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1 – 10 of over 3000
Article
Publication date: 31 May 2022

Maqsood Ahmad, Qiang Wu and Yasar Abbass

This study aims to explore and clarify the mechanism by which recognition-based heuristic biases influence the investment decision-making and performance of individual investors…

Abstract

Purpose

This study aims to explore and clarify the mechanism by which recognition-based heuristic biases influence the investment decision-making and performance of individual investors, with the mediating role of fundamental and technical anomalies.

Design/methodology/approach

The deductive approach was used, as the research is based on behavioral finance's theoretical framework. A questionnaire and cross-sectional design were employed for data collection from the sample of 323 individual investors trading on the Pakistan Stock Exchange (PSX). Hypotheses were tested through the structural equation modeling (SEM) technique.

Findings

The article provides further insights into the relationship between recognition-based heuristic-driven biases and investment management activities. The results suggest that recognition-based heuristic-driven biases have a markedly positive influence on investment decision-making and negatively influence the investment performance of individual investors. The results also suggest that fundamental and technical anomalies mediate the relationships between the recognition-based heuristic-driven biases on the one hand and investment management activities on the other.

Practical implications

The results of the study suggested that investment management activities that rely on recognition-based heuristics would not result in better returns to investors. The article encourages investors to base decisions on investors' financial capability and experience levels and to avoid relying on recognition-based heuristics when making decisions related to investment management activities. The results provides awareness and understanding of recognition-based heuristic-driven biases in investment management activities, which could be very useful for decision-makers and professionals in financial institutions, such as portfolio managers and traders in commercial banks, investment banks and mutual funds. This paper helps investors to select better investment tools and avoid repeating the expensive errors that occur due to recognition-based heuristic-driven biases.

Originality/value

The current study is the first to focus on links recognition-based heuristic-driven biases, fundamental and technical anomalies, investment decision-making and performance of individual investors. This article enhanced the understanding of the role that recognition-based heuristic-driven biases plays in investment management. More importantly, the study went some way toward enhancing understanding of behavioral aspects and the aspects' influence on investment decision-making and performance in an emerging market.

Book part
Publication date: 11 December 2006

Nick Schandler

The “winner's curse” (or, more precisely, failure to account for the winner's curse) was one of the first behavioralanomalies” to be discussed in the literature. The idea dates…

Abstract

The “winner's curse” (or, more precisely, failure to account for the winner's curse) was one of the first behavioralanomalies” to be discussed in the literature. The idea dates back to 1971, and was first applied to the bidding for oil drilling rights (See Capen, Clapp, & Campbell, 1971). The winner's curse is the phenomenon of systematically upward-biased winning bids in an auction market. That is, the winning bid in an auction tends to be much higher than some objectively defined value of the good.2 The basis of the anomaly is relatively simple. In an auction with a large number of buyers, each possessing imperfect information concerning the value of the auctioned good, there will be a spread of estimated values. If buyers possess rational expectations, we will expect roughly half (assuming a symmetric distribution of estimates) of the bidders to overestimate the value of the good, and roughly half to underestimate its true value. If buyers naively bid their estimated value of the good, the winning bid will equal the most extremely over-valued estimate. Thus, the winning bid will not only be an overestimate of the good's true value, but it will be the most extreme overestimate made by any bidder. Hence, while on average an individual's bid may equal the actual value of the auctioned good, the winning bid will most likely be a severe overestimate of the good's value. For this reason, bidders who naively bid their estimated value at an auction will tend to regret winning.

Details

Cognition and Economics
Type: Book
ISBN: 978-1-84950-465-2

Article
Publication date: 16 May 2016

Yuandong Xu

The empirical studies have indicated that the information uncertainty is one of the reasons leading to the momentum effect in the stock market. Based on this conclusion, the…

Abstract

Purpose

The empirical studies have indicated that the information uncertainty is one of the reasons leading to the momentum effect in the stock market. Based on this conclusion, the concept of “information uncertainty” is deepened into the concept hierarchy of “information ambiguity,” the purpose of this paper is to explain the momentum effect in the China’s stock market from information ambiguity.

