ELK ASIA PACIFIC JOURNAL OF FINANCE AND RISK MANAGEMENT

ISSN 2349-2325 (Online); DOI: 10.16962/EAPJFRM/issn. 2349-2325/2015; Volume 10 Issue 1 (2019)

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BEHAVIORAL BIAS & ITS INFLUENCE IN FINANCE, INVESTMENT & DECISION – MAKING

Joydeep Dass Assistant Professor in Finance International School of Management Excellence E-mail: [email protected] , [email protected], Ph. 9175360870 Abstract

Behavioral finance has gained popularity in the last decades. The subject uses the research made in psychology and analyses the understanding of human behavior in financial decision making by considering observed human behavior. Most of us are aware that human behavior and emotions significantly affect investment decisions. Human nature is a complex web of greed, fear, temptation, impulse and other emotions, which makes them, react to different market situations. Psychological research has proved that there are various forms of bias which affect decision making and majority of these decisions are related to money, finance & investing. Behavioral bias and motivation is the main driving force in making investment choices. Behavioral biases attempts to relate the information processing to an Investors decision choices and preferences. The subject also claims through various research that an Investor should be in control of his emotions apart from having independent thinking, reasoning and analytical capabilities, market knowledge, and dynamics of investing if he wants to succeed in making a good investment decision. These biases are deeply embedded in human psyche and an essential part of human nature. Influence of these biases affect all investors no matter how professional or novice they are. Behavioral finance is a study of the effect of cognitive and emotional factors and an attempt to extend the role of these biases in financial decision-making & Investment. KeyWords: Cognitive, Bias, Investor, Investment Decision-Making, Risk, Optimal, Sub- conscious, Estimation. Psychological. Anchor, Irrational.

INTRODUCTION knowledgeable in taking financial decisions. The assumption that emotions do not play Over the last couple of years traditional any role in financial decision-making is finance theories assumed that, investors are erroneous and in reality, it is not. Behavioral well informed, careful, consistent, and

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ISSN 2349-2325 (Online); DOI: 10.16962/EAPJFRM/issn. 2349-2325/2015; Volume 10 Issue 1 (2019) finance has grown exponentially in the last and why. Behavioral counsellors are also able few years as researchers are of the opinion to guide their clients and help them overcome that finance theories should account for these biases for their benefit. The following observed human behavior. Some theorists paragraph contains a comprehensive outline have categorized behavioral finance in two of some of these biases. sub-topics – Behavioral Finance Micro & Anchoring bias Behavioral Finance Macro. The former explains the irrational behavior and biases of This occurs when an individual relies on a individual investors and the later explains particular piece of information irrespective of that abnormal market behaviour. These weather that information is correct or occurs because individuals demonstrate incorrect. His future decisions are based on different behavior at different times. this information regardless of its outcome. Behavioural Scientists assume that each That piece of information is termed as investor is a constituent of that market and the “Anchor” and all his investment decisions are market is efficient. Behavioral scientist have based or centered around that Anchor. Once interfaced research with psychology to an anchor is fixed, judgements are made by develop the subject of Behavioral finance. In adjusting or interpreting information around other words, the use of psychology to that anchor [66]. For example, an Investor understand how people arrive at a decision feels that the price of a stock at which he will and research in psychology have developed buy will be Rs 500 when it is low for the last several such behavior called biases. These 52-week period. Now suppose the price of biases have significant impact in earning the stock falls to Rs 600, he will not buy it money from investments and they outline the because he has anchored it at Rs 500. Now, if process of individual decision-making & the the price of the stocks go up, he might lose preferences they choose from the out of a potential good investment alternatives. Study of these biases help opportunity & benefit of capital appreciation. investors make better financial decisions. In business, for example if the management Financial advisors, planners & analysts are decides to buy a used machinery, the initial able to understand distorted decisions, quotation received might be an anchor for the financial market behavior, improve rest of the decision on purchase or performance and correlate what went wrong negotiation on price.

