Qualitative Research in Financial Markets: Article Information

Qualitative Research in Financial Markets
Do investors exhibit behavioral biases in investment decision making? A systematic review

Syed Aliya Zahera, Rohit Bansal,
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Do investors exhibit behavioral biases in investment decision making? A
systematic review
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 towards 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 seventeen
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, policy makers 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 seventeen type 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 focus only 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.
1.0 Introduction
Financial Management popularly known as the art of wealth management has been the 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 terms1. While trading is meant for short term and quick returns, investing is for
the long-term that gives the investors an 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 since 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:
• Expected Utility Theory2 is concerned with the choice among the alternatives that have
uncertain outcomes. The aim is to attain a tradeoff between risk and return.
• Harry Markowitz3 approach helps an investor to achieve his optimal portfolio position and
explains how the diversification reduces the risk.
• CAPM4 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.
1
Stocks to Riches: Insights on Investor Behavior by Parag Parikh (2006), Seventeenth Edition, pp. 8-9.
2
Bernoulli, Daniel; originally published in 1738; translated by Dr. Louise Sommer. (1954). "Exposition of a New Theory on the
Measurement of Risk", Econometrica, The Econometric Society, Vol. 22, No. 1, pp. 22–36.
3
Markowitz, H.M. (March 1952). "Portfolio Selection". The Journal of Finance. 7 (1): 77-91. doi:10.2307/2975974
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:
• 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
1980’s 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 paper known “Prospect
theory: An analysis of decision under risk”. This paper became a well-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
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 (2011) has
extended the theories that further contradict the efficiency of the stock market. According to
4
Treynor, Jack L. (1961). Market Value, Time, and Risk. Unpublished manuscript, Sharpe, William F. (1964). Capital asset
prices: A theory of market equilibrium under conditions of risk, Journal of Finance, 19 (3), 425–442, Lintner, John (1965). The
valuation of risk assets and the selection of risky investments in stock portfolios and capital budgets, Review of Economics and
Statistics, 47 (1), 13–37., Mossin, Jan. (1966). Equilibrium in a Capital Asset Market, Econometrica, Vol. 34, No. 4, pp. 768–
783.
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. 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.
2. Disposition Effect
It was initially given by Hersh Shefrin and Meir Statman in 1985. Investors tend to sell superior
selling stocks early to realize the gains and they tend to hold the losing 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.
3. Herding Effect
It was identified by Shiller (2000), Kahneman & 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 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.
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.
5. Confirmation Bias
It was described by Charles Dickens (1960). 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 towards the information that they already have and avoid the other information.
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.
7. House Money Effect

It was given by Thaler & 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.
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.
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.
10. Framing
This bias was given by Tversky & 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.
11. Home bias

This was first introduced by French and Poterba (1991) and Tesar and Werner (1995).The
feeling of belongingness of the investors towards 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 towards home bias.
12. Self-attribution Bias
This was developed by Daryl Bem 1967, 1972. People attribute their success to their own hard
work and intelligence, while they blame their failure to the action of others or to some outside
factors.
13. Conservatism Bias

It was originated by Edwards (1968). 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.
14. Regret aversion

It was invented in three different following papers, Graham Loomes and Robert Sugden (1982),
David E. Bell (1982) and Peter C. Fishburn (1982).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.
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.
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 Kahneman and
Tversky.
17. Representativeness
It means assessing the characteristics of an event/object and considering them similar to other
events / objects. This make them to consider the event/ object more likely to happen which may
or may not happen. It was given by Kahneman and Tversky in early 70s.
In the following paper, the 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 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

i. 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.
ii. 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.
iii. 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.
iv. The issues and questions that were once a part of inappropriate evidence have now been
backed up by strong proofs and the doubts are treated with extreme theoretical support.
v. 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.
vi. An inquiry into this area makes it possible to understand an entirely new subject 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.
vii. The fundamentals of behavioral finance work at the individual and corporate level. The
behavior of individual investors, professionals, brokers, institutional investors can all be
studied simultaneously as well as separately.
1.3 Research Problems
i. We desired to point out the biases that the investors should willingly or unwillingly consider
while they make any investment choices.
ii. There was a need to collect various types of biases which can ease the readers to get
acquainted with these biases.
iii. The paper has aimed to highlights the key factors which are creating a base for the
improvement to these biases.
iv. This research will review those papers which have studied either one, two, or even multiple
biases in their research.
v. To find significant differences in the area of behavioral finance between the developing and
developed countries.
vi. To sort out the ways that may discard the discrepancies in the pricing of securities in the
stock market.
vii. 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. Richard 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, Amos Tversky, Daniel Kahneman (1979)
and Richard Thaler (1980) are considered as the father of the behavioral finance.5
2.1 Literature on factors influencing investment decisions