Design/methodology/approach

Based on the information ambiguity, the paper puts forward two hypotheses, portfolio analysis and cross-sectional regression analysis method were used to empirically test these hypothesis based on the weekly data.

Findings

The empirical results support the two hypotheses.

Originality/value

Finally, the paper discusses the importance from ambiguity to understand financial anomalies, such as momentum effect.

Details

China Finance Review International, vol. 6 no. 2
Type: Research Article
ISSN: 2044-1398

Keywords

Book part
Publication date: 25 May 2021

Reyhan Can and H. Isın Dizdarlar

Introduction: According to the effective market hypothesis, investors act rationally when making an investment decision. The hypothesis assumes that investors invest in a way that…

Abstract

Introduction: According to the effective market hypothesis, investors act rationally when making an investment decision. The hypothesis assumes that investors invest in a way that maximizes their returns, taking into account the new information received. If the information released on the market is interpreted in the same way by all investors, no investor would be able to earn above the market. This hypothesis is valid in case of efficient markets. In the event that investors show irrational behavior to the information released on the market, the markets move away from efficiency. Overreaction behavior is one of the non-rational behaviors of investors. Overreaction behavior involves investors overreacting by misinterpreting the new information released to the market. According to De Bondt and Thaler’s (1985), overreaction hypothesis in the event that investors overreact to the news coming to the market, after a period the false evaluation, the price of the security is corrected with the reversal movement, without the need of any positive or negative information. Aim: The purpose of this study is to examine investors’ overreaction behavior in mergers and acquisitions. For this purpose, overreaction behavior was analyzed for companies whose stocks are traded on the Borsa Istanbul, which were involved in mergers or acquisitions. Method: In the study, companies that made mergers and acquisitions for the period 2007–2017 were determined, and abnormal returns and cumulative abnormal returns were calculated by using monthly closing price data of these companies. Moreover, whether investors overreact to the merger and acquisition decision is examined separately for one-, three- and five-year periods. Findings: As a result of the research, it has been observed that there is a reverse return for one-, three-, and five-year periods. However, it has been determined that the overreaction hypothesis is valid for only one year.

Details

Contemporary Issues in Social Science
Type: Book
ISBN: 978-1-80043-931-3

Keywords

Article
Publication date: 14 November 2018

Samra Chaudary

The paper takes a behavioral approach by making use of the prospect theory to unveil the impact of salience on short-term and long-term investment decisions. This paper aims to…

Abstract

Purpose

The paper takes a behavioral approach by making use of the prospect theory to unveil the impact of salience on short-term and long-term investment decisions. This paper aims to investigate the group differences for two types of investors’ groups, i.e. individual investors and professional investors.

Design/methodology/approach

The study uses partial least square-based structural equation modeling technique, measurement invariance test and multigroup analysis test on a unique data set of 277 active equity traders which included professional money managers and individual investors.

Findings

Results showed that salience has a significant positive impact on both short-term and long-term investment decisions. The impact was almost 1.5 times higher for long-term investment decision as compared to short-term decision. Furthermore, multigroup analysis revealed that the two groups (individual investors and professional investors) were statistically significantly different from each other.

Research limitations/implications

The study has implications for financial regulators, money managers and individual investors as it was found that individual investors suffer more with salience heuristic and may end up with sub-optimal portfolios due to inefficient diversification. Thus, investors should be cautious in fully relying on salience and avoid such bias to improve investment returns.

Practical implications

The study concludes with a discussion of policy and regulatory implications on how to minimize salience bias to achieve optimum and diversified portfolios.

Originality/value

The study has significantly contributed to the growing body of applied behavioral research in the discipline of finance.

Details

Kybernetes, vol. 48 no. 8
Type: Research Article
ISSN: 0368-492X

Keywords

Article
Publication date: 24 June 2019

Srikanth Parthasarathy

The purpose of this paper is to examine the short horizon stock behavior following large price shocks in the Indian stock market.

Abstract

Purpose

The purpose of this paper is to examine the short horizon stock behavior following large price shocks in the Indian stock market.

