Impact of Psychological Biases on Investment Decisions in the UK Market

This essay explores the impact of psychological biases, such as greed and fear, on investment decisions in the UK market. It includes a study conducted on employees of AJ Bell Limited, a stock broking company, to understand the influence of these biases on decision-making. The results indicate negative impacts of psychological biases on investment decisions.

BEHAVIOURAL FINANCE

Abstract
The purpose of this essay is to identify the impact of psychological biases on investment
decisions with reference to UK market by conducting the researcher study on 20 employees of
AJ Bell limited, which a stock broking company based in UK. A research model was developed
in such a way to study the impact of greed and fear of investors while making investment
decisions. The information for this research has been collected through questionnaire by
distributing the same among employee of AJ Bell limited. Due to limited time and resources,
random sampling technique has been adopted to select small sample of just 20 employees, but
the follow up study will overcome this limitation.
The results of the study indicate that there are negative impacts of psychological biases over the
investment decision which has been obtained through various statistical tests and tools applied to
research hypothesis.

TABLE OF CONTENTS
Abstract......................................................................................................................................................2
TABLE OF CONTENTS..........................................................................................................................3
INTRODUCTION.....................................................................................................................................4
RESEARCH...............................................................................................................................................4
Literature Review....................................................................................................................................4
Theoretic model.......................................................................................................................................6
Hypothesis...............................................................................................................................................7
Experiments or illustrations.....................................................................................................................7
Experimental design..............................................................................................................................10
Experimental hypothesis........................................................................................................................10
Expected result, discussion and findings...................................................................................................11
Mythologies related to financial market or stock market.......................................................................18
CONCLUSION........................................................................................................................................18
REFERENCES........................................................................................................................................20
APPENDIX..............................................................................................................................................23
Questionnaire...........................................................................................................................................23

INTRODUCTION
Behavioral finance aims to study the impact of psychological biases over the outcome of
the market. It aims to study the influence of psychology over the investors and financial analyst’s
behavior. It emphasizes on the fact that the investors can behave beyond their self-control and
not always behave in a rational manner due to the influence of their own biases (Paul and
Upadhyay, 2018). The present essay will be based on how psychological biases such as greed
and fear plays an important role in decision making related to financial investments with
reference to financial market of UK. For this the information will be collected by conducting
study on AJ Bell limited. AJ Bell limited is a public limited company based in Manchester,
United Kingdom and it is listed on London Stock Exchange. It provides platform for online
investments and services such as stockbroker. It forms part of the FTSE 250 Index.
The main objective of this essay is to study how psychological factors such as
conservatism biases, availability biases, overconfidence biases and herding biases could possibly
affect an investment decision made by an investor. Such investment decisions of individual
investors will be measured in terms of degree of risk an investors can be able to take. Also, the
essay aims to study how psychological biases leads to higher risks and higher returns and vice
versa.
RESEARCH
Literature Review
Psychological biases
Psychological biases are considered as the most influencing factors which affects an individual’s
behavior in a great way. Whatever the judgements and decisions take place under these biases
are generally deviated from normative philosophies (Zhou and Xu (2020). The difference
between real response given by the investors and the expected response as per the normative rule
is due to the impact of psychological biases only. Errors and biases with respect to decision
making and judgements of the investors are neutralized by financial risk analysts.
According to Tuominen (2021), psychological biases is related to the practice of thinking and
making judgements and decisions which results in poor quality decision-making and

