Which biases are cited as impairing investment decision-making in behavioral finance?

• A. Confirmation bias only
• B. Loss aversion, overconfidence, and recency bias
• C. Anchoring and hindsight bias
• D. Hindsight bias and framing

Answer: (B)

Investing decisions are often distorted by behavioral biases that affect how we perceive risk and interpret information. Loss aversion makes losses feel more painful than equivalent gains feel good, which tends to make investors hold onto losing investments too long and sell winning ones too soon. Overconfidence leads to overestimating knowledge and underestimating risk, resulting in excessive trading, under-diversification, and taking on more risk than is appropriate. Recency bias causes recent events to loom larger in judgment than longer-term patterns, pushing investors to chase recent performance or react strongly to the latest news. Together, these biases are frequently cited as impairing investment decision-making in behavioral finance, making this combination the best answer. Other biases exist, but they don’t capture this commonly highlighted trio as clearly.