Behavioral biases influencing the investment decision-making process of institutional investors

Abstract

Nowadays people must take variety of large or small decisions. Some choices are easy and simple, while others are complex and require a multi-step approach in making the right decisions. This study evaluates the impact of behavioral biases that institutional investors must face while making investment decision. Behavioral bias is defined as a pattern of variation in judgment that occurs situations, which may sometimes lead to perceptual alteration, inaccurate judgment, illogical interpretation, or what is largely called irrationality. Decision making is the mental or the cognitive process that results in the selection of a course of action among several alternative situations. Every decision-making process comes to its end with a final choice. The aim of this study is to specify the impact of behavioral biases such as overconfidence bias, herding bias, representativeness, and home bias on investment decision making among institutional investors.

First, we are going to present emotional and cognitive biases, then we will try to theoretically explain the processes of investment decision making and investment strategies of the institutional investors, and finally we will evaluate and define the impact of these behavioral biases on the investment decision making of the institutional investors following the previous studies in literature.