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The impact of cognitive biases on capital investments

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  • Sebastian Serfas

Abstract

A large body of research shows that cognitive biases—unconscious mental errors caused by simplified information processing strategies—distort decision making in a variety of situations. This article demonstrates that these biases are also highly relevant with regard to decisions in a capital investment context, an area that has not received scientific attention yet. Building on a short introduction of the underlying principles and on brief analogy-based theoretical considerations, the main part describes and analyzes three series of empirical experiments, which clearly show that anchoring-induced cognitive biases systematically distort judgments and decision making in the respective contexts. This is the case for artificially incorporated anchors (first series of experiments) as well as for situation-embedded anchors (second series). The third series of experiments finally shows that the observed bias also persists for professionally experienced people. Copyright Springer-Verlag 2011

Suggested Citation

  • Sebastian Serfas, 2011. "The impact of cognitive biases on capital investments," Metrika: International Journal for Theoretical and Applied Statistics, Springer, vol. 21(4), pages 427-446, April.
  • Handle: RePEc:spr:metrik:v:21:y:2011:i:4:p:427-446
    DOI: 10.1007/s00187-011-0120-0
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    References listed on IDEAS

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    Cited by:

    1. Babar Khalid & Ahmed Imran Hunjra, 2015. "Measuring the Validity of the Instrument of Information Asymmetry, Accounting Information, Personal Values, Investment Satisfaction and Investor Decision: An Empirical Analysis of Pakistani Stock Exch," Journal of Policy Research (JPR), Research Foundation for Humanity (RFH), vol. 1(1), pages 36-54, March.
    2. Irina Skvortsova & Anna Vershinina, 2021. "Do Cognitive Biases Impact M&A Performance in Emerging Markets? Evidence from Russian Firms," HSE Working papers WP BRP 82/FE/2021, National Research University Higher School of Economics.

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