An Empirical Analysis of Overconfidence and Anchoring Biases in Investment Decision-Making

Abstract

Behavioural finance has emerged as an important field of study by recognizing that investment decisions are not always based on rational analysis but are frequently influenced by psychological biases. Among these biases, overconfidence and anchoring significantly affect investors' judgment, risk perception, and portfolio decisions. The present study empirically examines the influence of overconfidence and anchoring biases on investment decision-making among retail investors in Belagavi city. The study adopts a descriptive and exploratory research design and utilizes both primary and secondary data. Primary data were collected through a structured questionnaire administered to retail investors using a random sampling technique. Out of 70 responses collected, 56 valid questionnaires were used for analysis after excluding incomplete responses. Descriptive statistical tools, including frequency, percentage, mean, and standard deviation, were employed to analyse the data. The demographic profile indicates that the majority of respondents were male, young, well-educated, and belonged to low- and middle-income groups. The findings reveal that respondents exhibit a moderate level of overconfidence bias, with mean scores ranging from 3.13 to 3.80. Investors expressed strong confidence in the correctness of their investment decisions and showed a considerable tendency to rely on their own judgment while investing. The analysis also indicates a moderately high level of anchoring bias, with mean scores ranging from 3.39 to 3.89. Most respondents compared current market prices with purchase prices before selling investments and relied heavily on historical price trends and previous market information while making investment decisions. A comparative analysis suggests that anchoring bias is relatively more pronounced than overconfidence bias among the respondents. The study concludes that psychological biases substantially influence retail investors' decision-making and may lead to irrational investment behaviour, excessive trading, delayed selling decisions, and suboptimal portfolio performance. The findings highlight the need for behavioural finance education, investor awareness programmes, and objective investment strategies to minimize the adverse effects of cognitive biases and promote rational investment decision-making.