Investment decisions and its behavioral flaws in Germany – A behavioral finance approach

Bastian Schulz, MBA

Doctoral thesis

Abstract:

This dissertation examines the association between German investors' investment decisions and different behavioral biases in the context of behavioral finance on the stock market. The main objective of this dissertation is to identify behavioral biases leading to undesirable trading among German investors on the stock market and to propose measures to mitigate or eliminate undesirable investment behavior. Based on a questionnaire with 342 German investors and 23 publicly available case studies, it is found that there are several reasons why people get into trouble on the stock market. These reasons are related to behavioral biases, effects, and errors in human thinking. The findings reveal that German investors have relatively little knowledge of behavioral finance. The representativeness bias is found to be the most prevalent among German investors. This is followed by the loss and regret aversion bias, the overconfidence bias, the anchoring bias, and the herding bias. Male investors in Germany are more likely than female investors to succumb to the overconfidence bias. Experienced investors (>5 years) are less at risk of falling victim to the herding bias than inexperienced investors (<5 years). Among older (>35 years) and younger investors (<35 years), there was a minor tendency for older German investors to be more at risk of the anchoring bias. German high-frequency (<three-month period) investors are more susceptible to loss and regret aversion than German low-frequency (>three-month period) investors. The desperation bias is recognized as a new bias based on the research. The following measures are discovered: Creating a behavioral bias configurator and strategies to prevent each behavioral bias addressed in the study.

Keywords

Behavioral economics, behavioral finance, behavioral biases, heuristics, decision-making, overconfidence, availability, anchoring, herding, loss aversion, regret aversion, desperation bias, case study, German investors, stock market

Language used: English

Date on which the thesis was submitted / produced: 7. 11. 2023

Thesis defence

• Date of defence: 5. 12. 2023
• Supervisor: doc. Mgr. Ing. Petr Wawrosz, Ph.D.
• Reader: Ing. Petr Mach, Ph.D., prof. Ing. Mansoor Maitah, Ph.D. et Ph.D., doc. Ing. Milan Paták, CSc

University of Finance and Administration

Doctoral programme / field:
Finance / Finance