandes and Luiz, 2007) from the investors’ inherent behavior is not
possible. The existence of behavioral biases should not be considered always as the risk
factors, but some papers prove that few biases give a momentum to the investment activities
in the stock market. Linnainmaa (2009) found that the effect of disposition effect can be
reduced to half if the sell limit order is excluded from the overall limit order. Charles and
Kasilingam’s (2015) research shows that the behavioral bias factors like emotions, moods
and heuristics can be used as a base to educate the customers of mutual funds about the
strategies of investing in capital markets for avoiding unsuccessful investment decisions.
Thus, there is an increase in the investors of mutual fund holdings.
The effect of different biases on the different determinants of investor behavior such as
risk perception (Wang et al., 2006; Riaz and Hunjra, 2015), risk propensity (Pan and Statman,
2012), portfolio analysis (Hoffmann et al., 2010) risk tolerance (Sulaiman, 2012; Pak and
Mahmood, 2015), financial rationality (Soufian et al., 2014), financial literacy (Gustafsson
and Omark, 2015, financial planning (Guillemette et al., 2015; Hayat and Anwar, 2016) and
financial personality (Kubilay and Bayrakdaroglu, 2016). The following factors have been
identified, which implies a significant impact on the investors’ decisions such as investor’s
experience (Feng and Seaholes, 2015; Papadovasilaki, 2015), past investment results (Ray,
2009; Olsen, 1998), occupational effects (Dhar and Zhu, 2006; Yee et al., 2010), timing of
security issue (Deng et al., 2012; Maung and Chowdhury, 2014), investment intentions
(Njuguna et al., 2016; Trang and Tho, 2017), information processing (Graham et al., 2002;
Hüsser and Wirth, 2014), emotional feelings (Hassan and Bashir, 2014; Charles and
Kasilingam, 2015).
The investors have a tendency to focus on the fundamental factors like return on equity
(Michenaud and Solnik, 2008), profit margin (Otuteye and Siddiquee, 2015), future growth
(Moradi et al., 2011) and revenues (Lee et al., 2010) before investing in any security, but
behavioral finance digs deeper into finding the hidden emotional and psychological factors
with have a concurrent impact while taking investment decisions for both the individual and
institutional investors. The risk and return associated with an investment decision is well
estimated with the support of behavioral finance.
It gives a quick glimpse of the various dynamic authors who have specified their
outstanding contribution in this upcoming area realizing its importance in time (Zeelenberg
et al., 1997; Shiller, 2003). The readers can realize their association with home bias,
disposition effect, loss aversion, herding, etc., which they might not have recognized before.
The paper contributes some significant value addition to the knowledge of various
QRFM implications of financial decision-making such as new equity issuances (Daniel et al., 1998),
10,2 trading volume (Glaser and Weber, 2007), investment risk (Sachse et al., 2012), impact of
level of risk undertaken (Linciano and Soccorso, 2012; Ahmed, 2014), stock market volatility
(Messis and Zapranis, 2014), portfolio formation (Daly and Vo, 2013), investment
performance [Social Trust (Li et al., 2016)] and asset pricing (Dash, 2016; Chandra and
Thenmozhi, 2017). It also suggests some probable solutions to minimize the effect of these
240 biases (Zhang, 2006; Lovric et al., 2008; Nenkov et al., 2009; Feng and Hu, 2014).
Some prospective areas can be identified where the research can be conducted in the
future such as the impact of central banking policies on behavioral finance, integrating
investment decisions of individual and institutional investors, combining demographic
factors with psychological factors together, strategies for improving investors’ financial
literacy, investor sentiment analysis, role of CEOs in asset pricing and social and ethical
investing. It indicates few papers that can be referred by the new researchers who want to
understand the behavioral finance as a separate discipline.

8. Future implications
This field seems promising and interesting, as it provides an easy and interesting way to get
the benefits from the opportunities present in the market. There are vast possible areas in
behavioral finance that can be studied. First, the research should target the participants in
the market participating themselves and also those who invest through some financial
intermediaries. Second, there is a wide scope to study the differences in investing behavior
of investors on the basis of demographic and seasonal factors. The region wise climatic and
seasonal conditions that affect the decision-making power of the investors is an important
variable to be studied. Third, the target population can be narrowed down into many factors
on the basis of experience, occupation, financial needs, etc. of the investors. Fourth, there is a
dearth of study of behavioral finance in the developing countries and the developed
economies like US, UK and Europe have conducted substantial research and experiments to
obtain a strong understanding of investors’ behavior. As the economy of the developing
countries like India is still progressing, there is a wide possibility of the study of a variety of
investment patterns, investor behaviors and how the behavioral factors impact the asset
pricing. These opportunities provide an array of progressive areas that can be studied in the
near future. Finally, few pieces of the literature exist on some biases like conservatism,
recency, self-attribution bias, house money effect and endowment effect. There is a scope of
deeper research in these areas.

Notes
1. Stocks to Riches: Insights on Investor Behavior by Parag Parikh (2006), Seventeenth Edition,
pp. 8-9.
2. Stocks to Riches: Insights on Investor Behavior by Parag Parikh (2006), Seventeenth Edition.

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transformation approach”, MPRA, MPRA Paper No. 29722, available at: http://mpra.ub.uni-
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policy implications”, Journal of Monetary Economics, Vol. 49 No. 1, pp. 139-209.
Devi, S. and Karthikeyan, G.B. (2016), “A birds eye view on behavioral finance towards investment
decisions”, International Journal of Management Research and Business Strategy, Vol. 5 No. 3,
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Heshmat, N.A. (2010), “Corporate Managers’ Risk Propensity”, Finance and Corporate Governance
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Corresponding author
Rohit Bansal can be contacted at: rbansal@rgipt.ac.in

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