Jagongo and Mutswenje (2014) explains 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 position, and
performance of the firm, ROI, perceptions of investors towards 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 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 (2014) 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 & Lapori (2016) used the agent-based modelling to examine if 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. EMH 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 (2016) is to study the different sentiments of the investors which
5
Hammond, R. C. (2015). Behavioral finance : Its history and its future. Selected Honors Theses., Paper 30, 1–45.
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 & Brunnermeier (2003) finds 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 Mohanraj (2016) found the relationship
between demographic characteristics of investors 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 (Lorenzo Casavecchia, 2016). (Chhabra, &
De, 2012) finds that there is a significant impact of the result of the recent past failures on the
current potential to invest. 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 Chawdhury (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 EMH 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
Kahnneman 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 towards gains and risk taking towards losses. An alternative to EMH has been
explained by Soufian, Forbes, and Hudson (2014), the Adaptive Market Hypothesis or AMH.
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 the same theories in all the scenarios can result in the
wrong estimation of the operation of 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 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 (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 Kleinubing 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) finds the possible impact of investor type on the investment decisions.
He concludes that the investor type has a negative impact on the disposition effect and herding
while it has a positive effect on overconfidence. Aspara and Hoffman (2015) represents that the
disposition effect can be minimized by generating an inclination towards 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, this 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 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 (WACC) 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 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 investor psychology has a direct impact on the functioning
of the stock market. Fisher and Statman (2003) finds 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) studies 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 towards some
decisions while they remain uninformed and under confident towards 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 investor moods that have to be studied by experimenting on the relations among them
and 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 towards information collection, processing, and decision making. The ignorance, peer
influence, media information and broker's recommendation has a significant impact on the
decision to invest. Möhlmann (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 (2016) finds that capital control policies, transaction costs, trade
governance and market size determine the preference of investors towards 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 towards domestic portfolio drive
the investor behavior towards domestic securities.
Zhou and Tuan Pham (2004) investigate the possible reasons of investors’ different
orientation towards 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 et al (2008) studied the pattern of poor trading decisions of investors in China and
find 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 if 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 care has to be
taken to involve these emotional factors when designing the portfolio of 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 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 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. Secondly, there is no relationship between investors’
agreeableness and perceptional errors. Thirdly, 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. Fourthly, a strong relationship exists
between neuroticism and randomness bias and between hindsight bias and availability. Lastly,
there is a direct relation between openness and hindsight and overconfidence bias and there is an
inverse relation between openness and availability bias.
Chandra (2012) has also studied certain behavioral factors such as financial heuristics,
self-regulation, prudence & 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 due to a majority of
investors following the same investment decisions. Brudin & 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 is 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 SME'S 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.
By their study, Kengatharan & Kengatharan (2014) have highlighted the individual
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 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 if 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
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.
Baker & 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,
one percent 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 ASEAN,
Middle East, and other Western countries. Hayat and Anwar (2016) finds 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 due to 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, 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, endowment effect. Paul (2014) found representation, overconfidence,
herding, anchoring and framing as irregularities in financial markets. Joo and Bashir (2015)
explained biases such as herding, loss aversion, disposition effect, overconfidence, framing,
hindsight bias, 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, over confidence, prospect
theory etc.
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 gives a better understanding of the important
papers that can be referred by the researchers and scholars in behavioral finance. These are:
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 (2003) 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, Ph.D. thesis and dissertations that have
been completed in this area in the past. Goyal and Kumar (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 (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:
2.5.1 Relationship between experience and investment

Gupta and Ahmed (2016) finds the existence of loss aversion, regret aversion, and anchoring
have 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 perform at par with individual investors. Managers show
disposition effect but mutual funds don’t exhibit disposition effect. Bodnaruk & 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 & Seasholes (2005) said that
sophisticated investors are less prone to risk and experience can reduce the risk in investors to
72%. While the reluctance of investors to realize losses can be eliminated, there is no amount of
investor sophistication/experience that eliminates an investor’s propensity to realize gains.
Cronqvist & Siegel (2014) has 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 C (2016) tested the trend of investment 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 towards large-cap securities due to 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 towards large and medium
sized securities while undergraduates and doctorates have a lesser inclination towards 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 (2016) 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 towards 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 (BDI) 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, & Ansong, (2016) has studied the
impact of the personal values on the behavioral decision making and choices of the investors.
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 et al. (2007) describe that the decisions to invest
in the venture capital is to be taken by a group of managers and this can result in some
behavioral and political influences in those decisions. Hughes (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.
3.0 Research Gaps in the Existing Literature