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ISSN 2349-2325 (Online); DOI: 10.16962/EAPJFRM/issn. 2349-2325/2015; Volume 10 Issue 1 (2019) Affinity bias in behavioural finance [67]. A share broker for e.g. may judge a Company’s stock based A common human tendency where people on few characteristics ignoring the better tend to make irrational investment decisions ones. This bias occurs when there is a need to based on how a stock he or she perceives to come to a decision quickly and the best way be of value. An investor might show an to overcome it is to study the whole aspect eagerness to buy domestic stocks or foreign holistically and do own research and analysis. stocks also known as “Home country bias” or Confirmation bias “Foreign Country bias”. An investor might buy Company stocks, which work towards This is another type of bias where an environmentally viable projects because he individual stick to pre-existing beliefs feels that by doing so he will be contributing without verifying its correctness and to the betterment of the planet even if these authenticity. There is a tendency to justify companies are not foreseen to be profitable in and prove that the beliefs are true where in future. Similarly, Affinity bias occurs when fact it is not. They might try to substantiate investors invest in Companies, which invests false information to support their beliefs. in social projects when he believes that the This bias is mostly unintentional and causes Company will do greater good to the society to draw conclusions from incorrect [88]. information [36]. For example, an investor might have an illusion that a particular stock Halo effect will go up in future if purchased within the next 3 months. He will then try to collect This bias is commonly known as the “First information to prove the point that the price impression” bias or halo effect. Halo effect is of the stock will go up and it might happen a cognitive tendency to evaluate a thing based that the stock has suffered losses. He will still on impression of particular aspect, which continue and go with investing in the stock leads to a positive impression of the overall with the hope that the price will rise and than product. Judgements based on small amount he will make a profit out of it. The reverse of information could be disastrous and tendency to critically analyze and contradict understanding of halo effect is very important prior beliefs is known as disconfirmation bias in real life. The bias was first discussed by [68]. Edward Thorndike and now popularly used

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ISSN 2349-2325 (Online); DOI: 10.16962/EAPJFRM/issn. 2349-2325/2015; Volume 10 Issue 1 (2019) Overconfidence bias – human tendency to treat various pools of money differently depending on the source This is the most catastrophic of all the biases. and how it is planned to be used [37]. For Here the investor feels that the investment example, an investor has a certain amount of decisions he makes is the best of all his other funds to be invested in equities and fixed counterparts. They believe that are better and income securities. He comes across a few wiser than others are while making financial stocks worth $50000 and bonds worth decisions. Most of the time it happens that the 150000$.Suppose the broker says that he can decisions they made proved to wrong or procure both the equities and bonds at a counterproductive. This bias usually occurs reduced price of 10000$ early next week. The when the investor makes a profit on few investor would prefer to wait for the equities successful investments in the past and he until next week as the savings of 10000$ is develops a feeling of overconfidence that all seen by him as larger than the investment in his decisions in future will earn him a profit bonds even though both the savings are the no matter how bad the decision is [34]. For same. Another example could be an investor Example an investor purchases a stock which feels that a dividend from equities is a huge was all time low during the last few years and source of income and ignores the bonus almost dead and he invests in that stock with shares received even though the source of the hope that some day it will rise and earn both is the same from equity holdings. Tax him a profit. Over ranking bias is a type of refunds, bonuses, lottery winnings, gifts are confidence bias where people rate themselves perfect examples, where the money is not superior than that of others. In business & factored in financial planning. The amount Investing, this often leads to taking too much when received is considered a windfall and risk-taking ad finally leading to disastrous the money is recklessly spent in impulsive consequences. Timing optimism is another purchases. type of psychology where people overestimate the time required to complete a Status Quo bias particular task. Status quo bias is a preference given to the Mental Accounting bias present state of affairs and a natural bias towards the current or previous situation or This was developed by behavioural experience. A given standard is considered as Economist, Richard Thaler. This bias is a

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ISSN 2349-2325 (Online); DOI: 10.16962/EAPJFRM/issn. 2349-2325/2015; Volume 10 Issue 1 (2019) the reference point and an individual prefers European bonds because of the crisis in some not to deviate from that point. This cognitive European countries. The investor makes form of bias is usually found in risk averse financial decision based on those events [69]. investors. Loss aversion is the primary cause When there is a tumultuous period in of this bias. The investor feels that the current financial circles investors often quote the last situation is always better and any deviation global crisis, which hit the whole word that is from the current state of affairs is perceived the recession in 2008-09. as a loss. Even if the changed situation looks Sunk cost Bias promising the investors prefers to stick to the original one [40]. For example, an investor Sunk Cost is a cost, which has already been would prefer to keep money in Fixed committed in a project and there are no Deposits even if alternative investments chances of realizing the investments. Fixed options of other banks are profitable or a costs are sunk cost and the tendency to invest financial decision wherein a Company resources with little or no chance of recovery. prefers not to invest in a project because the This trap is called escalating commitment. It location is in a foreign country and not in the is a logical fallacy that future investments are home country no matter how profitable it is. justified because the resources already Behavioural Scientists say that this bias is a utilized will be lost if not continued. The big hindrance to effective decision-making. investor has a feeling that the cost that he has incurred will be recovered if he puts in more Recency bias money which in fact is not true. This bias Recency bias is the tendency of an individual occurs due to ongoing commitment. This is to recall or emphasize recent events or very risky as it could lead the investor to a observations. Recent information is debt trap [56]. In financial decision-making, considered more valuable than old a Company might spend millions on information [33]. For example, an investor developing a product, which probably has no may start to invest in mutual funds or a market at all, Finance Managers invest time, particular segment stock because the money & energy and persevere to work on it advertisement was prominently displayed with the hope that someday the product will recently in the media. Another example could capture the market, generate revenue and the be an investor stopped investing in foreign or

