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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…

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. ahead-of-print no. ahead-of-print
Type: Research Article
ISSN: 1746-8809

Keywords

Article
Publication date: 8 June 2022

Noppanon Homsud and Nopadol Rompho

This study aims to determine the effect of cognitive biases, that is, anchoring effect, illusion of control, and endowment effect, on customer satisfaction.

Abstract

Purpose

This study aims to determine the effect of cognitive biases, that is, anchoring effect, illusion of control, and endowment effect, on customer satisfaction.

Design/methodology/approach

An experimental design was applied using 524 undergraduate students as participants. A three-way ANOVA was employed for data analysis.

Findings

Positive relationships were found between cognitive biases and customer satisfaction. However, no such relationships were found between the interactions of various types of cognitive bias and customer satisfaction, except the interaction between illusion of control and endowment effect.

Research limitations/implications

This study focuses only on three types of cognitive biases; thus, it cannot be generalized to other such systematic patterns.

Practical implications

Marketers can introduce cognitive bias when implementing marketing campaigns to boost customer satisfaction.

Originality/value

This study expands the knowledge boundary by addressing the impact of the interaction between various aspects of cognitive bias that drive customer satisfaction.

Details

Asia-Pacific Journal of Business Administration, vol. ahead-of-print no. ahead-of-print
Type: Research Article
ISSN: 1757-4323

Keywords

Article
Publication date: 12 January 2021

Konrad Kulikowski

Despite evidence showing that cognitive biases – the systematic errors made by humans during cognitive processing, are prevalent among decision-makers, there is a lack of…

Abstract

Purpose

Despite evidence showing that cognitive biases – the systematic errors made by humans during cognitive processing, are prevalent among decision-makers, there is a lack of theoretical models providing insight into how these limitations of human mind might affect decisions made during performance management. This study aims to fill this gap and contribute to performance management scholarship by proposing a conceptual framework broadening our understanding of the role of cognitive biases in performance improvements practices and by highlighting remedies for cognitive biases.

Design/methodology/approach

Using benchmarking as an example, the authors integrate the knowledge from performance management and cognitive psychology literature. Examples of cognitive biases possible during benchmarking are used to illustrate how the limitations of human mind might have a critical role in performance management.

Findings

The cognitive biases might diminish the positive effect of performance improvement practice on organizational performance. As there is a prevalence of cognitive biases coupled with the inability of individuals to recognize and face them, the remedy for cognitive biases should be sought not at an individual but rather on an organizational level, in creating organizational cognitive biases policy (CBP).

Originality/value

The presented model provides new insights into the role of cognitive biases in performance management and allows seeing CBP as a safeguard against the effects of cognitive biases on performance. By referring to cognitive biases and CBP, our model also helps to understand why the same performance improvement practices might incite different opinions among decision-makers.

Details

International Journal of Productivity and Performance Management, vol. 71 no. 4
Type: Research Article
ISSN: 1741-0401

Keywords

Open Access
Article
Publication date: 19 May 2020

Chiara Acciarini, Federica Brunetta and Paolo Boccardelli

In a work environment marked by unprecedented complexity, volatility and ambiguity, managers must accomplish their objectives while navigating many challenges. This paper…

6582

Abstract

Purpose

In a work environment marked by unprecedented complexity, volatility and ambiguity, managers must accomplish their objectives while navigating many challenges. This paper aims to investigate potential interrelations among environmental transformations, cognitive biases and strategic decisions. In particular, the purpose of the study is to crystallize the state of art on the impact of cognitive biases on strategic decisions, in the context of environmental transformations.

Design/methodology/approach

The authors have conducted a systematic literature review to identify existing relevant work on this topic and to detect potential avenues for future research.

Findings

The findings highlight how decision-making is influenced and enabled by internal (e.g. perception) and external factors (e.g. digitalization). Specifically, the strategic role of cognitive biases appears to be crucial when investigating the related impact on strategic decisions in times of environmental transformation.

Practical implications

Implications are drawn for scholars and practitioners interested in evaluating the role of specific decision-making determinants for the formation and implementation of strategic decisions. In this sense, we stress that decision-makers need to manage their cognitive biases and select the right information out of a wide data set in order to adapt to environmental transformations.

Originality/value

By systematizing the literature review, potential interrelations among environmental transformations, cognitive biases and strategic decisions are identified. Furthermore, the primary phases that drive the decision-making process are proposed (analysis, decision, onboarding and control).

Details

Management Decision, vol. 59 no. 3
Type: Research Article
ISSN: 0025-1747

Keywords

Article
Publication date: 26 November 2020

Niklas Kreilkamp, Maximilian Schmidt and Arnt Wöhrmann

The purpose of this paper is to investigate if and how firms approach debiasing and what determines its success. In particular, this study examines if debiasing is…

Abstract

Purpose

The purpose of this paper is to investigate if and how firms approach debiasing and what determines its success. In particular, this study examines if debiasing is effective in reducing cognitive decision biases. This paper also investigates organizational characteristics that determine the effectiveness of debiasing.

Design/methodology/approach

This study uses survey data from German firms to answer the research questions. Target respondents are individuals in a senior management accounting function.

Findings

In line with the hypotheses, this paper finds that debiasing can reduce cognitive biases. Moreover, this study finds that psychological safety not only directly influences the occurrence of cognitive biases but is also an important factor that determines the effectiveness of debiasing.

Research limitations/implications

This paper provides evidence that debiasing can serve as a powerful management accounting tool and discusses debiasing in the context of recent management accounting literature. This study also adds to the stream of research that investigates the role of psychological safety in organizations by highlighting its importance for successful debiasing.

