A STUDY ON BEHAVIORAL BIASES IN STOCK MARKET INVESTMENT DECISIONS

Abstract

Investment in the stock market is one of the key tools of economic development in the contemporary world. Investment and growth opportunities provided by the stock market help people generate profits. In the last few years, the number of stock market participants has dramatically increased due to easy digital trading, financial literacy, mobile apps, and numerous platforms available for trading. Besides rational decisions, emotional and psychological factors greatly affect the behavior of investors in the stock market environment.

In the current research, the author aims to investigate the effect of different biases on the investment decisions of individuals. According to behavioral finance theory, individuals' emotions, perceptions, social influence, and heuristics can affect their decisions. Such irrationality can be detrimental for investments and can prevent efficient decision-making and successful risk management.

In the research, different types of biases, including overconfidence bias, herding bias, loss aversion bias, anchoring bias, availability bias, and emotional behavior were analyzed to find out how these biases affected the thinking processes, stock selection, perception of risks, and behavior patterns of investors.

The survey method has been chosen for data collection. Primary data has been gathered through a structured questionnaire administered among stock market participants and individuals who are active traders. The survey consisted of questions regarding the respondents' demographical characteristics, previous investment experience, market behavior, level of self-confidence, emotions when trading, perception of social factors, and attitude towards risks associated with investments.

The questions asked in the survey were answered using a five-point Likert scale which ranged from strongly agree to strongly disagree. Based on the obtained results, percentage analyses and interpretation approaches have been used for identifying major behavioral patterns of investors.

According to the conducted survey, the studied behavioral biases had significant effects on the investment behavior. In particular, many respondents revealed their tendency to exhibit overconfidence bias, which means that people believed in themselves while making investment decisions. Also, numerous investors confessed that the latest market news and social influence greatly affected their investment decisions. Moreover, the results showed that herding behavior was observed among stock market investors. Namely, a high number of respondents stated that they invested in particular stocks based on recommendations received from their friends and peers.

Despite the possibility to generate wealth through stock market investments, there is an indication that behavioral problems may have an impact on the performance of these investments, depending on how investors manage their biases. Such behaviors as excessive self-confidence, rashness, and being driven by emotions when making investment choices could pose risks and diminish the rationality of investment decisions made. In conclusion, the research shows that behavioral biases significantly influence stock market investments made by individuals. Investor behavior is not rational, and psychological influences have a huge impact on the process of participation in markets. Consequently, it is important to encourage investors to develop financial literacy, awareness, and emotional discipline in order to invest rationally. Generally, this research gives useful insights about behavioral problems related to stock markets, which are very important because of the emerging behavioral finance. The study will be useful for both individual investors and those who deal with such matters professionally.