Design/methodology/approach

The author followed the methodology developed by Pritamani and Singhal (2001) to the short horizon stock behavior following large price shocks. Multivariate regression has also been used to test the robustness of the evidenced results.

Findings

The abnormal return following large one-day price changes were not found to be important. However, large price one-day changes, conditioned with volume, evidenced significant reversals and momentum over the following 20-day period. Large price changes accompanied by low volume exhibited significant reversals and suggests significant economic profits. The large price changes accompanied by high volume exhibited continuations.

Research limitations/implications

Large price changes accompanied by low volume exhibited significant reversals and suggested significant economic profits. The large price changes with high volume exhibited continuations. The contrarian strategy of buying low-volume one-day losers and selling one-day winners produced significant short horizon economic profits in the Indian stock market directly contradicting the efficient market hypothesis and has behavioral implications.

Practical implications

In this paper, the author has unearthed significant simple profitable trading strategies based on reversals and continuation following large one-day price changes with potential for significant economic profits.

Originality/value

This paper provides a practical framework for profitable trading strategies based on reversals and continuation following large one-day price changes with a potential for significant economic profits. The analysis of short horizon stock behavior following large price shocks conditional on volume based on the chosen methodology has not been attempted so far in the Indian stock market.

Details

Review of Behavioral Finance, vol. 11 no. 4
Type: Research Article
ISSN: 1940-5979

Keywords

Article
Publication date: 14 May 2019

Syed Aliya Zahera and Rohit Bansal

The purpose of this paper is to study the disposition effect that is exhibited by the investors through the review of research articles in the area of behavioral finance. When the…

1615

Abstract

Purpose

The purpose of this paper is to study the disposition effect that is exhibited by the investors through the review of research articles in the area of behavioral finance. When the investors are hesitant to realize the losses and quick to realize the gains, this phenomenon is known as the disposition effect. This paper explains various theories, which have been evolved over the years that has explained the phenomenon of disposition effect. It includes the behavior of individual investors, institutional investors and mutual fund managers.

Design/methodology/approach

The authors have used the existing literatures from the various authors, who have studied the disposition effect in either real market or the experimental market. This paper includes literature over a period of 40 years, that is, Dyl, 1977, in the form of tax loss selling, to the most recent paper, Surya et al. (2017). Some authors have used the PGR-PLR ratio for calculating the disposition effect in their study. However, some authors have used t-test, ANNOVA, Correlation coefficient, Standard deviation, Regression, etc., as a tool to find the presence of disposition effect.

Findings

The effect of disposition can be changed for different types of individual investors, institutional investors and mutual funds. The individual investors are largely prone to the disposition effect and the demographic variables like age, gender, experience, investor sophistication also impact the occurrence of the disposition effect. On the other side, the institutional investors and mutual funds managers may or may not be affected by the disposition effect.

Practical implications

The skilled understanding of the disposition effect will help the investors, financial institutions and policy-makers to reduce the adverse effect of this bias in the stock market. This paper contributes a detailed explanation of disposition effect and its impacts on the investors. The study of disposition effect has been found to be insufficient in the context of Indian capital market.

Social implications

The investors and society at large can gains insights about causes and influences of disposition effect which will be helpful to create sound investment decisions.

Originality/value

This paper has complied the 11 causes for the occurrence of disposition effect that are found by the different authors. The paper also highlights the impact of the disposition effect in the decision-making of various investors.

Details

Qualitative Research in Financial Markets, vol. 11 no. 1
Type: Research Article
ISSN: 1755-4179

Keywords

Content available
Book part
Publication date: 27 January 2023

Bernd Krampen

Abstract

Details

Using Economic Indicators in Analysing Financial Markets
Type: Book
ISBN: 978-1-80455-325-1

Open Access
Article
Publication date: 14 November 2023

Hajer Chenini and Anis Jarboui

A separate study of the different behavioral biases does not allow for a full understanding of the complexity and stability of the heterogeneity of beliefs. Therefore, through a…

Abstract

Purpose

A separate study of the different behavioral biases does not allow for a full understanding of the complexity and stability of the heterogeneity of beliefs. Therefore, through a more global view of these anomalies, the authors wish to show that they can converge on a single concept, which is the heterogeneity of beliefs.

