ROLE OF BEHAVIOURAL HEURISTIC BIASES OF INDIVIDUAL INVESTORS IN INVESTMENT DECISION MAKING

Abstract

Behavioral heuristic bias in investment choices is an important but neglected factor of financial decision making, which confronts economic theories of rationality in investors. These heuristics, or judgmental heuristics, mental shortcuts or thinking strategies (not always confirmed by experience), can lead to suboptimal investment decision making and negative consequences related to individual investors’ portfolio management, asset allocation and trading activity. This study seeks to examine the extent to which a set of critical biases, namely overconfidence, anchoring, loss aversion, and mental accounting, exert influences on the investment decisions of individual investors. Based on a survey of 200 retail investors, the paper uses advanced statistical techniques such as correlation analysis, multiple regression and chi-square tests to examine the influence of biases on variables, such as risk tolerance, type of asset selected, and portfolio diversification.