Krichler and Maciejovsky (2001), 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
(2003) findings show that individuals are spuriously more optimistic towards 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 an unique study in itself and can be explored
to study the impact of more biases like disposition effect, home bias, loss aversion etc. 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 (2008) 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 is studied by Marie at 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 further extended to find the
impact of family size, investment objectives, and years of experience in the financial market,
peer influence etc. as they may have 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 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.
Atif Kafayat (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, GDP etc. on the trading patterns of the investors. Tekçe (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 (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 play a moderating role in relationship
between personality traits and the investment management. The sample size was quite low and
consists 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 and Touny (2016) found the presence of herding bias in Egyptian stock
exchange. They have found that how the effect of attitudinal determinants differ 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.
4.0 Research Methodology

4.1 Research Objectives
We constructed several research objectives based on the gaps in the existing literature. These are:
i. To understand why and how the behavioral finance theories are significantly different from the
traditional finance theories.
ii. To explore the authors who have given their significant contributions to the field of behavioral
finance.
iii. To categorize prevalent biases that can affect the investors and also identify the factors causing an
increase in these biases.
iv. To study the impact of these biases in association with demographic factors like age, experience,
gender, and education etc.
v. We want 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.
vi. 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
Methodology
Review of literature has been used as the basis of the research. Though the extensive literature
review could not be carried out due to the limit of various constraints but 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 since 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 (Firstly proposed by Kahneman, & Tversky, 1979) onwards, since
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
either to review the existing literature or 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.6 as per the
requirements of the study. Questionnaire and interview method have been used for the collection of
primary data. Secondary data is 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
Rensis Likert scale7 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 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 analysis8, Cronbach
Alpha9, Multivariate Analysis10, Factor Analysis11, ANOVA12, ANOCOVA13, T-Test14, F Test15, Z
6
Kothari, C.R.(2009), Research Methodology: Methods and Techniques, New Age International Publishers, New Delhi, pp. 60-65.
7
Likert, R. (1932). A technique for the measurement of attitudes. Archives of psychology. Vol. 22. pp. 5-55
8
Mendenhall, W., and Sincich, T. (1996), A Second Course in Statistics: Regression Analysis, 5th ed., Englewood Cliffs, NJ, Prentice Hall, United States of
America.
9
Glaser, M., and Weber, M. (2007). Overconfidence and Trading Volume Overconfidence and Trading Volume. The Geneva Risk and Insurance Review, 32(1), 1–
36.
10
Kothari, C.R. (2009), Research Methodology: Methods and Techniques, New Age International Publishers, New Delhi, pp. 60-65, pp. 315-340, 11pp. 321-337,
12
pp. 256-275, 13pp. 275-279, 14pp. 160-196, 15pp. 196, 225-228, 16pp. 196, 17pp. 336.
18
Levin, R.I and Rubin, D.S, Statistics for Management, 7th ed., Pearson, New Delhi, pp. 567-609.
19
Demirer, R., and Kutan, A. M. (2006). “Does herding behavior exist in Chinese stock markets”?, Journal of International Financial Markets, Institutions, and
Money, Vol. 16 No.2, pp.123–142. https://doi.org/10.1016/j.intfin.2005.01.002
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Kothari, C.R.(2009), Research Methodology: Methods and Techniques, New Age International Publishers, New Delhi, pp. 130, 318-319.
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Stock, J.M and Watson, M.W,(2004), Introduction to Econometrics, Pearson, New Delhi, pp. 463-465.
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24
Chen, G., Kim, K. A., Nofsinger, J. R., and Rui, O. M. (2007). Trading performance, disposition effect, overconfidence, representativeness
bias, and experience of emerging market investors. Journal of Behavioral Decision Making, 20(4), 425–451. https://doi.org/10.1002/bdm.561
Test16, Varimax17and Chi-Square Test18, are used for analysis of primary data. Besides this, Cross-
Sectional Standard Deviation19, Multivariate Regression20 ADF test21, Mann-Whitney test22,
Kolmogorov-Smirnov test23, Survival Analysis24 etc. are some of the tools for analyzing secondary
data.
Different sampling methods has 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 (2012), Linh (2015), Kannadhasan (2015), Chavali and Mohanraj (2016), Nouri et
al. (2017), as it seemed appropriate to reach the target investors. Random sampling is used by Sadi
et al. (2011), Jagongo and Ambrose (2014), Njuguna (2014), 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 (2015) had use
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 side, Quota sampling is used by
Bakar and Yi (2016) 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), 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 (2007), Hibbert (2013), D 'acunto
(2016), Nouri (2017). Nouri et al. (2017) used this test to measure the distribution of the data, to
check if the data is normally distributed or not. Survival Analysis methods are used by Guler
(2007),
Chen et al. (2007), Richards et al. (2011), 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 and Jungermann (2012),
Kengatharan and Kengatharan (2014), Charles and Kasilingam (2016), Prashantha and Mirji
(2016), 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 Chi square by
Kubilay and Bayrakdaroglu (2016). On the other side, ANOVA technique has been used by
following authors i.e. Lee et al. (2010), Lakshmi et al. (2013), Jhandir and Elahi (2014), 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. ANOCOVA is applied by Zeelenberg and Beattie (1997), Nwogugu (2010),
Philips (2012) Guillemette al. (2015). Varimax is used by Sadi et al. (2011), Sachse (2012),
Jagongo and Mutswenje (2014), Charles and Kasilingam (2015), Islamoğlu (2015). Charles and
Kasilingam (2015) gave an information of all the abstracted factors and also the variance that is
explained by these factors. Cronbach alpha is used by Glaser et al. (2013), Jagongo and Mutswenje
(2014), Kafayat (2014), Pak and Mahmmod (2015). The reliability of the survey measurement is
done with Cronbach 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, investment risk etc, 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),
Casavecchia (2016) have used Multivariate Regression. Xu et al. (2016) used it to find if female
CEO’s have an impact on bank loan contract based on various independent variables like gender,
collateral intensity etc. Following authors had applied‘t’ test, Cunningham (2002), Fernandes
(2007), Hoffmann et al. (2010), Rostami & Dehaghani (2015), 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 & 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), 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 (2008),
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 (2007), Feldman and Lepori (2016), Fochmann (2016), Feldman
and Lepori (2016), Fellner and Sutter (2017) 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), 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.
Insert Table 1 Description of Loss Aversion Biases

