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Influence of behavioral biases on investment decisions. The importance of financial education in times of crisis

Author

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  • Armenteros-Ruiz, Tamara
  • Benito, Leandro
  • López-Penabad, María-Celia

Abstract

While classical financial theories assume the rationality of the individual, Behavioral Finance supports the influence of cognitive and emotional aspects on investment decisions. The objective of this study is to contribute in this field by analyzing the presence of five biases –Overconfidence, Herd Behavior, Player Fallacy, Hot Hand Fallacy, and Domestic Bias– and their relationship with the personal characteristics of the investor, in particular with his EFE. We also analyze the effect of the financial crisis derived from Covid-19 on the aforementioned biases. This work is based on 109 questionnaires carried out in Galicia to individual investors, both real and potential, operating in the stock markets. The results confirm the existence of such biases, their relationship with some personal characteristics, a lower presence in individuals with greater financial knowledge and the intensification of Overconfidence and Herd Behavior during prolonged crises.

Suggested Citation

  • Armenteros-Ruiz, Tamara & Benito, Leandro & López-Penabad, María-Celia, 2023. "Influence of behavioral biases on investment decisions. The importance of financial education in times of crisis," Revista Galega de Economía, University of Santiago de Compostela. Faculty of Economics and Business., vol. 32(1), pages 1-27.
    • Handle: RePEc:sdo:regaec:v:32:y:2023:i:1_1
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    Keywords

    Behavioral Finance; Biases; Economic and Financial Education; Investment decisions; Stock markets;
    All these keywords.

    JEL classification:

    • G41 - Financial Economics - - Behavioral Finance - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making in Financial Markets
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty

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