Mind and Money: The Impact of Cognitive Biases on Investor’s Decision-Making

Abstract

Logic and rationality are two terms that often clash in the investor’s mind at the time of making decisions and multiple studies including the “Prospect Theory” (“Kahneman and Tversky”, 1979, 1982) explain this conflict of the human mind. Through this study, the researchers have attempted to explore the impact of three cognitive biases, namely, availability, hindsight, and anchoring, on the investor’s decision-making process.It’s a cross-sectional descriptive study conducted among a sample of 137 investors chosen from different demographic profiles including gender, age, and income. The three cognitive biases (availability bias, hindsight bias, and anchoring bias) were chosen as the independent variables, and the investor’s decision-making (measured through two sub-constructs namely tenure and risk diversification) is the dependent variable. The questions were generated using Pompian’s study (2011) on biases and the data was collected from the respondents using Google Forms. The Structural Equation Modeling using SPSS Version 20 was used for analyzing the data.The findings of our study state that while availability bias and hindsight bias have a significant positive impact on an investor’s decision-making, the same doesn’t hold true about the anchoring bias. Anchoring bias is measured to have a positive but mostly insignificant impact on an investor’s decision-making. Hence, this study too adds to the vast literature of studies on cognitive biases and holds it can mold the investor’s decision-making choices and hence, can provide guidance to the policymakers during policy decision-making. The findings can also serve as eye-openers to the various capital market investor about the various invisible factors that can divert their logical.