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A comprehensive review of behavioral biases in financial decision-making: from classical finance to behavioral finance perspectives

Authors :
Rasa Kanapickienė
Deimantė Vasiliauskaitė
Greta Keliuotytė-Staniulėnienė
Renatas Špicas
Ahmad Kaab Omeir
Tomas Kanapickas
Source :
Journal of Business Economics and Management, Vol 25, Iss 5 (2024)
Publication Year :
2024
Publisher :
Vilnius Gediminas Technical University, 2024.

Abstract

This paper offers a detailed analysis of the evolution of financial decision-making theories, focusing on the shift from classical finance to behavioral finance. Classical finance theories, including the Efficient Market Hypothesis and Modern Portfolio Theory, assume that investors behave rationally and that the market is efficient. However, these theories have faced criticisms highlighting the importance of considering irrational behaviors in financial markets. Behavioral finance addresses this gap by integrating psychological insights into financial decision-making. This study systematically reviews the literature on behavioral biases that affect individual investors, identifying fundamental biases and their impact on investment decisions. The analysis emphasizes the role of cognitive limitations and psychological tendencies in shaping market dynamics, influencing asset pricing, investment strategies, and market returns. The research also notes a shift in focus from market-level outcomes to the behavior of individual investors, with an increase in publications. The paper concludes that understanding investors’ biases is crucial for developing effective risk management strategies and investment recommendations, ultimately leading to improved market performance. The findings underscore the growing importance of behavioral finance in explaining investor behavior and market anomalies, highlighting areas for future research in this evolving field.

Details

Language :
English
ISSN :
16111699 and 20294433
Volume :
25
Issue :
5
Database :
Directory of Open Access Journals
Journal :
Journal of Business Economics and Management
Publication Type :
Academic Journal
Accession number :
edsdoj.917d54bcc69947b188df81beefec0579
Document Type :
article
Full Text :
https://doi.org/10.3846/jbem.2024.22314