Elucidating rational investment decisions and behavioral biases: Evidence from the Taiwanese stock market

Financial innovation has witnessed an increasing number of financial products in the financial industry. Various investment activities involving individual investors have also become prevalent in the Taiwanese financial market. Financial managers thus highly prioritize elucidating the investment behaviors of individual investors and then incorporate them in investment decision making. This study examines how rational decision making and behavioral biases are related, as well compares the relative differences of three behavioral biases, that is disposition effect, herding and overconfidence, by various demographic variables. The psychological cognition of investment decision making among investors and the antecedences of behavioral biases are also studied based on a sampling survey of 430 valid respondents from voluntary individual investors in Taiwan. Based on structure equation modeling (SEM), path analysis is performed on how rational decision making and three proposed behavioral biases are related. Analytical results indicate that the structural path model closely fits to the sample data, implying the role of rational decision making in investment behaviors among individuals. However, the irrational investment behavioral biases might arise in various decision-making stages. Our results further demonstrate that male and female investors significantly differ in disposition effect, herding and tendency of overconfidence.