The Impact of Psychological Biases on Investment Decisions (UK Market)

This report investigates the influence of psychological biases, specifically greed and fear, on investment decisions within the UK financial market. The study, conducted on a sample of 20 employees from AJ Bell Limited, a UK-based stockbroking company, utilized a questionnaire to gather primary data. The research model explored the impact of these biases on investor behavior. Statistical tests, including ANOVA and reliability analysis, were employed to analyze the data and test the research hypothesis. The results indicate a significant negative impact of psychological biases on investment decisions, leading to the rejection of the null hypothesis. The report also reviews relevant literature, discusses the theoretical model, and presents the experimental design and findings, highlighting the importance of understanding behavioral finance in the context of the UK market. Limitations due to sample size are acknowledged, with suggestions for future research to overcome these constraints.

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