A Review of the Relationship Between Loss Aversion Bias and Investment Decision-making Process

Research Article
Open access

A Review of the Relationship Between Loss Aversion Bias and Investment Decision-making Process

Jia Zhou 1*
  • 1 The University of Manchester    
  • *corresponding author zhoujiacd@163.com
Published on 10 November 2023 | https://doi.org/10.54254/2754-1169/27/20231240
AEMPS Vol.27
ISSN (Print): 2754-1177
ISSN (Online): 2754-1169
ISBN (Print): 978-1-83558-075-2
ISBN (Online): 978-1-83558-076-9

Abstract

The decision-making process determines that investors tend to be not rational to make substantial investment decisions when it possesses the possibility of great loss. This phenomenon can be explained by the loss aversion bias, which indicated that people have stronger feelings and biases when they are taking losses than gaining profits. However, it is also pointed out by other scholars that many other factors could influence the result of the bias, and rationality cannot be easily predicted. Therefore, by conducting survey analysis, it is then concluded in this paper that the loss aversion bias is significant in investors, and multiple factors could affect the degree of loss aversion for individual investors, they are age, gender, and the ability to take the risks.

Keywords:

loss aversion bias, decision-making process, irrational investors

Zhou,J. (2023). A Review of the Relationship Between Loss Aversion Bias and Investment Decision-making Process. Advances in Economics, Management and Political Sciences,27,143-150.
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References

[1]. Aina, N. S. N. & Lutfi, L.: The influence of risk perception, risk tolerance, overconfidence, and loss aversion toward investment decision-making. Journal of Economics, Business, & Accountancy Ventura, 401-413 (2019).

[2]. Arora, M. & Kumari, S.: Risk-taking in financial decisions as a function of age, gender: mediating role of loss aversion and regret. International Journal of Applied Psychology, 83-89 (2015).

[3]. D'Acunto, F.: Identity, overconfidence, and investment decisions. Haas School of Business, UC Berkeley (2015).

[4]. Gearon, M.: Cognitive biases: loss aversion (2018). [Online] Available at: https://uxdesign.cc/cognitive-biases-loss-aversion-925149360f46 [Accessed 15 8 2022].

[5]. Grant, R.: Contemporary strategy analysis. New York, NY: Wiley (2011).

[6]. Hicks, M. J.: Problem solving and decision making: Hard, soft, and creative. Belmont, CA: Cengage Learning (2005).

[7]. Khan, M. Z. U.: Impact of availability bias and loss aversion bias on investment decision making, moderating role of risk perception. Management & Administration, 17-28 (2017).

[8]. Li, Y., Kenrick, D. T., Griskevicius, V. & Neuberg, S. L.: Economic decision biases and fundamental motivations: How mating and self-protection alter loss aversion. Journal of personality and social psychology (2012).

[9]. Lunenburg, F. C.: The decision making process. National Forum of Educational Administration & Supervision Journal (2010).

[10]. Mahina, J. N. & Muturi, W. M.: Influence of Loss Aversion Bias on Investments at The Rwanda Stock Exchange. International Journal of Accounting, Finance and Risk Management, 131-137 (2017).

[11]. Mottola, G.: A Snapshot of Investor Households in America, s.l.: SEC (2015).

[12]. Passarelli, F. & Del Ponte, A.: Prospect Theory, Loss Aversion, and Political Behavior. Oxford Research Encyclopedia of Politics (2020).

[13]. Pikulina, E., Renneboog, L. & Tobler, P.: Overconfidence and investment: An experimental approach. Journal of Corporate Finance, 175-192 (2017).

[14]. Rubinstein, A.: Modeling bounded rationality. s.l.:MIT press (1998).

[15]. Tom, S. M., Fox, C. R., Trepel, C. & Poldrack, R. A.: The neural basis of loss aversion in decision-making under risk. Science, 515-518 (2007).

[16]. Willman, P., O'Creevy, F., Nicholson, N. & Soane, E.: Traders, managers and loss aversion in investment banking: a field study. Accounting, organizations and society, 85-98 (2002).

Cite this article

Zhou,J. (2023). A Review of the Relationship Between Loss Aversion Bias and Investment Decision-making Process. Advances in Economics, Management and Political Sciences,27,143-150.

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The datasets used and/or analyzed during the current study will be available from the authors upon reasonable request.

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About volume

Volume title: Proceedings of the 7th International Conference on Economic Management and Green Development

ISBN：978-1-83558-075-2(Print) / 978-1-83558-076-9(Online)
Editor：Canh Thien Dang
Conference website: https://www.icemgd.org/
Conference date: 6 August 2023
Series: Advances in Economics, Management and Political Sciences
Volume number: Vol.27
ISSN：2754-1169(Print) / 2754-1177(Online)

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References

[1]. Aina, N. S. N. & Lutfi, L.: The influence of risk perception, risk tolerance, overconfidence, and loss aversion toward investment decision-making. Journal of Economics, Business, & Accountancy Ventura, 401-413 (2019).

[2]. Arora, M. & Kumari, S.: Risk-taking in financial decisions as a function of age, gender: mediating role of loss aversion and regret. International Journal of Applied Psychology, 83-89 (2015).

[3]. D'Acunto, F.: Identity, overconfidence, and investment decisions. Haas School of Business, UC Berkeley (2015).

[4]. Gearon, M.: Cognitive biases: loss aversion (2018). [Online] Available at: https://uxdesign.cc/cognitive-biases-loss-aversion-925149360f46 [Accessed 15 8 2022].

[5]. Grant, R.: Contemporary strategy analysis. New York, NY: Wiley (2011).

[6]. Hicks, M. J.: Problem solving and decision making: Hard, soft, and creative. Belmont, CA: Cengage Learning (2005).

[7]. Khan, M. Z. U.: Impact of availability bias and loss aversion bias on investment decision making, moderating role of risk perception. Management & Administration, 17-28 (2017).

[8]. Li, Y., Kenrick, D. T., Griskevicius, V. & Neuberg, S. L.: Economic decision biases and fundamental motivations: How mating and self-protection alter loss aversion. Journal of personality and social psychology (2012).

[9]. Lunenburg, F. C.: The decision making process. National Forum of Educational Administration & Supervision Journal (2010).

[10]. Mahina, J. N. & Muturi, W. M.: Influence of Loss Aversion Bias on Investments at The Rwanda Stock Exchange. International Journal of Accounting, Finance and Risk Management, 131-137 (2017).

[11]. Mottola, G.: A Snapshot of Investor Households in America, s.l.: SEC (2015).

[12]. Passarelli, F. & Del Ponte, A.: Prospect Theory, Loss Aversion, and Political Behavior. Oxford Research Encyclopedia of Politics (2020).

[13]. Pikulina, E., Renneboog, L. & Tobler, P.: Overconfidence and investment: An experimental approach. Journal of Corporate Finance, 175-192 (2017).

[14]. Rubinstein, A.: Modeling bounded rationality. s.l.:MIT press (1998).

[15]. Tom, S. M., Fox, C. R., Trepel, C. & Poldrack, R. A.: The neural basis of loss aversion in decision-making under risk. Science, 515-518 (2007).

[16]. Willman, P., O'Creevy, F., Nicholson, N. & Soane, E.: Traders, managers and loss aversion in investment banking: a field study. Accounting, organizations and society, 85-98 (2002).

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