Behavioral Biases and Their Impact on Individual Investment Decisions

Abstract

This study investigates the influence of behavioral biases on individual investment decisions by integrating quantitative experiments and qualitative insights. A sample of 500 investors participated in structured surveys, simulated portfolio allocations under varying market conditions, and lottery tasks designed to elicit loss aversion, overconfidence, herding, anchoring, and confirmation bias. Complementary interviews with 25 investors and advisors provided contextual depth. The data were analyzed using multiple regression, structural equation modeling (SEM), and confirmatory factor analysis, alongside thematic coding of qualitative responses.The results highlight significant deviations from rational decision-making. Overconfidence was associated with excessive trading and reduced portfolio returns, while loss aversion produced strong disposition effects, consistent with Prospect Theory. Herding behavior emerged as a key driver of volatility, particularly under market stress, whereas anchoring and confirmation bias constrained adaptive decision-making. Demographic analysis revealed that younger investors exhibited higher overconfidence, while older investors displayed stronger loss aversion. Cross-country comparisons indicated greater susceptibility to herding and anchoring in collectivist cultural contexts.These findings underscore the enduring role of behavioral biases in shaping investment behavior, even in structured environments. They reveal that psychological distortions not only undermine portfolio efficiency but also contribute to systemic risks in financial markets. The study contributes to behavioral finance literature by providing empirical evidence from both developed and emerging markets, while also integrating technological and cultural perspectives. From a practical standpoint, the results highlight the importance of incorporating behavioral insights into policy, investor education, and financial advisory practices. By addressing these biases through regulatory interventions, digital nudges, and improved financial literacy, stakeholders can foster more resilient and rational decision-making in increasingly complex investment landscapes.