How Psychological Biases Affect Investment Decisions: An Analysis of Loss Aversion and the Endowment Effect

This study explores how loss aversion and the endowment effect affect investment decisions. When investors experience losses, they often continue to hold depreciating assets due to loss aversion, which ultimately reduces investment efficiency; while the endowment effect causes investors to overestimate the value of their assets, affecting reasonable transactions. This paper uses behavioral economics theory combined with case analysis to deeply explore the formation of psychological biases and their specific impact on investment decisions. Through case analysis and behavioral economics theory, this study reveals the influence mechanism of these psychological biases and proposes behavioral optimization strategies, including stop loss and portfolio diversification, to reduce the risk of irrational decisions. In addition, this study recommends that investors obtain educational resources through financial institutions to improve investors' awareness of psychological biases and improve market transaction efficiency through pricing transparency. The innovation of this study is to combine behavioral economics with actual investment cases to provide more operational optimization suggestions to promote more rational and efficient investment decisions.