GROUP BEHAVIORAL BIASES AFFECT FINANCIAL DECISIONS UNLIKE INDIVIDUAL BEHAVIORAL BIASES
Authors: Marcelo Henriques de Brito and Paula Esteban do Valle Jardim
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This work presents a new approach to behavioral finance with a theoretical contribution by suggesting and discussing with examples a list of group behavioral biases along with established individual behavioral biases, bringing, hence, an additional outlook on how behavioral biases affect financial decisions. While individual behavioral biases are detected in individuals acting alone, group behavioral biases require the scrutiny of group behavior. This awareness may be particularly important to institutional investors, whose decisions basically stem from a committee or a group that will exhibit behavioral biases depending on how the group members interact between themselves when making a decision, which may include negotiation activities and not necessarily be related to personality or hierarchy.
The focus on individual investors deciding on personal investments explain the need of work already developed in behavioral finance, which focus on individual behavioral biases, which may be a consequence from either cognitive errors or emotional biases. However, decisions from institutional investors basically stem from a committee or a group that will exhibit behavioral biases depending on how the group members interact between themselves when making a decision.
To address the challenge of identifying causes and consequences for unexpected or unsuitable financial decision-making within a group, this work initially retrieves previous work on individual behavioral biases, linking emotional biases and cognitive errors to the “system 1” and “system 2” decision-making framework. Then, a conceptual contribution of this paper, which may be particularly relevant for institutional investors, is to explain with examples - after research and experience - which are the group behavioral biases and their impact upon financial decisions.
Individual behavioral biases already acknowledged in other works on behavioral finance are contrasted in this work to the suggested group behavioral biases. Furthermore, this work suggests that there are two broad types of group behavioral biases: group dynamics biases and information-acceptance biases. Each broad type is subdivided into biases related to the structure of the group and biases related to how the group decision-making procedure occurs.
Group dynamics biases related to the manner the group is structured are the following: kin bias (belonging bias), harmony bias, and competition bias. On the other hand, group dynamics biases may be sorted according to five different decision-making procedures, namely: herding, fad bias, Plato bias (denial bias), scarcity bias, and home bias.
Information-acceptance biases may also be divided into a set related to how the group is structured (comprising: gender bias, survivorship bias, and equality bias) and another set related to the decision-making procedure (comprising cohesion bias, analytical bias, momentum bias, halo effect bias, and deceit bias). All these group bias share errors related to collecting, processing, or disclosing information. Normally the group members are conscious on these biases but are either unable or unwilling to change the setting.
This work may trigger ideas for future research and surveys on how groups analyze, recommend, and act on financial information and investment opportunities.