<abstract xmlns="http://www.w3.org/1999/xhtml"><p>The complex world of finance is characterised by numerous irrationalities that representatives of behavioral finance seek to explain by cognitive biases (flaws, inclinations or anomalies). Cognitive biases represent imperfect perception of reality and are caused by limited cognitive capacities of decision-makers. By analysing cognitive biases, the paper aims to answer the following questions that standard finance fails: Why active portfolio strategy is still the most influential strategy in portfolio management despite the mounting evidence of unsuitability of its application? Why investors prefer dividend payout over increase in capital value (dividend puzzle)? Why investors ignore benefits of investment diversification and choose to invest in a small number of shares of well-known local businesses (diversification puzzle)? Why investors avoid to sell “loser” shares and thus reduce the tax burden? Why shares of small companies usually bring higher returns compared to shares of large companies? The answers to these questions are obtained by using qualitative research methodology, which also represents the main result of the research.</p></abstract>

The complex world of finance is characterised by numerous irrationalities that representatives of behavioral finance seek to explain by cognitive biases (flaws, inclinations or anomalies). Cognitive biases represent imperfect perception of reality and are caused by limited cognitive capacities of decision-makers. By analysing cognitive biases, the paper aims to answer the following questions that standard finance fails: Why active portfolio strategy is still the most influential strategy in portfolio management despite the mounting evidence of unsuitability of its application? Why investors prefer dividend payout over increase in capital value (dividend puzzle)? Why investors ignore benefits of investment diversification and choose to invest in a small number of shares of well-known local businesses (diversification puzzle)? Why investors avoid to sell “loser” shares and thus reduce the tax burden? Why shares of small companies usually bring higher returns compared to shares of large companies? The answers to these questions are obtained by using qualitative research methodology, which also represents the main result of the research.

Cognitive Biases as an Integral Part of Behavioral Finance

Faculty of Hotel Management and Tourism in Vrnjačka Banja

Economic Themes

This work is licensed under the Creative Commons Attribution-NonCommercial-NoDerivatives 4.0 License.

{"article-title":"Cognitive Biases as an Integral Part of Behavioral Finance"}

The complex world of finance is characterised by numerous irrationalities that representatives of behavioral finance seek to explain by cognitive biases...

Cognitive Biases as an Integral Part of Behavioral Finance

Published Online: Jul 09, 2020

Page range: 75 - 96

Received: Feb 06, 2020

Accepted: Apr 20, 2020

DOI: https://doi.org/10.2478/ethemes-2020-0005

Keywords
cognitive biases, behavioral finance, financial decision making

© 2020 Milјan Leković, published by Sciendo

This work is licensed under the Creative Commons Attribution-NonCommercial-NoDerivatives 4.0 License.

Cognitive Biases as an Integral Part of Behavioral Finance

Published Online: Jul 09, 2020

Page range: 75 - 96

Received: Feb 06, 2020

Accepted: Apr 20, 2020

DOI: https://doi.org/10.2478/ethemes-2020-0005

Keywordscognitive biases, behavioral finance, financial decision making

© 2020 Milјan Leković, published by Sciendo

This work is licensed under the Creative Commons Attribution-NonCommercial-NoDerivatives 4.0 License.

Keywords
cognitive biases, behavioral finance, financial decision making