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ISSN 2349-2325 (Online); DOI: 10.16962/EAPJFRM/issn. 2349-2325/2015; Volume 10 Issue 1 (2019) cost incurred on its development will be individual finds it extremely difficult to cope recovered. up with and cannot as a result adjust with the change or react to the situation [71]. For Self-serving bias example in investing it is seen that people do This is a tendency of Individuals to link their not hedge against risky positions in the success or profits from investments to market and when there is an actual downward personal factors and all failures are attributed spiral occurring in markets the investor finds to external or situational factors which are it difficult to cope up with the loss suffered. beyond their control. This bias is commonly In short, an assumption that everything will found when people want to enhance their automatically restore to normalcy. self-esteem. An investor suffering loss will Impact bias attribute the reason to bad stock market conditions even if their decisions were wrong The impact bias, a form of which is the in stock picking. Similarly if he has earned or durability bias, in affective forecasting, is the made any profit would attribute the reason to tendency for people to overestimate the his knowledge or judgement made in length or the intensity of future feeling state investing. This bias is often observed in [41]. For example, an investor who makes a Mutual fund investment where the portfolio windfall gain from investing has a feeling or the scheme manager attribute all losses to that his excitement of the gain will last the poor market conditions and all gains to forever. However, as few months pass by the their knowledge and skills [70]. feeling gradually vanishes with negative events happening in their personal life. Dan Normalcy bias Gilbert, a social psychologist at Harvard This is a psychological phenomenon where University in his book “Stumbling of people tend to underestimate the probability Happiness” discussed this bias and provided of a disaster happening and the catastrophic behavioral insights to this type of bias [93]. effect it could have on the life and property. Choice paralysis bias There is a feeling that if a disaster has not happened until now than will not happen This is a bias, which occurs when an anymore and everything is perfectly normal. individual is offered with too many choices. When the real disaster happens, the He fails to decide which option to pick for

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ISSN 2349-2325 (Online); DOI: 10.16962/EAPJFRM/issn. 2349-2325/2015; Volume 10 Issue 1 (2019) seeking an optimal result. This usually believe that people understand him better happens when an investor seeks a perfect than they actually do. This occurs in financial solution and the fear of making a wrong investing where an expert understanding of a decision results in a no decision made at all. product leads the investor to make a decision Choice paralysis is also called the paradox of of buying or selling without making a proper choice and developed by Barry Schwartz analysis of the underlying product. Excessive who said that the more choices an individual knowledge causes wrong decision [46]. In has the less likely that he will take action and 1990, Elizabeth Newton, a Stanford Graduate equally likely that he would not be satisfied performed an experiment that illustrates the with the decision [72]. For example, an curse of knowledge bias. investor has the option to choose from Ambiguity aversion bias equities, mutual funds, forex etc. He is not been able to make a decision because of many This is another form of bias where an choices he has at his disposal. The primary individual prefers known risks for unknown cause of this bias is also due to information risks. The individual prefers to choose an overload on an investor. alternative where the outcome is certain or known than where the outcome is unknown Curse of knowledge bias or uncertain [44]. An example would be an This is another cognitive form of bias where investor parking his surplus money in fixed knowledge and expertise of any subject income instruments than in speculative or makes an individual vulnerable to curse. The volatile instruments. In the former the income more familiar you are with any subject, the that he is going to earn is certain and harder it is for you to put yourself in the shoes unambiguous than the latter option. The of someone who is not familiar with that investor performs a mental calculation at the thing. A person cannot unlearn what he has back of his mind of income that would accrue learned or experienced over the years and at to him before shelling out money in stocks. the same time, he cannot go to the basics and Blind spot bias learn it again [42]. It becomes difficult to explain the subject to others who are new to A psychological tendency where people it and think according to their level of believe that they are more correct in their understanding. This bias causes a person to judgement and analysis than that of their

