Psychological Biases, Main Factors of Financial Behaviour - A Literature Review

Abstract

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.