Decision-makers are often subject to various behavioural biases. Although they may affect both retail investors and professional money managers, behavioural biases are likely to be more severe among retail investors.
The objective of this short note is to present an overview of the main biases that have been detected and to describe how one can empirically identify and measure them. We start by introducing two broad types of behavioural biases: those affecting beliefs and those affecting preferences. Then we discuss some of the most popular biases that can be traced among investment decisions: (1) excessive trading, i.e., investors trading more than what can be justified by rational choice, (2) disposition effect, i.e., the tendency to sell winning stocks and hold losing ones and (3) home bias, i.e., investors’ portfolio tilt towards domestic equities.
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