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ISSN 2349-2325 (Online); DOI: 10.16962/EAPJFRM/issn. 2349-2325/2015; Volume 10 Issue 1 (2019) peers. People believe that they are more is the same. Another example would be an capable and have superior abilities in terms investor receiving 50100 rupee as dividends of performance in comparison to others. A and he would spend the 100 rupee first and person with blind spot bias is most likely to retain the 50000 rupee. ignore advice and listen to another person’s Disposition effect bias evaluation. This bias has the potential to create conflicts within the Organization, as This is the most irrational of all the human people with these biases are averse to behavior. The tendency of an investor to sell criticism and do not make efforts to improve stock, which has risen in value, rather than decision-making. Even after providing stock, which has gone down in value. training people exhibit resistance to change Financial prudence say that an investor their views, usually adamant and unwilling to should hold stocks, which is rising in value change the quality of their decision. In because that stock has the probability to finance it is seen an Investor making a buy or generate greater returns in future. Behavioral a sell decision of a stock and advising others scientist have time and again tried to to do the same no matter how incorrect the understand as to what is the motive that advice is [73] drives this behavior and the Prospect theory developed by Daniel Kahneman & Amos Denomination bias Tversky in 1970 is the best available The denomination effect is a form of bias description of this behavior & risk perception where an individual is likely to spend the by an investor as of date [74]. smaller denomination of currency than the False consensus bias larger ones. This effect is commonly observed in investing where an Individual This is a form of cognitive bias where there has more propensity to buy the stock when is an inherent tendency of an individual to the asset class is comparatively larger than assume that others have accepted their the smaller ones [53]. For example if an opinions, viewpoints & belief around them. individual is having a 100 rupee note and at There is a perception that a consensus exists the same time ten 10 rupee note on his wallet where in fact it is not. There is “false he is more likely to use the ten 10 rupee note consensus”. For example, an investor might first instead of the 100 even though the result have invested in a particular category of stock

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ISSN 2349-2325 (Online); DOI: 10.16962/EAPJFRM/issn. 2349-2325/2015; Volume 10 Issue 1 (2019) and he starts advising others to invest in that Another example of cognitive bias where stock with the belief that the other person people react differently to a particular choice would exactly do what he has done. This bias depending on weather the choice is projected increases a person self-esteem but he may as a loss or a gain. Simply put, the same facts feel worthless later on when he realizes that if presented in two different ways could lead he has overestimated his skills, knowledge to two different outcomes. This occurs and and abilities [75]. relative to how the information is presented or depicted. For example if in a stock market Familiarity bias analysis a falling stock is analyzed as a good A psychological tendency of an individual to stock and a rising stock is analyzed as a bad develop liking or preference for an object stock the investor would make up his mind to with which they are familiar. The human put money based on those analysis. Lot of mind comes to a decision quickly based on market mis-selling happen due to this bias similarities of past events and come to a and gullible investors fall an easy prey to conclusion of the current situation. This bias unscrupulous stock market analyst. The best may therefore mislead in future. For example way to guard against framing bias is to if a person is familiar with an equity stock thoroughly read and understand the than it is very likely that he would invest in information and see what impact it could equities leaving all other investing options. have on the conclusion [31]. Once this bias sets in for a particular object it Endowment bias is very difficult to change perception about that object no matter how attractive the This is a situation where an individual gives alternative options are. Another example value to an object, which he owns than could be an investor trusting a financial something, which he does not, owns. adviser whom he has met only once without Endowment effect was popularized by Thaler actually finding out if he is really experienced in 1980, people would often demand more to or competent enough to give advice. Also give up an object than they would be willing known as the mere exposure effect [30]. to pay to acquire it. For example, an investor holding on to falling stocks with the hope that Framing effect bias it will fetch higher returns if retained for a longer period. They consider their holdings

