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Arab Journal of Administration المجلة العربية للإدارة

Abstract

This study seeks to identify and analyze the behavioral biases that affect investors’ decisions in the financial markets. The study adopts Behavioral Finance school’s tools and methodologies, as it is a relatively new branch of Finance. Behavioral finance is fundamentally different from standard finance. Because standard finance assumes that investors behave rationally and do not make errors in investment decisions, whereas behavioral finance suggests that investors deviate from rationality in their decision-making, hence, make errors. We use interdisciplinary research theories that blend Psychology into Finance to shed a light on common mistakes “biases” investors usually are prone to in their decisions and to draw the researchers’ attention, specialists and policy makers to the behavioral aspects of investment activities in financial markets in the Arab World where there is scarcity of such literature. Using inductive approach, we discuss and analyze 10 of the most common biases through surveying 62 studies that looked into different behavioral biases separately. These biases are Confirmation, Hindsight Overconfidence, and Loss aversion, Mental Accounting, Representativeness& Conservatism, Disposition, Framing, Status Quo Bias and Anchoring. Finally, the study provides recommendations to individuals regarding how to deal with behavioral biases and to policy makers regarding how to consider policy and regulation that address behavioral biases issues.

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