A Systematic Literature Review on Behavioral Biases Affecting Investment Decisions in Capital Markets

Abstract

Behavioral finance emerged as a response to consider behavioral aspects in financial decision-making. It has challenged the assumptions of rational investors and efficient markets. This study systematically reviews the literature available on behavioral biases affecting investment decisions in capital markets. The main purpose of the study is to identify major psychological and cognitive biases that influence investors and to analyze how these biases shape investment behavior, thereby affecting market outcomes. The study adopts the PRISMA 2020 framework (Page et al., 2021) to conduct a systematic literature review of scholarly articles published between 1955 and 2024. Relevant studies were collected from open-source Google Scholar, and a total of 61 articles were identified, of which 29 articles met the inclusion criteria and were selected for final inclusion. The findings show that behavioral biases like overconfidence, herding behavior, anchoring, representativeness, disposition effect, mental accounting, regret aversion, and loss aversion significantly influence investors' psychology and emotions, leading to poor investment choices that cause market inefficiencies. Overconfidence, herding, and representativeness emerged as the most frequently investigated biases.  Although there has been extensive study of individual biases, no prior review has systematically studied these biases within a single PRISMA framework spanning seven decades of research across both developed and emerging capital markets. This review addresses that gap by covering 29 studies to map which biases are most frequently studied, where research has concentrated geographically, offering investors, financial advisors, and policymakers a consolidated evidence base for designing debiasing strategies, investor education programs, and behaviorally informed regulatory approaches.