Design/methodology/approach

It is therefore essential to stress that the importance of this study is mainly reflected in the methodological approach used in the construction and analysis of the map and not only in the results achieved. This contribution states that structural analysis, as a means of building the cognitive map, can facilitate the task of investors and other decision-makers, in the identification and analysis of the heterogeneity of beliefs that can therefore guide investors' strategy in decision-making.

Findings

The authors have studied the behavior of the investor and its way of interpreting the information and the authors have emphasized the value of studying the concept of heterogeneity of beliefs in its complexity. So that part of the work seems to be relevant and crucial to filling, if you will, that void. In this sense, the authors have shown that behavioral abnormalities are multidimensional concepts: “self-deception”, “cognitive bias”, “emotional bias” and “social bias”.

Originality/value

In particular, this article will aim to achieve the objective of proposing a model for measuring the heterogeneity of beliefs. Thus, the authors want to show that the heterogeneity of beliefs can be measured directly through the different behavioral anomalies.

Details

Journal of Economics, Finance and Administrative Science, vol. 29 no. 57
Type: Research Article
ISSN: 2077-1886

Keywords

Article
Publication date: 28 June 2022

Maqsood Ahmad

This article aims to systematically review the literature published in recognized journals focused on cognitive heuristic-driven biases and their effect on investment management…

2044

Abstract

Purpose

This article aims to systematically review the literature published in recognized journals focused on cognitive heuristic-driven biases and their effect on investment management activities and market efficiency. It also includes some of the research work on the origins and foundations of behavioral finance, and how this has grown substantially to become an established and particular subject of study in its own right. The study also aims to provide future direction to the researchers working in this field.

Design/methodology/approach

For doing research synthesis, a systematic literature review (SLR) approach was applied considering research studies published within the time period, i.e. 1970–2021. This study attempted to accomplish a critical review of 176 studies out of 256 studies identified, which were published in reputable journals to synthesize the existing literature in the behavioral finance domain-related explicitly to cognitive heuristic-driven biases and their effect on investment management activities and market efficiency as well as on the origins and foundations of behavioral finance.

Findings

This review reveals that investors often use cognitive heuristics to reduce the risk of losses in uncertain situations, but that leads to errors in judgment; as a result, investors make irrational decisions, which may cause the market to overreact or underreact – in both situations, the market becomes inefficient. Overall, the literature demonstrates that there is currently no consensus on the usefulness of cognitive heuristics in the context of investment management activities and market efficiency. Therefore, a lack of consensus about this topic suggests that further studies may bring relevant contributions to the literature. Based on the gaps analysis, three major categories of gaps, namely theoretical and methodological gaps, and contextual gaps, are found, where research is needed.

Practical implications

The skillful understanding and knowledge of the cognitive heuristic-driven biases will help the investors, financial institutions and policymakers to overcome the adverse effect of these behavioral biases in the stock market. This article provides a detailed explanation of cognitive heuristic-driven biases and their influence on investment management activities and market efficiency, which could be very useful for finance practitioners, such as an investor who plays at the stock exchange, a portfolio manager, a financial strategist/advisor in an investment firm, a financial planner, an investment banker, a trader/broker at the stock exchange or a financial analyst. But most importantly, the term also includes all those persons who manage corporate entities and are responsible for making their financial management strategies.

Originality/value

Currently, no recent study exists, which reviews and evaluates the empirical research on cognitive heuristic-driven biases displayed by investors. The current study is original in discussing the role of cognitive heuristic-driven biases in investment management activities and market efficiency as well as the history and foundations of behavioral finance by means of research synthesis. This paper is useful to researchers, academicians, policymakers and those working in the area of behavioral finance in understanding the role that cognitive heuristic plays in investment management activities and market efficiency.

Details

International Journal of Emerging Markets, vol. 19 no. 2
Type: Research Article
ISSN: 1746-8809

Keywords

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