unchallenging decisions. An individual’s perceptions when impact decision making may leads to
poor or good decisions which is not proved to be true always.
Investment decision making
Astafiev and Guo (2018), has explained the influence that demographic factors can have on the
behavior of the investors. Like in their study, it is revealed that how gender as a demographic
factor is associated with the factors of behavioral finance. Also, it is proved that there can be a
significant impact of individual savings over financial factors. Similarly, Wang, Wang and
Zhang (2017), has explained that when an investor takes a financial decision, there is high
probability of decision affected by psychological biases.
According to Rajapaksha and Sugathadasa (2020), investors behave rationally and make
decisions wisely which results in maximization of returns and minimization of risks. However,
modern financial studies confirm that there seem no signs of rationality in an investor’s decision,
whereas in modern days it seems that investment decisions are highly influenced by factors such
as individual psychology, perceptions, emotional factors like fear, greed, anxiety and excitement.
Impact of greed and fear in decision making related to investment
It is highly believed in the financial market that the thought process of investors gets highly
influence by their emotional factors such as greed and fear. As per the views of Khan and
Mubarik (2020), the greed of investors to become rich as soon as possible urges them to make
investment even in a stock that is beaten down due to extraordinary expectations of successive
upward movement of market which results in ignorance of weak fundamentals of the stock. On
the contrary, it has been studied by Imren, E., S. Karayılmazlar, R. Kurt, and Y. Cabuk, (2017),
as the market gets influenced by greed and become overwhelmed it also surrender in the events
of fear (Kapoor and Prosad, 2017). Fear in an investor causes them to sell much earlier their
stake in the market even when such stocks are considered to be the best performing in the
market. Fear also results in stopping investors from buying quality stocks when the market is
volatile due to the fear of further downside movements.

Theoretic model
Regret Aversion
Regret Aversion biases denote that when it comes to investment decision-making investor
can either take unnecessary risk. At the time of investment fear of losing money or capital is
always remain in the mind of investor. This theory motivates investors to go for heavy
investment (Christianti, 2018). This approach also ignores the signs of impending crash.
Irrespective of the situation of market this theory believes in investing heavily in market
even if the risk is high. Regret aversion demonstrated that when it comes to investing in
market fear of losing capital is always there in the mind of investor. Return under this
practice is expected to be high due to the high risk volume.
Herd Instinct
Herd instinct is about to make investment based on other. Under this investor assess that
what other investors are doing in market what are the areas they are investing to earn heavy
returns. This theory does not favor the individual own mentality and sense of investing
capital rather it believes that other people must have better knowledge of investment that can
empower healthy returns as an investor (Kehinde and Olugbenga, 2017). This hypothesis
give value to other sense of knowledge in respect to investment rather than believing on
individual own instinct. This hypothesis increases the risk of investment as individual do not
use its own knowledge which maximizes the risk of investment.
Over confidence
Over confidence instinct is also a useful theory used when it comes to taking an investment
decision. This theory is all about being over confident at the time of taking investment
decision. This theory belongs to such investors that earn healthy return to the beginning and
due to that it become over confident. In the over confidence due to good knowledge and skill
investor take wrong decision. This hypothesis completely misleads the entire investment
decision which increases the risk of investment.
Representativeness
Representativeness bias is also a key instinct associated with the investment decision-
making. This involves representation of the investment in more effective way than it is

actually are. This hypothesis is completely risky as it involves presenting investment in
wrong way (Yaseen and Naqvi, 2018). Once the investor gets realization about the wrong
investment than it represents it in a wrong way so that market image does not get demolish.
Companies also represent wrong value of return that further improve the risk of this
investment. This is a complete risk investment decision-making.
Hypothesis
H0: There will be no significant impact of psychological biases, that is greed and fear over the
investment decision making.
H1: There will be a significant impact of psychological biases, that is greed and fear over the
investment decision making.
Experiments or illustrations
Suitable data: In order to study the research issue related to the impact of psychological biases
over the investment decision taken by an investor, the researcher here has adopted questionnaire
source for conducting study on such psychological effects (Baker, Filbeck and Ricciardi, 2017).
Hence suitable primary data in order to prove the research hypothesis has been gathered through
questionnaire method. Also, to justify the results of the study so conducted, the researcher has
reviewed various literature pertaining to the impact of psychological biases over investment
decisions.
Reliability analysis has been undertaken to prove the consistency of the observations under
consideration. The researcher has been successfully able to prove that the observations under
consideration are identical to each other in terms of construct that has been measured has an
identical outcome. This success can be seen through the table below indicating Cronbach’s
alpha, which comes out to be 0.769, as this figure is considered to be the good in terms of
reliability of the observations so obtained and analyzed.
Reliability
Statistics
Cronbach's
Alpha
Cronbach's
Alpha Based on
Standardized
Items
N of Items
.769 .734 9