Insert Table 2 Description of Disposition Effect
Insert Table 3 Description of Framing Biases

Insert Table 4 Description of Herding Biases
Insert Table 5 Description of Overconfidence Biases
Insert Table 6 Number of Times Biases Studied during the Literature Review
5.0 Results & Findings

Most of the papers on behavioral finance have pointed towards 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 Gergena Y. 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.
Cunnigham (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.
Chen (2008) has given a model to quantify the value of judgments generalized from the
entropy theory of information. While the rate of return on investment 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 modelling 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 et al. (2011) find the six success factors that help to improve the outlook of
the entrepreneurs towards the entrepreneurial actions. These findings will help to take steps
towards improving the actions that will generate the spirit of entrepreneurship. Jiang (2016)
explains 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.
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 general job-related activity. But the
probability estimates aren’t reduced by both the methods.
6.0 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 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 the25. The
book, 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, 2011), 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 lead to the
reduction in the prices of these securities in the market. Through the comprehensive literature
review, Joo and Durri (2015) have concluded that though there is not any specific theory for the
behavioral finance but 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
25
Stocks to Riches: Insights on Investor Behavior by Parag Parikh (2006), Seventeenth Edition.
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?
7.0 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 a single study in the literature
extensively reviewed and collected seventeen different types 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
adequately in the Indian context. We have found that both the psychological biases (Feng-hua et al.
2007, Chira et al., 2008, Tekçe, 2014, Rzeszutek, 2015) and investment biases (Stracca, 2004,
Glaser and Weber, 2007, Moradi et al., 2011, Nguyen and Schuessler, 2013, Pak and Mahmood,
2015) has 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 and Fernandes, 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, 2015 research show that the
behavioral bias factors like emotions, moods, heuristics etc. can be used as ab base to educate the
customers of mutual funds about the strategies of investing in capital markets for avoiding
unsuccessful investment decisions. Thus, 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, 2010),
portfolio analysis (Hoffmann et al., 2010) risk tolerance(Sulaiman, 2012, Pak and Mahmood,
2016), financial rationality (Soufian et al., 2014), financial literacy (Gustafsson and Omark, 2015,
financial planning (Guillemette et al., 2015), Hayat and Anwar, 2016), financial personality
(Kubilay and Bayrakdaroglu, 2016) etc. The following factors have been identified, which implies
significant impact on the investors’ decisions such as investor’s experience (Feng and Seaholes,
2015, Papadovasilaki, 2015), past investment results (Ray, 2009, Olsen, 2017), 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. 2012, 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), revenues (Lee et al., 2010) before investing in any security but behavioral
finance digs deep 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 implications of financial decision
making such as new equity issuances(Daniel et al., 1998), 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, 2016, investment performance (Social Trust (Li et al. 2016), asset pricing
(Dash, 2016, Chandra and Thenmozhi, 2017), etc. It also suggests some probable solutions to
minimize the effect of these biases (Zhang, 2006, Lovric et al., 2008, Gergena Y. 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 CEO's in asset pricing, social and ethical investing etc. It indicates few
papers that can be referred by the new researchers who want to understand the behavioral finance as
a separate discipline.
8.0 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. Firstly, the research should target the participants in the market
participating themselves and also those who invest through some financial intermediaries.
Secondly, 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. Thirdly,
the target population can be narrowed down into many factors on the basis of experience,
occupation, financial needs, etc. of the investors. Fourthly, there is a dearth of study of behavioral
finance in the developing countries and the developed economies like U.S, U.K, and Europe have
conducted substantial research and experiments to obtain a strong understanding of investors’
behavior. Since the economy of the developing countries like India is still progressing, so 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. Lastly, few pieces of 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.
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Table 1 Description of Loss Aversion Biases
Author Data type Journal Sample size and Tools Country

