The Influence of Behavioral Finance on Investment Decisions: A Study of Cognitive Biases in Portfolio Management
DOI:
https://doi.org/10.22399/ijcesen.2006Keywords:
Behavioral finance, Cognitive biases, Investment decisions, Portfolio management, Risk behaviorAbstract
This academic article examines how behavioral finance can help inform more effective investment decisions, with an emphasis on the impact of cognitive biases on portfolio management. Many principles of traditional finance are based on rational behavior by investors (the person who takes on the investment), with the market being efficient (i.e., the market value reflects all the available information) too, but behavioral finance is a field that helps emphasize the impact of psychological factors on investor behavior. The research explores critical cognitive biases including overconfidence, loss aversion, anchoring, herd behavior, and confirmation bias, and their influence on the decision-making processes in investment strategies. Through a mixed-method study including surveys and interviews with retail and institutional investors, the study reveals the prevalence and influence of these biases on portfolio diversification, risk assessment, and asset allocation. Cognitive Biases: A Real Financial Breaker. The research outcomes show that significant deviations from rational behavior tend to exist, this leads to dysfunctional investments that reduce capital. Similarly, it concludes with suggestions on ways of counteracting these biases through investor education, decision-support tools and behavioral training programs, thus encouraging more rational and informed investment decisions.
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