ANOVA or (Analysis Of Variance) is a statistical test undertaken to identify whether the results
obtained from experiments are significant for rejecting the null hypothesis and accepting the
alternate hypothesis.
Model Sum of Squares Df Mean Square F Sig.
1
Regression 3.160 3 1.053 28.568 .000b
Residual .590 16 .037
Total 3.750 19

Df: It is the
degree of
freedom
calculated
as the
number of
items of
independent
nature.
F: It the
value in the
Analysis of
variance
obtained by
dividing two
mean
squares
which
indicates
the ratio of
explained
and
unexplained
variance.
In the above table indicating the p value as 0.0000, which is less than 0.05, this means that the
researcher must reject the null hypothesis. Rejecting null hypothesis means the statement “there
will be no significant impact of psychological biases, that is greed and fear over the investment
decision making” is not true. Alternatively, researcher must accept the alternative hypothesis
which states that “There will be a significant impact of psychological biases, that is greed and
Model
Summary
Model R R Square Adjusted R
Square
Std. Error of
the Estimate
Change
Statistics
R Square
Change
F Change df1 df2 Sig. F Chang
1 .918a .843 .813 .19202 .843 28.568 3 16 .0

fear over the investment decision making” (Thaisongkroh and Rattanasiriwongwut, 2018). This
statement is proved to be true through testing the hypothesis at a 95 % confidence level and the
resulting p value is derived as 0.000 which is less than the 0.05. Hence, alternate hypothesis will
be accepted, which is actually in alignment with the research aim.
Experimental design
The researcher has designed his sample of 20 employees of AJ bell limited acting as a broker in
the financial market of UK. By designing their sample of 20 employees, the results are obtained
through experimenting their perceptions and behavioral aspects with respect to investment
decisions in order to address the research issue (Yuniningsih, Widodo and Wajdi, 2017). By
collecting their viewpoints and opinions through questionnaire and experimenting the same
through statistical tests, regression analysis and correlation, the researcher has derived the results
which is in alignment with the research issue and successfully proved that there are significant
impacts of psychological biases over the investment decisions by rejecting null hypothesis and
accepting alternative hypothesis (Kenzhetayeva and Fleming, 2017). But the fact cannot be hold
through for others in the control group as is proved for experimental group.
Experimental hypothesis
The hypothesis as mentioned above has been demonstrated through conducting
experiments on 20 stock broker employees of AJ Bells by selecting them through random
sampling method and collecting their views through questionnaire along with experimenting the
same with the help of statistical tests and tools (Nofsinger, 2017).
Expected result, discussion and findings
Theme: Inner feeling and emotions influence decision-making
Q.1) Do you consider your inner feelings and emotions while making an investment decision?
Yes 12
No 8

Interpretation: 60% respondents took part in interview round stated that inner feelings and
emotions also play a role while making investment decision. Remaining 40% respondents
projected that the role of inner feeling and emotion is not a part of any investment decision they
made. (Nofsinger, 2017), has also reflected in its study that inner feeling and instinct also involve
and support investor in taking best level of investment decision-making.
Theme: Investors rely on over instinct in making investments
Q.2) Do you rely upon your own instincts while making investment?
Strongly agree 8
Agree 4
Neutral 2
Disagree 4
Strongly Disagree 2
Yes No
0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
60.00%
40.00%
Inner feeling and emotion role in invetsment
Column C

