What issue can behavioral bias create for investors?

Behavioral bias can significantly impact investors by skewing their judgment and leading to irrational decisions. This occurs because behavioral biases, such as overconfidence, loss aversion, and anchoring, can distort an individual's perception of risk and return. For instance, an investor may hold onto a losing investment due to loss aversion, believing that they’ll recoup their losses, or they may overestimate their ability to predict market movements due to overconfidence. These biases can result in suboptimal choices that do not align with sound investment strategies, leading to poor financial outcomes.

In contrast, the other options do not accurately reflect the effects of behavioral biases on investment behavior. For example, the suggestion that behavioral bias increases analytical accuracy misrepresents the nature of bias, which tends to impair reasoning rather than enhance it. Similarly, behavioral bias does not contribute to improved compliance with regulations or enhance long-term planning; instead, it often complicates these aspects by interfering with clear, rational decision-making necessary for following regulations and developing sound long-term strategies.