Default rules in investment decision-making: trait anxiety and decision-making styles (original) (raw)
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Frontiers in psychology, 2017
According to previous literature, trait anxiety is related to the tendency to choose safety options during risk decision-making, that is, risk avoidance. In our opinion, anxious people's risk preference might actually reflect their hypersensitivity to emotional information. To examine this hypothesis, a decision-making task that could elicit the framing effect was employed. The framing effect indicates that risk preference could be modulated by emotional messages contained in the description (i.e., frame) of options. The behavioral results have showed the classic framing effect. In addition, individual level of trait anxiety was positively correlated with the framing effect size. However, trait anxiety was not correlated with risk-avoidance ratio in any condition. Finally, the relationship between anxiety and the framing effect remained significant after the level of depression was also taken into account. The theoretical significance and the major limitations of this study are ...
Behavioral Finance Biases in Investment Decision Making
International Journal of Accounting, Finance and Risk Management, 2020
Traditional finance suggests that investments made by rational behaviors investors examine risk and return before decision making to gain maximum profit later behavioral finance challenge traditional finance and introduce psychological factors affect decision making. The aim of this research paper is to explore how behavioral biases affect investment decision making under uncertainty. Dependent variable investment decision making is a composite activity, it never be made in a vacuity by depending on personal resources. Based on this study investment choices alternatives influence by human rational and irrational behavior, therefore, examine the impact of behavioral finance in the decision-making process. Behavioral finance phenomenon variables; heuristic, prospects, personality characteristics, feeling, moods and ecological factors explore under this research. Overconfidence, Representativeness, Anchoring, Regret Aversion, Hindsight, Herding Effect and Home Bias included in investors psychology behaviors. Survey questionnaire tool used to collect sample to conduct quantitative research. To test the hypothesis Regression analysis run by the SPS software. Findings revealed that there was an effect of behavioral biases on investment decisions. Empirical results concluded investment decision making influenced by heuristic behaviors more than prospects and personality characteristics. The originality of this study, it is very beneficial for investors and financial institutions to make decision by observation of psychological factors.
Psychological Biases, Main Factors of Financial Behaviour - A Literature Review
European Journal of Natural Sciences and Medicine
In the context of the sophistication of financial relationships, investment alternatives, risk and recurrent recent financial crises, human factor has become increasingly important in investor decision-making. Studies on investment behavior of a number of authors at different times and places, encouraged this new widely accepted inter-disciplinary field of finance: Behavioral Finance. In order to understand and explain individual decision making and investment behavior, it is necessary to study behavioral factors which impact it. Various scholars have studied factors of financial behavior and their impact on financial decision making, and in particular a special focus has been given to psychological biases. Usually investors are not aware of their behavioral biases. If investors become conscious of biases they can face, they can act more rationally. This way of thinking might increase the quality of their decision-making. The paper aims to help decision-makers and investors get to know with psychological biases, in order to make better decisions when investing, reducing the chances of being vulnerable to behavioral deviations, as the consequences of individual errors are inevitably reflected at a macro level, causing instability and economic-financial crisis.
Journal o f Informatics Education and Research, 2024
ABSTRACT In the ever-evolving realm of financial markets, understanding the underlying psychological dynamics shaping investor behavior is paramount. Financial behavior refers to the choices and actions people make when managing their own cash across a range of investment vehicles, including stocks, bonds, mutual funds, and real estate. It includes components that are vital in determining the results of investments, including risk tolerance, investment objectives, decision biases, emotions, and financial literacy. Achieving long-term investment success and financial security requires an understanding of and ability to control one's own financial behavior. An extensive research model has been painstakingly built to clarify the complex connections between these psychological variables and the process of making investing decisions. This study examines the impact of three psychological aspects on investment decisions made by 220 investors who trade on the National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE): information asymmetry, problem framing, and risk propensity. Effective investing strategies necessitate an awareness of the interplay between psychological biases and cognitive processes, as these aspects influence personal investment decisions. By using a quantitative research methodology, information was gathered by sending surveys to investors who were actively trading stocks on the BSE and NSE platforms. Regression analysis and correlation studies are two statistical analytic approaches that were used to investigate the connections between investing decisions and psychological aspects. The study's conclusions add to the corpus of knowledge by illuminating the complex dynamics of financial decision-making and the part played by psychological variables. Furthermore, the knowledge gained from this study has important ramifications for financial advisors, investors, and legislators that aim to improve investor welfare and encourage well-informed stock market decision-making. Keywords: Financial Behavior, Personal Investment, Psychological Factors, Investment Decision
Behavioral Finance: The Aversion to Uncertainty Bias in Individual Financial Decisions
SSRN Electronic Journal, 2015
This research verifies the existence of the aversion to uncertainty bias in individual financial decisions. It also evaluates the effects of gender and knowledge in this bias. We considered a sample of 80 undergraduate management students from Universidade Católica de Brasília. The results supported the existence of the uncertainty bias amongst individuals facing financial decisions. Contrasting previous studies, men presented greater uncertainty bias than women. The students with higher financial knowledge presented lesser uncertainty bias when compared to the ones with reduced knowledge. This last result supports the classification of the aversion to uncertainty as cognitive and not emotional bias.