Interpretation: 40% investors took part in interview round strongly agreed over the role of
instinct in investment decision-making. 20% people agreed over the instinct and the same
number of people disagreed the role of instinct in making investment decision. 10% people
stated that there is not such role and the same number of respondent had not such opinion. Based
on the majority views it can be demonstrated that instinct do play role. Kusev, Purser, Heilman,
Cooke, Van Schaik, Baranova, Martin and Ayton, 2017, in its research also favored the role of
instinct in taking better investment decision.
Theme: Personal feeling and perception suppresses the rationale reason of investment
Q.3) Do you think your personal feelings and perceptions suppresses the rational reason for
making an investment?
Yes 12
No 8
Interpretation: 60% investors in the interview round favored the personal feeling and
perception surpasses the investment decision-making. Remaining investors disagreed with this
40.00%
20.00% 10.00%
20.00%
10.00%
Instincts role in investment decision
Strongly agree
Agree
Neutral
Disagree
Strongly Disagree
Yes No
0
0.2
0.4
0.6
60.00%
40.00%
Personal feeling support
Column C

statement. Salman, Khan and Jave (2020), in its study has also denoted that yes personal feeling
and perceptions surpasses the rational reason for making decisions.
Theme: Other investors decisions impact over choosing stock type
Q.4) Does other investor’s decision have impact on your decision over choosing stock types
while making investment?
Every Time 7
Almost every time 4
Neutral 3
Almost Never 5
Never 1
Interpretation: 35% respondent took part in interview round supported the opinion that
investors decisions always create an impact over the decision-making of investor every time any
stock is purchased. 25% respondent interpreted that it takes no role. 20% stated that almost every
time it takes role. 15% people were neutral and the remaining favored never. Based on the
opinion of majority of people it can be stated that every time it plays role. Alkaraan (2019), in its
study also supported the argument that decision-making of other investors influences the stock
purchase of investor.
Theme: Other investors decision impact over investment decision-making

Q.5) Does other investor’s decision regarding buying and selling of stocks impacts your
decision for the same?
Yes 12
No 8
Interpretation: It is interpreted that 60% respondent favored that decisions of other investors
influence the investment decision-making. 40% disagreed with this fact. Based on the opinions
of majority of people it can state that it creates an impact over decision-making. Tajuddin and
Endang (2017), has favored these assumptions that other investors decision also influences the
investor buying decision-making.
Theme: Investment decisions are sensitive towards gain than losses
Q.6) Do you think that your investment decisions are more sensitive towards losses than gains?
Always 4
Often 3
Sometimes 1
Seldom 8
Never 4
Yes No
0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
60.00%
40.00%
IMpact of other investors over buying
Column C

Interpretation: 40% people stated that only some cases are there where the investment
decisions have been sensitive towards the losses. 20% respondent state that it always a part of
consideration and the same number of peoples stated that it never a part of it. Based on the
majority view it can indicate that only the seldom time it becomes a part of investment decision.
Alshamy (2019), specified that there are only some instances where investment decisions are
sensitive towards the losses incurred. Profit is always the major area of focus.
Theme: Investors rarely hold the loss making stock
Q.7) Do you still hold over the investment which have declined in value after other investor’s
action of selling stocks?
Always 4
Usually 3
Sometimes 6
Rarely 7
20.00%
15.00%
5.00%
40.00%
20.00%
Decisions are senstitive towards losses
Always
Often
Sometimes
Seldom
Never

Interpretation: 35% state that they keep the stock rarely if other investors are bringing out the
capital involved in the investment. 30% sometimes hold the stock. Based on the opinions reflect
by the majority of respondent it can specify that most of the investors do not keep the stocks that
contain losses. Sharma, Singh and Awasthi (2017), has also favored the opinion ion its study that
investor should release the stock contained losses in market.
Theme: Investors do not prefer buying stock performing lesser than expectation
Q.8) Do you purchase stock which is not performing well with the expectation of that stock to
get rebound?
Yes 8
No 12

