The Role of Behavioral Bias in Investment Outcomes

Xixuan Zhang

doi:10.54097/hbem.v15i.9323

Authors

Xixuan Zhang

DOI:

https://doi.org/10.54097/hbem.v15i.9323

Keywords:

Loss aversion, endowment bias, framing bias, overconfidence, diversification.

Abstract

Investment decisions are made by individuals who are subject to behavioral biases. The biases could lead to a significant impact on the outcome of investments. This research paper aims to investigate the role of behavioral biases in investment decisions and outcome. The study draws on the theories of Rational Behavioral Finance, which recognizes that human behavior is influenced by both rational and irrational factors. The paper reviews several key behavioral biases that can affect investment decisions, including loss aversion, endowment bias, framing, overconfidence, and the illusion of control. The analysis of these biases is based on the context of different investment settings, including stock markets, mutual funds, and real estate. The paper introduces the significance of each bias, and how they can lead to suboptimal investment decisions. The latter part of the paper highlights how the biases can be addressed to improve the outcome of investments. Eventually, the research paper concludes that behavioral biases can significantly impact investment outcomes, but the application of Rational Behavioral Finance theories and strategies can mitigate the impact of these biases.

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