Kengatharan and The sample was consisted of 86 male (67.2%) and 42 female (32.8%)
Asian Journal of Finance &
Kengatharan Primary investors. Cross - sectional design for questionnaire, Convenience, Sri Lanka
Accounting
(2014) Stratified sampling, Likert scale, SPSS
Mirji and C IOSR Journal of Economics
Primary 382 male, 118 female candidates, Chi -square test Sri Lanka
(2016) and Finance
Journal of Advances in
Mallick(2015) Secondary Review paper, qualitative data, Journals, Books and available data
Business Management
Five investors belonging to the "Analyst Association of Capital
Godoi et al(2005) Primary Managerial Finance Brazil
Markets", Deep qualitative interview
Primary Journal of Finance,
Source ICICI direct money manager's records of investors, secondary
Suresh (2013) and Accounting and India
data from financial reports and primary data from researcher
Secondary Management
Trade records of 120 days relating to 50 stocks, Regression,
Hassan and European Journal of
Secondary Descriptive statistics like Mean, Standard Deviation, Skewness, Pakistan
Bashir(2014) Scientific Research
Kurtosis, ADF Test
EPRA International Journal 380 retail investors segregated in two groups on the basis of
Gupta and
Primary of Economic and Business investment experience, Discriminant Analysis And Chi-Square Test, India
Ahmed(2016)
Review SPSS 21.0, Wilks Lambda And F Test
Wolf (2005) Secondary SSRN Electronic Journal Review Paper
Journal of Finance and
Mokhtar(2014) Secondary Review Paper
Investment Analysis
122 investment advisor candidates, 104 executive MBA students at the
Ofir and Wiener Jerusalem School of Business Administration, and 42 employees from
Primary SSRN Electronic Journal Israel
(2009) various industries (other than the financial services industry) for a total
of 268 subjects, Chi square statistic
101 respondents, Descriptive & Cross Sectional Analysis
International Journal of Questionnaire, SPSS And Factor Analysis, Chi Square, Kendall Rank
Chavali and
Primary Economics and Financial Correlation Test, Risk Tolerance Scale by Grabble and Lytton. India
Mohanraj(2016)
Issues Principal component analysis and Varimax rotation method, Factor
analysis
Heterogeneous Agent Model of a financial market with chartist and
Fischer(2012) Primary Algorithmic Finance fundamentalist traders those who exhibit bounded rationality, control Germany
theory in the frequency domain
Essay on financial Two important factors are over-extrapolation of past price changes and United
Barberis (2011) Primary
innovation and crisis belief manipulation States
Journal of Business & 68 students of Jacksonville University, Chi square test, Pearson p
Chira et al (2008) Primary USA
Economics Research value
Table 2 Description of Disposition Effect

