Understanding the Formation of Irrational Financial Behavior in Stock Investment Decisions

Abstract

By addressing the fundamental psychological biases that affect investors, this study seeks to understand how irrational financial behavior manifests in stock investment decisions. Data were collected quantitatively using questionnaires with 20 attribute statements, and Exploratory Factor Analysis (EFA) was used to analyze the results, with 263 stock investors as respondents. The findings suggest that seven factors, including anchoring bias, familiarity bias, risk aversion bias, representativeness bias, overconfidence, conservatism bias, and loss aversion, can be used to classify illogical financial behavior. The results show that investors' decisions are heavily impacted by cognitive and emotional biases rather than being entirely rational. Familiarity bias indicates a preference for well-known investments, while anchoring and conservatism biases reflect reliance on historical data. Overconfidence and representativeness reflect subjective judgments and beliefs about one's own abilities, while risk aversion and loss aversion emphasize emotional reactions to potential losses. These biases influence investors' perceptions of risk, information processing, and decision-making. By providing empirical evidence of the multifaceted nature of irrational behavior in stock investment decisions, this study contributes to behavioral finance. The results also have useful implications for improving investor knowledge and financial literacy, especially regarding identifying and mitigating behavioral biases.