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ISSN 2349-2325 (Online); DOI: 10.16962/EAPJFRM/issn. 2349-2325/2015; Volume 10 Issue 1 (2019) as valuable. This happens due to endowment is either not informed or misinformed and effect. This is the reverse behavior of a they form opinions contrary to their beliefs. rational investor. It is often seen that an People prefer to go with the majority instead investor is willing to pay significant extra for of going on their own. A common tendency a particular thing if he believes that by paying is observed where people adopt opinion and more he will very shortly own that particular follows the behavior of the majority so that thing. This bias led many people to debt trap they feel safe and avoid conflict. Also known from where they were never been able to as the “Herd Mentality”. Either they are not come out [76]. interested to do their own analysis or they find it time consuming. They have a feeling Regret aversion bias that if somebody has done it is advisable to This is a bias where there is a fear or feeling go with that tribe and follow them [77]. The that the decision taken today would prove financial meltdown of 2008-09 caused wrong in the future. People tend to avoid because of this. People moved in herds to expensive mistakes and all decisions appear obtain subprime loans and when all defaulted to them as costly. An individual prefers to not on their debts leading to crisis in the entire take a decision at all or put money in a project global financial economy than to regret later on the outcome of that Gambler’s fallacy decision. Financial investments come with due share of losses and gains and the risk This is a false assumption that a current event averse investor prefers to minimize the will determine the outcome of a future event. feeling of pain by deliberately choosing risk In other words, the probability of an event averse strategies [32]. decreases when it has occurred very recently but actually, the result of a future event is Social proof bias unrelated to the result of a current event. For This bias is otherwise known as the example, an Investor putting money in stocks bandwagon effect or group thinking. This in particular sector say telecom, and he earns occurs when an individual does or says good returns out of it & satisfied. Now the something because they have seen some Investor starts investing in infrastructure people around them speaking of the same sector stocks with the hope that it will give thing. This bias creeps in when an individual him good returns because of his experience

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ISSN 2349-2325 (Online); DOI: 10.16962/EAPJFRM/issn. 2349-2325/2015; Volume 10 Issue 1 (2019) with the telecom sector stocks. The investor suggested this in year 2002. When Finance commits gambler’s fallacy because the return managers are confronted with two options on infrastructure stock has no relation at all such as which region is more investor with the telecom sector stocks. Investor friendly, Asia or Europe, they are more likely falling prey to gambler’s fallacy is highly to choose the option with which they are vulnerable to run into severe debt trap [78]. familiar. The decision made using this heuristic is more likely to be correct when Affect heuristics taken under time pressure because there is Affect heuristic is a mental shortcut where limited information search. People with little people jump to a decision quickly and knowledge of stocks and even less instantly. The feeling of good or bad drives knowledge of markets invest in stocks they the ultimate decision of the individual [58]. believe in and hold them for longer periods. Researches have shown that if an individual They rarely sell those and add only once in is in a positive mental state than he is more their portfolio. This behavior is an example likely to perceive any decision as giving good of fast & frugal heuristics [79]. benefits with low risk. Conversely, if a Similarity heuristic person is in negative state of mind than the decision will be perceived as low in benefits Similarity heuristic is a psychological and has high risks. This emotional response tendency to make decisions based on plays a significant role in personal finance & experience. An individual tries to pick up investing and could potentially lead to wrong similarities from the favorable experience he decisions made, opportunities missed leading had in the past and makes judgements or to unfavorable outcome. decisions based on those experiences [8]. For example, an investor will look for those Recognition heuristics stocks similar to what he had purchased a few The tendency of an individual to compare years back and he will mentally try to figure two available options using some fixed out the similarities with those stocks before criteria’s and then choosing one of the investing. Understanding of heuristic are alternatives. There is a bias that the useful as they sometimes lead to faulty recognized object is more valuable than the decisions. The common heuristics are unrecognized one. Goldstein & Gigerenzer availability, representative & base rate [80]

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ISSN 2349-2325 (Online); DOI: 10.16962/EAPJFRM/issn. 2349-2325/2015; Volume 10 Issue 1 (2019) Information bias caused by inaction to lesser harm caused by the action. Financial managers believe that a This is a tendency for individual to seek more recent financial proposal is not feasible or and more information even if the information risky than the existing project, which are is not relevant to the decision. This bias giving less returns even though the cost of occurs when any information is either both the project alternatives may be the same. inaccurately measured or recorded Wrong cash flow estimation happen in incorrectly. In large organizations, Senior project financing due to this bias [9]. Leadership tries to source information from multiple sources before investing in projects Post decision rationalization bias and asks for more reports and analysis. They This bias occurs when people have invested have a bias that the value of this information considerable effort, time & money in any would largely mitigate the risk in a project activity and they try to convince themselves [81]. that the expenditure incurred is worth it. Outcome bias People initially overlook the negatives while making a decision and then attempt to justify The tendency to see the results by its outcome the wrong choice made & try to convince instead of the quality of decisions taken at others. Also known as the choice supportive that time. A failed project does not mean that bias [14]. Financial managers often reject the decision was wrong and attributed to good proposals and they feel that the initial other factors unrelated to the project or may cost incurred is the best and further review or be that was the best alternative. Financial estimation of cash flow is not required [26]. managers often review the same project multiple times to overcome outcome bias. Source credibility bias Baron and Hershey described this bias in The belief that the person, organization who their paper “Outcome bias in decision has provided that information or the source of evaluation” [21]. that information is not credible. This Omission bias information’s are ignored or rejected even if they are right & authentic. The reverse is A tendency to see future harmful actions as accepting information from untrusted source worse instead of equally harmful inactions or with a belief that they are true and genuine. omissions. At times, people prefer harm

