Behavioural Biases in Investment Decision Making

Behavioural finance is the study of the influence of the psychological factors on financial markets evolution. Investors fall prey to their own and sometimes others’ mistakes due to the use of emotions in financial decision-making. Investors are people with a very varied number of deviations from rational behaviour, which is the reason why there is a variety of effects, which explain market anomalies. Classical finance assumes that investors are rational and they are focused to select an efficient portfolio, which means including a combination of asset classes chosen in such a manner as to achieve the greatest possible returns over the long term, under the terms of a tolerable level of risk. Behavioural finance paradigm suggests that investment decision is influenced in a large proportion by psychological and emotional factors and even group behaviour.