Data
Author Journal name Sample size and Tools Country
Type
Barber et al Financial Analysts Trading records of 78000 households, PGR (proportion of gain realized) and PLR
Secondary California
(1999) Journal (proportion of loss realized) ratios
Feng and Data comprised of 1,511 investors (accounts), survival analysis, first indicator
Seaholes Secondary Review of Finance variable is called the “Trading Loss Indicator” or “TLI”. Our second indicator China
(2005) variable is called the “Trading Gain Indicator” or “TGI
Data of large discount brokerage - 78,000 households, small discount brokerage -
Barber and The Review of 14667 accounts of individual investors, large retail brokerage - 665,533 investors
Secondary California
Odean (2008) Financial Studies with non-discretionary accounts, professional money managers - 43 institutional
money managers
Journal of
Chen et al 46,969 individual investor accounts and 212 institutional investor accounts, Cross
Secondary Behavioral China
(2007) sectional regression, Survival analysis, Mean monthly portfolio turnover, Regression
Decision Making
122 investment advisor candidates, 104 executive MBA students at the Jerusalem
Ofir and SSRN Electronic
Primary School of Business Administration, and 42 employees from various industries, a total Israel
Wiener (2009) Journal
of 268 subjects, Chi square statistic
Finnish Central Securities Depository (FCSD) registry, Helsinki Stock Exchange
Linnainmaa
Secondary Journal of Finance (HEX) stock data, HEX microstructure data within some time period and Finland
(2010)
consolidated limit order book of the Helsinki Stock Exchange
Behavioural
Richards et al The brokerage company provided the trading data for 7,828 active investors who had
Secondary Finance and UK
(2011) made at least two trades per year
Economic
Psychology: Recent
Developments
Chhabra and SSRN electronic Data consists of 2.45 million individual investors trading in 755 stocks during a total
Secondary India
De (2012) Journal period of 18 months (374 trading days) from (January 2005 - June 2006)
Suresh (2013) and Accounting and Review Paper
International
Lakshmi et al Journal of
Primary 318 investors, Structural Equation Model (SEM) India
(2013) Economics and
Management
20th National
Jhandir and Target population is 37000 investors. Cronbach’s alpha, T-test, Correlation analysis,
Primary Research Pakistan
Elahi (2014) Ordinary Least Square Method
Conference
Bodnaruk and
Journal of Financial The mutual fund website provides details of all mutual fund investors from march
Simonov Primary Sweden
Intermediation 2006. Sharpe ratios, Multivariate analysis
(2015)
Journal of
Aspara and
Behavioral and
Hoffman Primary 97 students studying business at Finland university, Two-way ANCOVA Finland
Experimental
(2015)
Finance
Feldman and Review of 30 investors, testing on basis of rationality. Mann-Whitney test, Kolmogorov-
Secondary USA
Lepori (2016) Behavioral Finance Smirnov test
Aren et al
Secondary Kybernetes 25 articles that focused on Home Bias, Disposition Effect And Herding Behavior
(2016)
Hayat and SSRN Electronic 158 investors on Pakistan Stock Exchange, Likert scale, Multiple choice questions,
Primary Pakistan
Anwar (2016) Journal Regression, ANNOVA
International
Journal of
Marketing,
Sukheja (2016) Secondary Review Paper India
Financial Services &
Management
Research
C.E.P.R Discussion
Li et al (2016) Secondary 2,621,450 investment accounts trading six equity funds from 2002 to 2011, in China China
Papers
Alghalith et al The Journal of Risk Data series of S&P 500 from January 2000 to March 2010, a simple percentage
Secondary USA
(2012) Finance change in the index value from time t -1 to time t
The Journal of
Cronqvist and
Secondary Financial 15,208 adult twin pairs, Covariation metrics. Sweden
Siegel (2014)
Economics
Table 3 Description of Framing Biases

