Behavioral Biases and Investment Risk: Insights from Retail Investors

Abstract

This study examines how behavioral biases influence investment risk among retail investors by employing a Systematic Literature Review approach. The rapid growth of retail investor participation has intensified the relevance of behavioral finance, which argues that individuals often deviate from rational decision-making due to psychological factors. The findings reveal that biases such as overconfidence, loss aversion, herding behavior, and heuristic-driven judgments significantly affect how investors perceive and manage risk. Overconfidence leads to excessive trading and underestimation of downside risk, while loss aversion creates overly conservative or emotionally reactive investment patterns. Herding behavior contributes to increased market volatility, though its influence varies across different market environments. Heuristic biases, including representativeness and anchoring, further distort risk assessment. The review also highlights that financial literacy acts as an important moderating factor, reducing the negative impact of cognitive and emotional biases by improving information processing and decision quality. Overall, the results underscore those behavioral biases play a central role in shaping investment behavior in modern financial markets, emphasizing the need for investor education, behavioral-based advisory strategies, and policy measures that accommodate the psychological realities of retail investors.