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ISSN 2349-2325 (Online); DOI: 10.16962/EAPJFRM/issn. 2349-2325/2015; Volume 10 Issue 1 (2019) This bias ultimately results in poor financial project a rosy picture based on past results to decision-making because of under estimation Investors when they are in need of funds for of the trusted and reliable source [92] expansion or diversification and resulting in bad decisions [83] Student Syndrome In-group bias This is the tendency to wait until the deadline date to finish or start approaches. Sir Goldratt The tendency to give importance or popularized this bias in 1997. The name is preference to person who belong to the same derived from behavior in students where they group. This is observed when one favors start to study a night before the exam starts. person who belong to the same race, In Financial, budgeting the departments starts ethnicity, religion or nationality. There is an to utilize the budgets at the end of the year “Us Vs Them” feeling where people treat when the budget period ends. Also, in another those in the outgroup differently than those in example would be filing annual financial the in-group [25]. This usually happens in reports when the last date has approached. financial decision making where there is Also, called procrastination and a belief that representative members from different work is better done when the deadline business units. The decision maker prefers to approaches and the task gets priority for accept opinions or suggestions from the completion. This bias is a big obstacle to member who is from his group or department working efficiently especially projects, and tend to ignore other group members [84] which are critical, and time bound [82]. Generation effect Optimism bias The generation effect refers to the finding This is popularly known as wishful thinking. that people remember information better Beliefs, decisions & actions, which look very when they actively participate to produce it, appealing but very hard to achieve or cannot rather than being provided by someone else. be achieved rationally. A belief that the future An individual will retain information, which will be much better than the present. he has actually experienced or dealt with Financial projections are usually associated before than something, which he has heard or with this type of bias. By being optimistic read. For example, a Finance manager who Finance, managers make estimates and try to had a tough time to secure a bank loan would

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ISSN 2349-2325 (Online); DOI: 10.16962/EAPJFRM/issn. 2349-2325/2015; Volume 10 Issue 1 (2019) remember it for long than if he would not if it presented in proper viewable format. The have faced at all. This bias actually is a good audience appreciates a power point slide or a strategy for learning [90]. video projector running film associated with pictures, images and graphs [89]. Hindsight bias Conjunction fallacy The bias where people believe that they knew the outcome of the event before it actually An unwanted importance to detailed happened. This phenomenon is referred to, as scenarios. People often erroneously judge the “I knew it all along”. People foresee all probability of two events occurring together outcomes as predictable with all the available as higher than the probability of occurrence information at hand. In Finance, this happens of one of the events [20] It is a faulty when the Organization or the respective assumption that detailed conditions are more department fail to meet the revenue targets. probable and likely to happen than general This bias sets in and they feel convinced that ones [47]. For example if a Finance manager they were sure of the outcome beforehand is asked to select one funding proposal from and their predictions were stronger & many he will choose and pick the one which inevitable [23] has the maximum details attached to it even though it may not be the best available Picture Superiority effect option. This leads to indecision and waste of As the saying goes “A picture is worth 1000 valuable time & effort. words”. People tend to remember when facts Repetition bias are presented pictorially or graphically than by mere words or sentence. Picture A belief that if something is talked about by superiority effect play a significant role in most number of people most of the time than retention & recognition memory. Human that particular thing is most likely to be good. memory captures information using two A general belief that if a particular thing is different codes, the “verbal” code and the spoken at length by too many people than “Image” code. Visual images are easy to there is some truth in it and is blindly remember and easily retrievable when believed. Research shows that when a person required. In Finance, a budget or a financial is uncertain about something than there is a project proposal is more likely to be approved tendency to seek approval from others to

