PSYCHOLOGICAL BIAS AND FINANCIAL RISK TOLERANCE OF MUTUAL FUND INVESTORS - A SYSTEMATIC LITERATURE REVIEW

Abstract

Background and Introduction
The theme of financial investment is of grave concern as the probability of psychological bias and the existence of
huge financial risk. In financial investment,decision making is very important for individual investors to be conscious
withtheir personality traits and financial risk tolerances due to the chance of occurrenceof psychological biases.
Objectives
We intended to conduct a systematic review of the concepts related to psychological biases and financial risk
tolerance of mutual fund investors residing in India and abroad by reviewing previous researches. Further, to identify
the most commonly occurring biasesand also to find research gaps on this topic.
Methodology /Design
The literature review wasperformed by retrievingthepreviously published data from the year 1973-2018 period of
time.Theliterature selection criteria were based on keywords like Psychological bias, Cognitive bias, Emotional
biases, Availability bias, Cognitive-Dissonance bias, Confirmation Bias, Conservatism bias, Framing bias,
Representativeness bias and financial risk tolerance of the mutual fund investors. The review also emphasized the
details of the list of journals, countries of research conductance, conceptual and empirical researches over the period
of time on behavioral bias and financial risk tolerance.
Results
The literature survey resulted in 9 studies (>100 respondents), 45 journals, and 12 countries with empirical
researches, 48 studies comprising conceptual (38) and empirical (10) researches that covered the topic over the
stipulated period.
Study Findings
Most of the literature review on behavioral bias shows the limited research in developingeconomies, the ascendency
of secondary source data of empirical research, and lack of empirical research on individuals displaying group
behavior. The reviews of studies indicate a significant correlation between the psychological biases and personality
traits of the investors and affected their financial risk tolerances.
Conclusions
Our systematic analysis of psychological bias and risk tolerance significantly covered the research published during
the period of time from 1973-2018. The data will be of great value to the researchers, academics, and professionals
working in the field of finance in understanding the impact of psychological biases on financial risk tolerance.
Further, more detailed studies are required to determine the prevalence of different cognitive biases and personality
traits and their potential impact on mutual fund investors.