2015
In this study, the authors intend to identify psychological factors which could influence the criteria for investment decision which are discussed with three dimensions (risk, repay and corporate data). With regard to this aim, the criteria for investment decision were examined through defense mechanisms, personality traits, emotional intelligence and financial literacy. Defense mechanisms and certain personality traits have become prominent for risk criterion while defense mechanisms and financial literacyhave been important to repay criterion. Lastly, for corporate data criterion, defense mechanisms, some personality traits and emotional intelligence have been found as important. Within this scope, this study can be said to have carried out a preliminary research in its field in terms of explanatory variables.
Role of Psychological Factors in Individuals Investment Decisions
International Journal of Economics and Financial Issues, 2015
In this study, the authors intend to identify psychological factors which could influence the criteria for investment decision which are discussed with three dimensions (risk, repay and corporate data). With regard to this aim, the criteria for investment decision were examined through defense mechanisms, personality traits, emotional intelligence and financial literacy. Defense mechanisms and certain personality traits have become prominent for risk criterion while defense mechanisms and financial literacyhave been important to repay criterion. Lastly, for corporate data criterion, defense mechanisms, some personality traits and emotional intelligence have been found as important. Within this scope, this study can be said to have carried out a preliminary research in its field in terms of explanatory variables.
Fear of the unknown: The effects of familiarity on financial decisions
2004
Abstract Experimental and capital market evidence indicates that individuals prefer proximate and familiar investments; sticking to current consumption/investment positions, and choice alternatives positioned as default options. We offer an integrated explanation for these effects based upon fear of change and of the unfamiliar. We model fear of change as a tendency for individuals, in evaluating deviations from familiar choices in the face of model uncertainty, to focus on the worst-case scenarios.
Purpose -The purpose of this paper is to introduce the special issue of Review of Behavioural Finance entitled "Behavioural finance: the role of psychological factors in financial decisions". Design/methodology/approach -The authors present a brief outline of the origins of behavioural economics; discuss the role that experimental and survey methods play in the study of financial behaviour; summarise the contributions made by the papers in the issue and consider their implications; and assess why research in behavioural finance is important for finance researchers and practitioners. Findings -The primary input to behavioural finance has been from experimental psychology. Methods developed within sociology such as surveys, interviews, participant observation, focus groups have not had the same degree of influence. Typically, these methods are even more expensive than experimental ones and so costs of using them may be one reason for their lack of impact. However, it is also possible that the training of finance academics leads them to prefer methodologies that permit greater control and a clearer causal interpretation. Originality/value -The paper shows that interdisciplinary research is becoming more widespread and it is likely that greater collaboration between finance and sociology will develop in the future.
Behavioral decision-making in finance: An overview and assessment of selected research
Spanish Journal of Finance and Accounting / Revista Española de Financiación y Contabilidad, 2013
ABSTRACT Everyday financial decisions are the product of diverse factors, including instinct, habit, emotion, reason, and social interaction. Psychologists have long aspired to unravel the determinants of intuitive judgment and choice. Slowly but surely, they have identified various psychological mechanisms that cause predictable decision biases. This survey puts special emphasis on behavioral research in finance that investigates information overload, emotion, social influence, and ambiguity aversion. It also discusses selected cognitive models that attempt to integrate the way individuals interpret and act upon information. In general, behavioral research casts serious doubts on the validity of some of the key insights of mainstream finance such as portfolio theory, the positive risk-return trade-off, and efficient markets.