The Effect of Behavioral Finance on Stock Investment Decisions

Statement of the Problem

In the light of conventional financial theory, investors are supposed to be rational, wealth-maximizers and follow modern financial theories’ rules. The most important theories in stock investment decision-making are Modern Portfolio Theory and Capital Asset Pricing Theory, and the results of several empirical studies in various financial markets proved that investment decisions were not always based on the fundamentals of modern financial theories; as a result, behavioral finance studies became important in stocks’ decision-making. Behavioral finance was developed to explain investor behavior when traditional financial theory provides no sufficient explanations.

Studies in this modern domain did not resolve the problem of determining which of the following factors are most important in stock investment decision-making (overconfidence, loss aversion, risk perception, and herding). The target of the research problem is to answer the following main and sub-divided questions: The first main question is:

“Is there an impact of behavioral factors on stock investment decision-making in ASE?”

This question is sub-divided into the following sub-questions:

1. Does overconfidence have impact on stock investment decision-making at ASE?
2. Does loss aversion have an impact on stock investment decision-making at ASE?
3. Does herding have an impact on stock investment decision-making at ASE?
4. Does risk perception have an impact on stock investment decision-making at ASE?