Author Data type Journal name Sample size and tools Country
A total of 200 participants, most of them students. The experiment
Glenzer et al International Center for was programmed and conducted with the experiment software Z-
Primary Germany
(2014) Insurance Regulation(ICIR) Tree (Fischbacher, 2007), Wilcoxon Signed rank test, Regression
analysis
2500 households, 102 students, 94 people were sent questionnaire
Nenkov et al Journal of Marketing
Primary through mail and 183 undergraduate students, Morningstar toolbox, Boston
(2009) Research
Confirmatory factor analysis
Trade records of 120 days relating to 50 stocks, Regression,
Hassan and European Journal of Scientific
Secondary descriptive statistics like Mean, Standard Deviation, Skewness, Pakistan
Bashir (2014) Research
Kurtosis, ADF Test, E Views
Mokhtar (2014) Secondary Review Paper
Investment Analysis
Hayat and Journal of Behavioral 158 investors, ANNOVA, Standard Deviation, Correlation,
Primary Pakistan
Anwar (2016) Decision Making Regression
International Journal of
Sukheja (2016) Secondary Marketing, Financial Services Review paper India
& Management Research
The IUP Journal of 428 investors, Pearson chi square, Continuity Correction, Fisher's
Mittal (2010) Primary India
Behavioral Finance Exact Test, Likelihood Ratio, and Linear- by- Linear Association
Table 4 Description of Herding Biases
Author Data Type Journal name Sample size and Tools Country
41 stocks were selected , the Ordinary Least Squares (OLS) method,
Messis and The Journal of Risk
Secondary Cross sectional means and Standard deviation of betas, ADF test , Australia
Zapranis (2014) Finance
GARCH and TARCH test
122 investment advisor candidates,17 104 executive MBA students
Ofir and at the Jerusalem School of Business Administration, and 42
Primary SSRN Electronic Journal Israel
Wiener (2009) employees from various industries (other than the financial services
industry) for a total of 268 subjects, Chi square Statistic
International Financial
Demirer and 375 Chinese stocks on the Shanghai and Shenzhen Stock Exchanges,
Secondary Markets, Institutions and China
Kutan (2006) Cross sectional standard deviation
Money
46,969 individual investor accounts and 212 institutional investor
Chen et al Journal of Behavioral
Secondary accounts, Cross Sectional Regression, Survival Analysis, Mean China
(2007) Decision Making
Monthly Portfolio Turnover, Regression
Matsumoto et Journal of International 92 students from University of Brazil, 90% margin of confidence to
Primary Brazil
al. (2013) Finance & Economics check range of correct answers from Questionnaire
Suresh (2013) and Accounting and Review paper
Lakshmi et al.
Primary Economics and 318 investors, Structural Equation Model [SEM] India
(2013)
Management
Kengatharan and 86 male (67.2%) and 42 female (32.8%) investors, Cross Sectional
Asian Journal of Finance
Kengatharan Primary design for questionnaire, Convenience, Stratified Sampling, Likert Sri Lanka
& Accounting
(2014) Scale, SPSS
Sample of 200 respondents including lecturers, students
Bakar and Yi
Primary Procedia Economics and of finance, bank officers, executives and managers, Likert Scale, Malaysia
(2016)
Finance coefficient of multiple determinants (R Square) and using F static
Paul (2014) Secondary SSRN Journal Review of existing bias
Jhandir and SZABIST's 20th National Target population is 37000 investors, Cronbach’s alpha, T - test,
Primary Pakistan
Elahi (2014) Research Conference Correlation analysis and Ordinary least square
Mallick (2015) Secondary Review Paper
Business Management
Hayat and 158 investors, Likert scale, Multiple Choice Questions, Regression
Primary SSRN Electronic Journal Pakistan
Anwar (2016) and ANNOVA.
25 articles that focused on Home Bias, Disposition Effect And
Aren et al (2016) Secondary Kybernetes
Herding Behavior, Systematic Review
380 retail investors who are segregated in two groups based on
Gupta and
Primary investment experience, Discriminant Analysis And Chi-Square Test. India
Ahmed(2016)
ISI Impact Factor SPSS 21 .0 is used, Wilks Lambda And F Test
1985- 588 investors , 1990- 958 investors , 1995- 2714 investors,
Casavecchia International Journal of
Secondary 2000- 2295 investors, 2005- 2732 investors, 2007- 1532 investors, Australia
(2016) Managerial Finance
OLS, Fixed-effect panel data models
Journal of Insurance and 104 teaching population, Descriptive statistics such as Range,
Omondi (2016) Primary Kenya
Financial Management Standard Deviation And Variance
Table 5 Description of Overconfidence Biases

Author Data type Journal name Sample size and Tools Country
Kengatharan and
Asian Journal of Finance 86 male(67.2%) and 42 female (32.8%) investors, Cross Sectional,
Kengatharan Primary Sri Lanka
& Accounting Convenience , Stratified Sampling, Likert Scale , SPSS
(2014)
IOSR Journal of
Mirji and C
Primary Economics and Finance 382 male. 118 female candidates, Chi Square method India
(2016)
(IOSR-JEF)
Mallick (2015) Secondary Review paper
Business Management
Feldman and Review of Behavioral
Secondary 30 investors, Mann-Whitney test, Kolmogorov-Smirnov test USA
Lepori (2016) Finance
Sample size was 220 investors, CFA was utilized on the Questionnaire, and
then SEM is used to analyze the final model. chi square, AGFI (Adjusted
Theoretical and Applied
Kafayat (2014) Primary goodness of fit), TLI (Tucker-Lewis coefficient), p-value, GFI (goodness of Pakistan
Economics
fit), CFI (comparative fit index) and RMSEA (root mean square error of
approximation)
123 Bachelor's student at Alto University. 23 investors from large

