Intrusion of Behavioral Biases in Investor's Decision Making

Abstract

Economics and conventional investment theory is based on assumption that people are rational while markets are efficient, but people often think and act irrationally, and financial markets rarely follow textbook models of efficiency. People have errors and biases in their thinking and emotions. (Townsend). With the emergence of behavioral finance a controversy started that this new area of finance has divided it into two parts i.e. standard finance & behavioral finance but such is not the case rather researchers have found that finance was always behavioral (Bashir et al, 2013). Behavioral finance studies the characteristics of investor and the impact of information on their investment decisions and market outcomes. Behavioral finance describe the ways people interpret and act upon information for making investment decisions. Behavioral finance draws on the psychology and cognitive science literatures to examine why individual decision-making often diverges from rational choices in efficient ways (Chira, Adams & Thornton, 2008).