Behavioral Finance Biases and Investment Decision Making in Butwal Sub-Metropolitan City

Purpose: This paper reviews the influence of the specified behavioral finance biases on investment choices of the individual investors. Particularly, it examines how anchoring bias, disposition effect, gambler fallacy, herding behavior, mental accounting, and overconfidence bias affect the decision making behavior in financial markets. Methods: The study took the form of a descriptive and explanatory research. The structured questionnaire was used to collect primary data on the basis of scales of validated behavior finance measurement scales. Based on the sample size formula of Yamane (1967) to use when dealing with a large number of people, 385 individual investors were selected. Partial Least Squares Structural Equation Modeling (PLS-SEM) was used in analyzing the data. The measurement model was checked on internal consistency reliability, convergent and discriminant validity. The proposed relationships were tested with the help of a bootstrapping procedure to identify the statistical significance of the relationships. Findings: The findings show that the effects of anchoring bias, disposition effect, herding behavior, and mental accounting are statistically significant in investment decision-making. Of these variables, mental accounting has the most significant impact implying that the ability of investors to place money in distinct mental accounts and label markets the fund contributes a lot to the financial decision taken by the investors. Gambler bias and overconfidence bias on the other hand were not revealed to have any significant impact and this means that speculative reasoning and overconfidence are not always relevant in the decision making of investors in the sampled population. The structural model has a high explanatory power, which supports the fact that behavioral finance factors play a crucial role in the study of investor behavior. Implications: The results signify the significance of applying behavioral finance principles in the investor education and financial advice services. Specifically, the discussion of such phenomena as mental accounting and anchoring could help to improve the quality of decisions and promote the increase in reasonable investment behavior, particularly in the fast-evolving financial markets of major cities.