Behavioral Biases of the Investment Decisions of Romanian Investorson the Bucharest Stock Exchange

AbstractClassical economics and the study of financial markets from a normative point of view have their foundations laid in the rationality of economic agents. The main hypothesis revolves around decision making under rationality. Any(financial) decision is taken as if a person(investor) is maximizing a certain expected utility (welfare).This has been contradicted repeatedly through experiments within the behavioral finance field, whose development took place specifically in order to integrate irrationality in economic decision making. Moreover, there have also been theoretical studies that have shown that investors do not act as if they are rational, but on the contrary, exhibit many biases that lead to poor investment decisions in specific contexts. This paper wishes to analyze the investment decisions and behavior of investors from Bucharest's Stock Exchange, Romania. Using financial transaction data, we wish to study some of the most prominent behavioral biases investors have shown to be prone to. Thus, we wish to see if traders exhibit overconfidence in their trading positions, whether they have a representativeness bias and a disposition effect. The paper is structured as follows: the first section introduces the literature that has been done on similar studies. In section 2, the data is analyzed both from a normative and behavioral point of view. In section 3, we undergo our empirical analysis and test the main hypotheses. Section 4 concludes