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ISSN 2349-2325 (Online); DOI: 10.16962/EAPJFRM/issn. 2349-2325/2015; Volume 10 Issue 1 (2019) reinforce the certainty [19]. The more a to discount them. In personal finance, particular subject is repeated the truer it investment behavior is patient in the long run becomes. This bias is also known as the and impatient in the short run. People are “illusory truth effect”. Repetition bias is the impatient in the For example, a Finance memory effect and likely to result in wrong manager would prefer to invest 5 million now decision in critical business situations. with immediate cash flow than on one with 10 million-investment cash flow after 5 Zero-risk or certainty effect bias years. Management’s short-term vision & A preference of certain or small benefits over eagerness for instant returns is often the root larger ones, which are uncertain. This is the cause of this bias [86] same, as “I will play safe”. Uncertainty is a Control illusion dynamic state and Individuals are naturally averse to avoid discomfort and A belief of the decision maker that they will unpleasantness. This bias occurs because be able to control the outcome of an event in people try to reduce this feeling. Zero-risk future even though they have no influence. solutions are usually preferred for risky This illusion develops when the participants decisions [91]. Financial managers prefers to are involved too much personally and try to avoid small risk rather than mitigating a influence the outcome. Sometimes Finance larger one. Another example could be an Managers make impractical financial investor’s preference for fixed deposits projections of cost & revenue with the where he is certain that he would get the impression that they will be able to contain return irrespective of the market situation. the cost and increase the income but in Kahneman and Tversky introduced certainty reality, it is not possible as externalities come effect in 1979 [18]. into play. This is similar to being overambitious in business situations not Discounting bias under control [16]. The preference to smaller returns to longer Experiential limitations returns especially when the smaller returns accrue within a short period. Also, known as This bias occurs when an individual limit hyperbolic discounting. The delay in reward their current or future activity based on makes them less attractive and people choose previous experiences. People fail to think

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ISSN 2349-2325 (Online); DOI: 10.16962/EAPJFRM/issn. 2349-2325/2015; Volume 10 Issue 1 (2019) further & beyond. There is a tendency to return optimization, asset allocation reject unfamiliar things even if it appears to strategies, and finally the investment be profitable & they tend to focus on outcome. The study of these biases can help evaluation of a single activity or choice. Bad the Financial Service Industry to devise experiences of the past stop a person to get suitable products and services so that the into trouble again even though the action is Investor do not make wrong decisions. promising or likely to benefit. This bias Further, it explains the reasons & emotions inhibits creativity, as there is a tendency to that guide the decision-making process and reject good ideas and hinders Organizational save investors from damaging their own growth [87] financial position & future prospects. In an uncertain environment, knowledge of bias & CONCLUSION heuristics can help reduce risk & can aid Behavioral finance is a wonderful decision-making. The biases discussed above supplement to the demerits of economic would be a useful guide & provide a theory and has important academic and framework to devise appropriate investment practical application. Behavioral biases strategies to investors and managers. The sometimes are a greatest threat to a person’s subject has assumed an important role all wellbeing. These biases historically have over the world in recent times. been studied empirically and a majority of the empirical literature uses experimental REFERENCES:- economics and surveys. Behavioral Finance could not adequately explain as to why 1. https://www.toptal.com/finance/finan Investors over react under certain situations cial-analysts/investor-psychology- and under react under other circumstances. behavioral-biases Behavioral finance assumes that financial 2. http://www.iaeme.com/MasterAdmin markets are informationally inefficient which /UploadFolder/IJCIET_09_06_130- practically is not. Only a few of the biases 2-3/IJCIET_09_06_130-2-3.pdf discussed in the paper considered real live 3. https://www.disea.uniss.it/sites/st06/f data from individual. Behavioral finance iles/ricerca/katerina_korena_the_mos attempts to find an answer & explain t_important_behavioral_biases_in_in irrational financial and investment decisions. vesting.pdf Psychological bias can influence the risk-

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ISSN 2349-2325 (Online); DOI: 10.16962/EAPJFRM/issn. 2349-2325/2015; Volume 10 Issue 1 (2019) 4. Sahi, S., Arora, A. P., & Dhameja, N. 14. https://www.cfainstitute.org/Browse (2013), ―An exploratory inquiry into Pages/TopicsPublicationsBrowseVie the psychological biases in financial w?Topics=Behavioral%20Finance investment behavior,‖ Journal of 15. https://www.cfainstitute.org/en/resea Behavioral Finance, 14, 94–103. rch/financial-analysts- 5. https://journals.sagepub.com/doi/abs/ journal/2007/behavioral-finance-and- 10.1177/0972622517738833 wealth-management 6. https://acadpubl.eu/jsi/2018-118- 16. https://www.researchgate.net/profile/ 18/articles/18b/56.pdf Helena_Matute/publication/Illusion- 7. http://journals.euser.org/files/articles/ of-control-The-role-of-personal- ejnm_v1_i2_18/Blerina.pdf involvement.pdf 8. http://www.academia.edu/30268345/ 17. http://www.behaviorlab.org/Papers/ HEURISTIC_AND_BIASES_RELA Hyperbolic.pdf TED_TO_FINANCIAL_INVESTM 18. https://reflectd.co/2013/08/10/the- ENT_AND_THE_ROLE_OF_BEH certainty-effect-we-overweight- AVIORAL_FINANCE_IN_INVEST outcomes-that-are-considered- MENT_DECISIONS_A_STUDY certain-relative-to-outcomes-that- 9. https://www.safalniveshak.com/wp- are-merely-possible/ content/uploads/2013/11/Understand 19. http://psychology.wikia.com/wiki/Re ing-Behavioural-Biases-in-Finance- petition_bias Investing.pdf 20. https://www.researchgate.net/profile/ 10. https://www.ripublication.com/irbf17 Simon_Klein5/publication/32142238 /irbfv9n1_11.pdf 5_Avoiding_the_conjunction_fallacy 11. http://dl4a.org/uploads/pdf/52.pdf _Who_can_take_a_hint/links/5a2143 12. https://aeca.es/old/refc_1972- f7a6fdcc6a18bbe3dc/Avoiding-the- 2013/2013/157-5.pdf conjunction-fallacy-Who-can-take-a- 13. http://shodhganga.inflibnet.ac.in/bitst hint.pdf ream/10603/203432/6/06.chapter%2 21. https://www.interaction- 02.pdf design.org/literature/article/outcome- bias-not-all-outcomes-are-created- equal