Interpretation: 60% investors projected to not to buy the non-offering stock. 40% people stated
the opposite opinion. Wang and Li (2021), in its study also favored this mindset of investment.
Theme: Investors sell stock when prices get high
Q.9) Do you prefer to sell stocks whose price in the market is increasing instead of decreasing?
Yes 12
No 8
Interpretation: Interview projected that 60% people sell the stock when the prices are
increasing., Remaining investor wait for more time. Trönnberg and Hemlin (2019), also reflected
in its study that stock must be sold at the time prices are increasing.
Yes No
0
0.2
0.4
0.6
40.00%
60.00%
Buying non performing stock
Column C
Yes No
0
0.1
0.2
0.3
0.4
0.5
0.6
0.7 60.00%
40.00%
Selling stock with increasing market price
Column C

Mythologies related to financial market or stock market
 Stock market investment is gambling: This myths generally misguided investors in the
basis of loss that has occurred to many investors in the past times (Shah, Ahmad and
Mahmood, 2018). This led to the rise of greed and fear among investors and they buy or
sell their investment on illogical basis.
 Investment in stock market can be made by experts: This another myth that prevails in
the market, where it is believed that some restricted people who are experts and
experienced can make investment in the market. This led to many people deprived of
wealth creation from the investment in stock market. This is nothing but the creation of
herd mentality in an individual investors. For example, am attempt was made to study
who can perform well Wall Street expert investment managers or Orlando in 2012, where
it has been revealed that where at the end of the year, the returns earned by Orlando are
higher than what these experts and investment managers had earned.
 High risks means high returns: The most prevailing myth of the market is when there is
a very high risk, there is high return. This is just a myth and in real sense this is not true
because if the same would be true then everyone likes to invest risky investments only in
order to reap higher benefits.
 Huge amount for investment must be available: It has been believed by many people
that a lot of money must be there to make money (Boda and Sunitha, 2018). But the same
is not true as can be seen in the example of Warren buffet who has started investing just
with some few dollars saved from selling newspapers and Stock market billionaire
Rakesh Jhunjhunwala has started investing just by 5000.
CONCLUSION
From the above essay it has been concluded that there is significant impact of individual
psychological biases when they make investment decisions. If we look at the traditional concept
it can be concluded that investor after making utilization of various information available to them
and then make rational decisions. The study was based on AJ Bell’s employees or stock brokers
from whom various information regarding investor’s decision making while making investments
are gathered and experiment is done on this information in order to analyze how psychological
biases plays an important role in investment decision making. So, the study concludes that any
individual investor can reduce the impact of such psychological biases like Greed and fear which

can have a negative impact over investment decision making in the attempt to enhance their
return on investment in order to ensure the sustainability of return for the long run.

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APPENDIX
Questionnaire
Q.1) Do you consider your inner feelings and emotions while making an investment decision?
 Yes
 No
Q.2) Do you rely upon your own instincts while making investment?
 Agree
 Strongly agree
 Neutral
 Disagree
 Strongly disagree
Q.3) Do you think your personal feelings and perceptions suppresses the rational reason for
making an investment?
 Yes
 No
Q.4) Does other investor’s decision have impact on your decision over choosing stock types
while making investment?
 Every time
 Almost every time
 Neutral
 Almost never
 Never
Q.5) Does other investor’s decision regarding buying and selling of stocks impacts your decision
for the same?
 Yes
 No
Q.6) Do you think that your investment decisions are more sensitive towards losses than gains?
 Always
 Often
 Sometimes
 Seldom
 Never
Q.7) Do you still hold over the investment which have declined in value after other investor’s
action of selling stocks?
 Always
 usually
 Sometimes
 Rarely
Q.8) Do you purchase stock which is not performing well with the expectation of that stock to
get rebound?
 Yes
 No

Q.9) Do you prefer to sell stocks whose price in the market is increasing instead of decreasing?
 Yes
 No