When Sustainability Meets Speculation: A Critical Review of Investor Overconfidence in ESG Stocks and the Market Outcomes

The review paper attempts to compile, analyse, evaluate, and critique research papers from different geographies, including Italy and India. The paper explores and interprets five research papers, all of which focus on overconfidence, among other behavioural biases and their impacts on ESG decision-making. All the research papers are published after 2015, after the Paris Climate Agreement, which was an important marker for increased efforts from companies to improve their products and fit them to the highest standards of environmental, social, and governance aspects. The review paper explores their methodology, including its strengths and weaknesses; results, including the statistics and their implications; and limitations, those recognised by the authors and those that can be inferred. Finally, the review paper concludes the results and talks about the solutions that were provided by the five studies to try to mitigate the effects of overconfidence and other behavioural biases in ESG decision-making. All the papers have similar results: all five studies highlight the role played by cognitive biases, especially overconfidence bias, in poor decision-making in ESG investments. The studies have also found that the investors' values play a huge role in decision-making. Finally, the studies are suggesting many solutions, such as transparency by providing non-financial information, third-party certification of rating agencies and investor education about the basic pillars of ESG to mitigate the impacts of cognitive biases on decision-making.