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ISSN 2349-2325 (Online); DOI: 10.16962/EAPJFRM/issn. 2349-2325/2015; Volume 10 Issue 1 (2019) 47. https://www.researchgate.net/profile/ 55. https://tejas.tcarts.in/pdf/june16_beh Simon_Klein5/publication/32142238 aviouralfin.pdf 5_Avoiding_the_conjunction_fallacy 56. https://corporatefinanceinstitute.com/ _Who_can_take_a_hint/links/5a2143 resources/knowledge/economics/sun f7a6fdcc6a18bbe3dc/Avoiding-the- k-cost/ conjunction-fallacy-Who-can-take-a- 57. https://pdfs.semanticscholar.org/1f2e hint.pdf /f6ac3a71bdb2f8b1e2555e456798e0 48. https://hbr.org/2014/10/identifying- d40d84.pdf the-biases-behind-your-bad- 58. http://blog.ev.uk/behavioural- decisions finance-the-influence-the-affect- 49. https://ift.world/wp- heuristic content/uploads/2018/02/R06-The- 59. http://library.mpib- Behavioral-Biases-of-Individuals- berlin.mpg.de/ft/tp/TP_How_2012.p IFT-Notes.pdf df 50. http://oakharvestfg.com/blog/2018/0 60. https://econtent.hogrefe.com/doi/10. 3/28/exploring-the-behavioral- 1027/2151-2604/a000284 biases-of-investing/ 61. https://pdfs.semanticscholar.org/9b6 51. https://www.researchgate.net/publica 9/665e272ca9ce41147c67afdbe285b tion/227466891_Beyond_Greed_and 29c4308.pdf _Fear_Understanding_Behavioral_Fi 62. https://effectiviology.com/halo- nance_and_the_Psychology_of_Inve effect/ sting 63. http://www2.um.edu.uy/abalsa/semin 52. http://www3.psych.purdue.edu/~will arios_2013_archivos/Three%20level ia55/392F- %20recogntion%20heuristic%20Ego '06/HewstoneRubinWillis.pdf zcue.PDF 53. https://internationalbanker.com/brok 64. https://doi.org/10.3389/fpsyg.2011.0 erage/cognitive-bias-series-6- 0147 denomination-effect/ 65. https://core.ac.uk/download/pdf/1591 54. https://gupea.ub.gu.se/bitstream/207 45455.pdf 7/1619/1/0506.34.pdf 66. https://www.coglode.com/gem/ancho ring-bias

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ISSN 2349-2325 (Online); DOI: 10.16962/EAPJFRM/issn. 2349-2325/2015; Volume 10 Issue 1 (2019) 88. http://www.sarvervrooman.wfadv.co judgment: Bias, expertise, and the m/files/68283/18_Key_Behavioral_S judge's point of view. Journal of arver-Vrooman_WFA_4cF_hi- Personality and Social Psychology, res.pdf 37(1), 48-74. 89. https://tactics.convertize.com/definiti 93. https://jamesclear.com/book- ons/picture-superiority-effect summaries/stumbling-on-happiness 90. https://escholarship.org/uc/item/4r62 94. https://www.sciencedirect.com/scien 3773 ce/article/pii/B978044453265750021 91. https://tactics.convertize.com/definiti 4 ons/zero-risk-bias 95. http://www.emeraldgrouppublishing. 92. Birnbaum, M. H., & Stegner, S. E. com/products/journals/journals.htm?i (1979). Source credibility in social d=rbf

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