Decision Making in Financial Markets: A Thematic Review and Discussion

Abstract

Financial decision making is generally characterized by high degree of risk, uncertainty as well as complexity. Decision making in financial markets takes under consideration a stack of factors including personal, technical and situational factors and above all it necessitates an understanding of human instinct on the top of financial skills. In the broad arena of literature, research studies have proposed two primary themes of decision making-one is the rational approach and the another one is irrational or bounded rationality approach. Rational world presupposes being reasonable in every aspect and making unbiased decisions. Irrationality approach contents that investor behaviour is driven by emotions even if they are well informed. This research paper by using the relevant literature in the field of behavioural decision making and investor psychology, provides an overview of these two distinctive academic doctrines, which clears the way-out that how in actual world people undertake their decision making. Furthermore, this research paper reviews how behavioural biases can lead to errors in investment decision making.

The mediating effect of the COVID-19 pandemic on heuristic techniques and cognitive biases on investment decision-making

“…Due to this situation, this paper explores the knowledge gap and seeks an explanation of how or why the COVID-19 pandemic influenced investors' investment decision-making as correlated to the existing heuristic techniques and cognitive biases. Bisati, Ganai, and Gulzar (2021) posited that investors typically use behavioral heuristics to resolve their decision-making processes, which can result in solid investment decisions without utility maximization and systematic errors in judgment. Investment decisions matter.…”

Influence of Heuristic Techniques and Biases in Investment Decision-Making: A Conceptual Analysis and Directions for Future Research

“…On the contrary, in reality, Investors are assumed to behave irrationally in the market: trade excessively, acquire stocks without considering the underlying value, purchase stocks following influence from family and friends, and make judgments on historical performance. In addition, investors usually resolve their decision-making process using behavioural heuristics that might give rise to systematic errors in judgments and induce good investment choices devoid of utility maximization (Bisati et al, 2021). According to Raheja et al (2019); Triani and Tarmidi (2019), Individuals make diverse investment decisions and choices.…”