Role of Cognitive Bias in Investment Decision Making
Date
2024
Authors
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Journal ISSN
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Publisher
Shanker Dev Campus
Abstract
This study explores the influence of cognitive biases on investment decision-making
among Nepalese investors, focusing on overconfidence bias, illusion of control bias,
anchoring bias, and loss aversion bias. Using a descriptive research design, data were
collected from 384 active investors in the Nepal Stock Exchange through structured
questionnaires. The results reveal that cognitive biases significantly shape investment
decisions, often leading to irrational behaviors and suboptimal outcomes. Overconfidence
bias emerged as a dominant factor, with investors overestimating their predictive abilities
and underestimating risks. Illusion of control bias was also prominent, as participants
believed they could influence market outcomes, leading to excessive risk-taking.
Anchoring bias reflected a fixation on initial reference points, such as purchase prices,
while loss aversion bias highlighted a tendency to prioritize avoiding losses over potential
gains, resulting in poor portfolio adjustments. The findings align with behavioral finance
theories, particularly Prospect Theory, emphasizing the need for financial literacy
programs and behavioral interventions. This study contributes to the behavioral finance
literature, offering actionable recommendations to mitigate biases and foster rational
investment practices, thereby enhancing market efficiency in Nepal.