Empirical Research on the impact of behavioral biases on decision making.

1. Impact of Behavioral
Biases on Risky
Decision making
Snawer Gill
MS-Finance
Topic:

2. Behavioral Finance
Behavioral Finance (BF) is an emerging
discipline that represents a collection of
alternative approaches to refine the classical
finance definition of economic rationality. In
particular, BF draws on the psychology and
cognitive science literatures to examine why
individual decision-making often deviates
from rational choices in systematic ways.

3. Behavioral Finance
Behavioral finance studies how
subjective behavioral elements
introduce distortions (twist) in the
individual’s decision-making process.

4. Behavioral Biases
The existence of most of the particular
cognitive biases listed has been verified
in psychology experiments.

5. Abstract
How the decision making is effected by behavioral
elements.
Outcomes of empirical study.
Decision-making and behavioural biases.
Behavioral Biases: (A list of B.B has been studies)
My Research Gape
The correlation of Overconfidence, confirmation and
gambling biases. This study will check the
simultaneous effect of these biases on rational
decision making.

6. D.V Decision Making
I.V Over-confidence,
Confirmation Bias
Gambler’s Fallacy

7. Introduction
Researchers have proved that investors make
unreasonable investment decision.
Overconfidence bias is an affecting component of the
decision making process.
The overconfidence upshot is a well-established bias.
According to Shefrin, overconfidence “pertains to how well
people understand their own abilities and the limits of
their knowledge” (Shefrin, 2007).
The tendency for explanations of other individuals'
behaviours to overemphasize the influence of their
personality and underemphasize the influence of their
situation.
Overconfidence is an unrealistic positive views of one’s self
and one’s performance.

8. Over Confidence Bias
Overconfidence=
Expected performance > Actual
Performance
Overconfidence (-ve) Decision Making

9. Over-Confidence
Overconfidence is considered the most
robust finding in the psychological
finding of judgment. (Bondt and Thaler,
1995).

10. Scenario I: Your real performance or result would be
given to check-up in 10 minutes.
Scenario II: Your real performance or result would be
given to check-up next week.
It’s natural that you will be less overconfident in the
first one. Now why? Your reality principle of loss
aversion or overconfidence avoidance is activated now.
You ovoid the overconfidence state and you know that
your real performance is given up. You prefer
to see yourself as an under confident subject than
overconfident.
The under confidence sate makes you happier!

11. How does it affect investors’ decision?
Overconfidence causes investors to
misinterpret the accuracy of our
information and overestimate our skill in
analyzing them.
This can lead to poor investment
decisions, excessive trading (Odean
1999), risk taking, and ultimately
losses.

12. Confirmation Bias
Confirmation Bias is a psychological
phenomenon that explains that why
people tend to seek out information
that confirms their existing opinions and
overlook or ignore information that
disproves their beliefs.

13. Confirmation bias is also a cognitive
bias. Its tendency to affect decision
making is greater in males as compare
to females (Zipporah, 2014).
Confirmation Bias

14. Gambling Bias: Forming portfolios
Gambler’s Fallacy is the tendency to
think that future probabilities are
altered by past events, when in reality
they are unchanged. The expectation of
growth in the future is related to
another bias called gamblers’ fallacy.
Introduction

15. Gambling Bias: Forming portfolios
to implement portfolio theory, expected
return, risk, and correlations are
needed. However, mental accounting
makes it difficult to view these factors
accurately
Introduction

16. Gambling Bias: Forming portfolios
So far, overconfidence and gambling
biases have a simultaneous impact on
investment decision making. This study
also contributes into literature that
gambler’s fallacy leads decision makers
in a negatively auto- correlated decision
making.
Introduction

17. Gambling Bias: Forming portfolios
For example, in a fair coin toss people
may believe that a sequence of coin
flips as “HTHTHTH…..” is more likely to
occur than a sequence of “TTTTTH”
(Daniel Chen, Tobias J. Moskowitz, &
Kelly Shue, 2014)
Introduction

18. Introduction

20. Probability

21. Considering the past
People use their past outcome as a
factor in evaluating a current decision.
People are willing to take more risk
after gains (house money effect) and
take less risk after losses (snake bite or
risk aversion).

22. Daily KIBOR Rates as on 27thMay 2015
Daily KIBOR Rates
As on 27th May, 2015
27th Jan 27th Feb 27th Mar 27th Apr 27th May
1-Week 8.85 % 8.40 % 7.91 % 7.59 % 6.83 %
2-Week 8.84 % 8.47 % 7.93 % 7.74 % 6.84 %
1-Month 8.84 % 8.50 % 7.91 % 7.81 % 6.84 %
3-Month 8.63 % 8.44 % 7.94 % 7.76 % 6.78 %
6-Month 8.63 % 8.70 % 7.95 % 7.74 % 6.78 %
9-Month 8.90 % 8.68 % 8.20 % 7.97 % 7.06 %
12-Month 8.96 % 8.76 % 8.20 % 7.95 % 7.14 %
2-Years 8.14 % 8.26 % 8.30 % 7.52 % 7.34 %
3-Years 8.42 % 8.34 % 8.41 % 7.61% 7.58 %

25. Actual Previous Highest Lowest Dates Unit Frequency
7.00 8.00 20.00 7.00 1992 -
2015
percent Daily

26. Objectives of study
The objectives of this study are;
To investigate the relationship of
overconfidence with gambling bias.
To investigate the relationship of confirmation
bias with gambler’s fallacy.
To investigate the simultaneous influence of
overconfidence, confirmation and gambling
biases on decision making.

27. Literature Review
Experiment conducted by Zipporah,
2014 shows that human beings are
influenced by a set of cognitive
biases including overconfidence,
confirmation and disposition biases.
Women are affected by confirmation
bias as compare to men.
Decision taker is beyond this phenomenon
that each time there is a new probability
(Daniel Chen, Tobias J. Moskowitz, & Kelly
Shue, 2014).

28. Literature Review
Fundamentally, all the investors make such
propositions and predictions before they go in to
the process of stock investment. For example; the
stock price will remain the same or go up? The
low level of stock exchange graph has a gambling
effect on the investors to predict that stock prices
will rise up (Zipporah, 2014)

29. Literature Review
This study concludes that overconfidence
level in men and women differently influence
the decision making. Women tend to be less
overconfident as when compare to the men.
The empirical results of this study elaborate
that men are more over confident than
women (Pulford, & Colman, 1997).

30. Theoratical Framework
Overconfidence
Confirmation
Bias
Gambling
Bias
Decision Making

31. Hypotheses
Overconfidence
Ha: Overconfidence affects investor’s
decision making while investing in stock
market.
H0: Overconfidence doesn’t affect
investor’s decision making while
investing in stock market.

32. H2
Confirmation Bias
Ha: Confirmation affects investor’s
decision making while investing in stock
market.
H0: Confirmation doesn’t affect
investor’s decision making while
investing in stock market.

33. H3
Gambler’s Fallacy
Ha: Gambler’s Fallacy affects investor’s
decision making while investing in stock
market.
H0: Gambler’s Fallacy doesn’t affect
investor’s decision making while
investing in stock market.

34. Methodology
Research Methodology
This study will be done on the basis of direct
questionnaires presented to the individual investors.
Research questions will be designed in such a manner
that the respondents do not understand that their
biasness level is going to be checked or empirically
tested. Pearson’s Co-efficient of correlation will be
used to analyze the correlation between overconfidence,
confirmation bias, gambler’s fallacy and investor’s
decision making. Chi-square test will be done to check
out the relationship among these biases.