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Optimization of Sustainable Portfolios Considering Behavioral Biases: ESG Risk Management
Abstract
As the role of sustainability is gaining importance among investors, they are more focused on adopting ESG principles into their portfolios. Despite this, bringing a balance between financial returns and sustainability objectives is frequently challenged by the behavioral biases affecting investor's decision-making. Biases like herd behavior, overconfidence, and loss aversion disrupt the investor's investment decisions, weakening the effectiveness of ESG strategies and negatively affecting portfolio returns. Therefore, it is essential to embed behavioral finance concepts into optimizing sustainable portfolios. This research explores the optimization of sustainable portfolios by addressing behavioral biases and the application of effective risk management techniques. The research identifies the significant cognitive biases that shape investor's behavior in the context of ESG investing. The research then investigates how these biases influence financial returns and ESG goals.
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