Behavioral Biases and Financial Decision-Making of Individual Investors in Afghanistan: A Literature Review of Cognitive and Emotional Biases

Abstract

This review examines cognitive and emotional biases that influence financial decision-making of individuals and considers their implications within Afghanistan’s fragile market. It employed a literature review approach and drew on peer-reviewed scholarly literature from respected international journals. The reviewed literature of behavioral biases was organized into two broad categories: cognitive biases and emotional biases. The study examines how these biases influence trading behavior, asset allocation, diversification, and risk-taking behavior and other financial decisions and subsequently contextualizes them within the Afghanistan financial environment. The review indicates that overconfidence boosts the excessive risk-taking behavior in trading, while anchoring might cause investors to rely excessively on previously available information and respond slowly to new information. Mental accounting is a phenomenon that influences how people classify and evaluate financial resources, whereas loss aversion may lead individuals to place greater weight on losses than equivalent gains. Herding may encourage individuals to follow the decisions of others, particularly under uncertainty and limited information, while regret will discourage individuals from revising previous financial decisions. Economic uncertainty, limited market development, and informal financial practices in Afghanistan may increase the relevance of these behavioral inclinations in financial decision-making. Although behavioral biases have been widely studied in developed and emerging markets, evidence concerning fragile markets remains limited and fragmented. Afghanistan represents an underexplored context in behavioral finance, particularly how behavioral biases interact with financial decision-making under conditions of institutional and market fragility. The review highlights the need for context-specific empirical research and behavioral financial literacy programs to improve the decision-making of individual and household investors in Afghanistan.