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Understanding heuristics-based financial decision-making using behavioral portfolio strategies

Kamran Quddus (Accounting and Finance, Indian Institute of Management, Ranchi, India)
Ashok Banerjee (Finance and Control, Indian Institute of Management, Kolkata, India)

Review of Behavioral Finance

ISSN: 1940-5979

Article publication date: 19 November 2021

Issue publication date: 14 March 2023




Through a portfolio choice model, the study empirically examines the influence of the heuristic simplification through peak-end rule (PER) and the associated neglect of the duration of the experience. The portfolio strategy adopted involves optimizing portfolios to capture the impact of heuristic-driven investors' experience of good and bad states. The study attempts to validate PER in an empirical context and is expected to generate trading rules, which would exploit pricing errors emerging out of the use of heuristics by investors.


The empirical approach adopted in the study primarily examines returns to portfolios sorted according to various hedonic evaluation rules. Behavioral portfolios are constructed using hedonic experiences as conditioning variables.


The results imply that there is continued investor demand for such assets in the short run. An equal weight portfolio based on a three-month hedonic evaluation earns an average monthly return of 2.77% over the next 12 months.


The authors’ study may perhaps be the first attempt to use the peak-end heuristic in portfolio construction.



Quddus, K. and Banerjee, A. (2023), "Understanding heuristics-based financial decision-making using behavioral portfolio strategies", Review of Behavioral Finance, Vol. 15 No. 2, pp. 121-137.



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