Review of Behavioral Scandinavian Bank. Secondly, debiasing experiment was conducted. 60
Perttula (2012) Primary Alto
finance branch mnagers, 60 advisers from Finnish company, 29 participants in
seminar from Finland, Multivariate Analysis , Regression
Hayat and 158 Investors, Likert Scale, Multiple Choice Questions, Regression,
Primary SSRN Electronic Journal Pakistan
Anwar (2016) ANNOVA
Suresh (2013) And Accounting and Review paper
Sample of 46,969 individual investor accounts and 212 institutional investor
Chen et al Journal of Behavioral
Secondary accounts, Cross Section Regression, Survival Analysis, Mean Monthly China
(2007) Decision Making
Portfolio Turnover, Regression
Mokhtar (2014) Secondary Review Paper
Investment Analysis
3500 investors, two measures of investor sentiment, one by Investor’s
Fisher and The Journal of Portfolio
Primary Intelligence (II) and the other by the American Association of Individual California
Statman (2003) Management
Investors (AAII), use of Correlation Coefficient
Lakshmi et al
Primary Economics and 318 investors, Structural Equation Model [SEM] India
(2013)
Management
Assuming various aspects of a firm activities like (1) Default decisions, (2)
Hackbarth Journal of Financial and Washingto
Primary Debt coupon choice and debt-equity mix, and (3) Pecking order financing
(2008) Quantitative Analysis n
behavior
Kirchler and
Journal of Risk and
Maciejovsky Primary 72 students of Business Administration, 2*3 Factorial design Vienna
Uncertainty
(2002)
Matsumoto et 92 students from university of brazil, 90% margin of confidence to check
Primary SSRN Electronic Journal Brazil
al.(2013) range of correct answers from Questionnaire
The main data set consists of 563,104 buy and sell transactions of 3079
Glaser and The Geneva Risk and
Primary individual investors, Data on the securities traded are obtained from Germany
Weber (2007) Insurance Review
DataStream, Correlation, Regression
Journal of Economic
Barberis (2013) Primary Review paper USA
Perspectives
Barber and
Secondary Financial Analysts Journal Trading records of 78000 households, using PGR and PLR ratios California
Odean (1999)
Hughes et al
Secondary Science And Technology A sample of 2,252 observations, Regression, T statistics America
(2010)
Jhandir and National Research Target population is 37000 investors, Cronbach’s alpha, correlation analysis,
Secondary Pakistan
Elahi (2014) Conference Ordinary least square method is used
Chira et al Journal of Business & 68 students at Jacksonville University in Jacksonville, Chi square test,
Primary USA
(2008) Economics Research Pearson p value
Primary
Glaser et.al. Journal of Behavioral 33 professionals of a large German bank, 75 advanced students, Kruskal -
and Mannheim
(2013) Decision Making Wallis test
Secondary
Proceedings of the 2011
Annual Meeting of the
De et al (2011) Secondary 50 stocks included in S&P CNX Nifty index, Regression analysis India
Academy of Behavioral
Finance and Economics
Hassan and European Journal of Trade records of 120 days, Descriptive statistics were computed including
Secondary Pakistan
Bashir (2014) Scientific Research Mean, Standard Deviation, Skewness, Kurtosis, ADF Test, E Views
Table 6 Number of Times Biases Studied during the Literature Review

Serial No. Biases Number of time studied
1 Overconfidence 24
2 Disposition effect 20
3 Herding 17
4 Loss aversion 14
5 Mental accounting 06
6 Representativeness 06
7 Conformation 06
8 Framing 07
9 Hindsight 05
10 Anchoring 04
11 House money
03
effect
12 Home bias 03
13 Self-attribution 02
14 Conservatism 01
15 Regret aversion 02
16 Endowment effect 02
17 Recency 01
Total 123

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Qualitative Research in Financial Markets

Do investors exhibit behavioral biases in investment decision making? A systematic review

*Related content and download information correct at time of download.

1.1 Behavioral biases

7. House Money Effect

11. Home bias

13. Conservatism Bias

14. Regret aversion

1.2 Research Motivation

1.3 Research Problems

2.1 Literature on factors influencing investment decisions

2.2 Literature on behavioral biases

decisions having an adverse impact on the firm’s position.

2.3 Literature on Multiple Biases

2.5.1 Relationship between experience and investment

3.0 Research Gaps in the Existing Literature

cross country transitions of financial information targeting comparatively a wide range of

4.0 Research Methodology

Insert Table 1 Description of Loss Aversion Biases

Insert Table 3 Description of Framing Biases

5.0 Results & Findings

6.0 Conclusion and Suggestions

7.0 Contributions to the field of behavioral finance

Representativeness, Confirmation, Framing, Hindsight, Anchoring, House money effect, Home

8.0 Future implications

Journal, Vol. 2, No. 2, pp. 1-9.

Table 1 Description of Loss Aversion Biases

Author Data type Journal Sample size and Tools Country

Table 2 Description of Disposition Effect

Table 3 Description of Framing Biases

Table 4 Description of Herding Biases

Table 5 Description of Overconfidence Biases

123 Bachelor's student at Alto University. 23 investors from large

Table 6 Number of Times Biases Studied during the Literature Review

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