Nik Maheran Nik Muhammad () (Universiti Technologi Mara, Kelantan, Kampus Kota Bharu, 15050 Kota Bharu, Kelantan, MALAYSIA)
Abstract
Behavioral finance models often rely on a concept of individual investors who are prone to judgment and decision-making errors. This article provides a brief introduction of behavioral finance which encompasses research that drops the traditional assumptions of expected utility maximization with rational investors in efficient markets. The article also reviews prior research and extensive evidence about how psychological biases affect investor behavior and prices. The paper found that the most common behavior that most investors do when making investment decision are (1) Investors often do not participate in all asset and security categories, (2) Individual investors exhibit loss-averse behavior, (3) Investors use past performance as an indicator of future performance in stock purchase decisions, (4) Investors trade too aggressively, (5) Investors behave on status quo, (6) Investors do not always form efficient portfolios, (7) Investors behave parallel to each other, and (8) Investors are influenced by historical high or low trading stocks. However, there are relatively low-cost measures to help investors make better choices and make the market more efficient. These involve regulations, investment education and perhaps some efforts to standardize mutual fund advertising. Moreover, a case can be made for regulations to protect foolish investors by restricting their freedom of action of those that may prey upon them.
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