Investors’ Biases & Stock Return Volatility: A Systematic Literature Review

Abstract

Purpose: Literature is scarce on the possible relationship between investors’ biases, risk tolerance attitude, and stock return volatility. The researcher investigated what are the investor biases, and how they contribute to the risk-averse and risk-seeking attitudes and developed a taxonomy model of investors’ biases in the form of a causal framework that impacts stock return volatility. Methodology: The study employs a systematic literature review approach. The analysis of literature includes 65 articles from impact factor journals including three seminal papers in the fields of traditional and behavioral finance. The time frame ranges from 2008 to 2022. Findings: The findings suggest that investors encounter certain biases such as cognitive, emotional, cultural, religious, financial, macroeconomic, demographic, etc. Literature has identified positive, negative, and mixed impacts of investors' biases on stock return volatility. The systematic analysis of literature helps in identifying recently evolving biases such as individualism, uncertainty avoidance, a religious adherence, investor mood, weather bias, fear sentiments, sports sentiments, power distance, masculinity, social media sentiments so on and so forth. Conclusion: The study has proposed an integrated taxonomy model comprised of possible investors’ biases as independent variables along with mediating, controlling, and moderating variables that impact stock return volatility. Moreover, investors’ risk tolerance profile is also constructed which indicates the role of behavioral biases in shaping investors’ attitudes as risk seekers and risk-averse.