A Systematic Literature Review on Overconfidence and Related Biases Influencing Investment Decision Making

In the current market scenario, it has been observed that biases are among the most significant factors influencing investment decisions. Among these biases, overconfidence is a common phenomenon managers tend to exhibit while making decisions. To understand the role of overconfidence bias in invest...

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Bibliographic Details
Published in:Economic and business review for Central and South-Eastern Europe 2024-06, Vol.26 (2), p.130-150
Main Authors: Karki, Uttam, Bhatia, Vaneet, Sharma, Dheeraj
Format: Article
Language:English
Subjects:
Behavior
Behavioral economics
Bias
Cash flow
confirmation bias
Decision making
Efficient markets
Expected utility
Financing
hindsight bias
investment biases
Investment decision
investment decision making
Investments
Literature reviews
managerial decision making
Manipulation
overconfidence bias
R&D
Rationality
Research & development
Stockholders
Systematic review
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Summary:In the current market scenario, it has been observed that biases are among the most significant factors influencing investment decisions. Among these biases, overconfidence is a common phenomenon managers tend to exhibit while making decisions. To understand the role of overconfidence bias in investment decision making, this study thoroughly scrutinizes and consolidates the current research on overconfidence bias. To achieve the objective, this study performs a systematic review of literature utilizing the PRISMA approach and examines 92 journal articles published in the last 20 years. Results suggest that the other two biases-hindsight and confirmation-are related to overconfidence bias. In addition, the review suggests that biases result in three major outcomes. The first, positive, aspect pertains to the promotion of mental well-being and significant allocation to research and development investments. Conversely, the second, negative, aspect involves the manipulation of operating cash flow, which tends to diminish the value of shareholders. Third, there is a preference for internal financing over external financing options. Furthermore, the research also suggests factors that may overcome the influence of the overconfidence bias. This study demonstrates its originality through thematic analysis, which effectively examines multiple dimensions of biases. Moreover, incorporating these research findings can enhance managerial decision-making processes, promote more objective assessments, and ultimately improve the overall quality of investment choices.
ISSN:1580-0466
2335-4216
DOI:10.15458/2335-4216.1338