The impact of the sunk cost fallacy and other behavioural biases on individual Irish investors

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Percival, Stefphane
Issue Date
MBA in Finance
Dublin Business School
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This dissertation aims to prove that individuals make irrational decisions when under such circumstances as uncertainty and risk. The research conducted assesses forty-two Irish professionals and their behaviour while making decisions pertaining specifically to that of investing in stocks and shares. In particular, the dissertation focuses predominantly on one aspect of Behavioural Finance i.e. the sunk-cost fallacy. Other biases such as overconfidence bias, regret aversion, mental accounting and so on are also considered. Behavioural finance or more broadly behavioural economics is a study that combines cognitive psychology, microeconomics and finance. The research finds evidence of the sunk cost fallacy as well as other biases prevailing amongst the Irish investors during the primary data analysis. The reasons for which are consequently explained in detail. Unlike the Efficient Market Hypothesis (EMH), Behavioural Finance takes into account other aspects and variables of individual behaviour since it holds financial markets and individuals to be irrational. Behavioural Finance began with the theory formulated by two famous people i.e. Amos Tversky and Daniel Kahneman which was the Prospect Theory. The research strongly utilises this theory throughout the dissertation. Author keywords: Behavioural Finance, behavioural economics, sunk-cost effect/fallacy, mental accounting, Irish investor, regret aversion, prospect theory, overconfidence bias, optimism bias