INVESTMENT THINKING AND BEHAVIORAL BIASES: EXAMINING THE PSYCHOLOGICAL FOUNDATIONS OF FINANCIAL GROWTH

Abstract

This paper examines the relationship between investment mindset and behavioral biases, and explores how psychological factors fundamentally influence financial decision-making and long-term wealth accumulation. It draws on seminal works such as those by Kahneman and Tversky (1979), Barberis and Thaler (2003), and Barber and Odean (2000). This study analyzes the most common cognitive biases that influence investor behavior—including loss aversion, overconfidence, following the actions/decisions of the majority rather than one’s own judgment, and relying on the first information received when making decisions. Empirical evidence shows that loss aversion has a coefficient of λ = 2.25 (Tversky & Kahneman, 1992), meaning that a loss feels about twice as painful as an equivalent gain. Overconfident investors trade 75% of their portfolio annually, yet achieve only an 11.4% return compared to a market return of 17.9% (Barber & Odean, 2000). Our analysis reveals that understanding these psychological foundations is crucial for developing effective investment strategies and achieving sustainable financial growth. Financial literacy has been shown to significantly mitigate the impact of behavioral biases on investment decisions.