Practical implications

This paper informs firms that use or intend to use debiasing about crucial determinants to consider when debating its implementation, i.e. psychological safety. This study also identifies risk management as a potential interface for the implementation of systematic debiasing.

Originality/value

While previous research primarily addresses specific cognitive biases and debiasing mechanisms using lab experiments, this is – to the best of the knowledge – the first study investigating cognitive biases and debiasing on a broad conceptual level using survey data.

Details

Journal of Accounting & Organizational Change, vol. 17 no. 4
Type: Research Article
ISSN: 1832-5912

Keywords

Article
Publication date: 27 May 2022

Maqsood Ahmad, Qiang Wu, Muhammad Naveed and Shoaib Ali

This study aims to explore and clarify the mechanism by which cognitive heuristics influence strategic decision-making during the coronavirus disease 2019 (COVID-19…

Abstract

Purpose

This study aims to explore and clarify the mechanism by which cognitive heuristics influence strategic decision-making during the coronavirus disease 2019 (COVID-19) pandemic in an emerging economy.

Design/methodology/approach

Data collection was conducted through a survey completed by 213 top-level managers from firms located in the twin cities of Pakistan. A convenient, purposively sampling technique and snowball method were used for data collection. To examine the relationship between cognitive heuristics and strategic decision-making, hypotheses were tested by using correlation and regression analysis.

Findings

The article provides further insights into the relationship between cognitive heuristics and strategic decision-making during the COVID-19 pandemic. The results suggest that cognitive heuristics (under-confidence, self-attribution and disposition effect) have a markedly negative influence on the strategic decision-making during the COVID-19 pandemic in an emerging economy.

Practical implications

The article encourages strategic decision-makers to avoid relying on cognitive heuristics or their feelings when making strategic decisions. It provides awareness and understanding of cognitive heuristics in strategic decision-making, which could be very useful for business actors such as managers and entire organizations. The findings of this study will help academicians, researchers and policymakers of emerging countries. Academicians can formulate new behavioural models that can depict the solutions to dealing with an uncertain situation like COVID-19. Policymakers and strategic decision-making teams can develop crisis management strategies based on concepts from behavioral strategy to better deal with similar circumstances in the future, such as COVID-19.

Originality/value

The paper’s novelty is that the authors have explored the mechanism by which cognitive heuristics influence strategic decision-making during the COVID-19 pandemic in an emerging economy. It adds to the literature in strategic management, explicitly probing the impact of cognitive heuristics on strategic decision-making; this field is in its initial stage, even in developed countries, while little work has been done in emerging countries.

Peer review

The peer review history for this article is available at https://publons.com/publon/10.1108/IJSE-10-2021-0636.

Details

International Journal of Social Economics, vol. 49 no. 10
Type: Research Article
ISSN: 0306-8293

Keywords

Article
Publication date: 13 April 2020

Haili Zhang, Hans van der Bij and Michael Song

While some studies have found that cognitive biases are detrimental to entrepreneurial performance, others have conjectured that cognitive biases may stimulate…

Abstract

Purpose

While some studies have found that cognitive biases are detrimental to entrepreneurial performance, others have conjectured that cognitive biases may stimulate entrepreneurial action. This study uses a typology of availability and representative heuristics to examine how two patterns of biases affect entrepreneurial performance. Drawing on ideas from cognitive science, this study predicts that various levels of biases in each pattern stimulate entrepreneurial behavior and performance.

Design/methodology/approach

A profile-deviation approach was employed to analyze data from 253 entrepreneurs and zero-truncated Poisson regression and the zero-truncated negative binomial regression to test hypotheses.

Findings

This study finds some positive associations between a particular level of cognitive biases in each of the two patterns and entrepreneurial behavior and performance. Results show that the patterns of biases often stimulate and never hurt entrepreneurial behavior and performance. The opposite holds for a lack of cognitive biases, which hurts and never stimulates entrepreneurial behavior and performance.

Originality/value

This study examines patterns of cognitive biases of entrepreneurs instead of single biases. The study broadens the perspective on the heuristics and cognitive biases of entrepreneurs by examining patterns of biases emanating from the availability and the representativeness heuristic that make a difference for entrepreneurial behavior and performance. The study also brings the “great rationality debate” closer to the entrepreneurship field by showing that a normative rule based on statistics and probability theory does not benefit entrepreneurial behavior and performance.

Details

International Journal of Entrepreneurial Behavior & Research, vol. 26 no. 4
Type: Research Article
ISSN: 1355-2554

Keywords

Article
Publication date: 13 September 2021

Moses Munyami Kinatta, Twaha Kigongo Kaawaase, John C. Munene, Isaac Nkote and Stephen Korutaro Nkundabanyanga

This study examines the relationship between investor cognitive bias, investor intuitive attributes and investment decision quality in commercial real estate in Uganda.

Abstract

Purpose

This study examines the relationship between investor cognitive bias, investor intuitive attributes and investment decision quality in commercial real estate in Uganda.

Design/methodology/approach

A cross-sectional research survey was used in this study, and data were collected from 200 investors of commercial real estate in Uganda using a structured questionnaire. Hierarchical regression analysis was used to test the hypotheses derived under this study.

Findings

The results indicate that investor cognitive bias and investor intuitive attributes are positive and significant determinants of investment decision quality in commercial real estate. In addition, the two components of Investor cognitive bias (framing variation and cognitive heuristics) are positive and significant determinants of investment decision quality, whereas mental accounting is a negative and significant determinant of investment decision quality. For investor intuitive attributes, confidence degree and loss aversion are positive and significant determinants of investment decision quality, whereas herding behavior is a negative and significant determinant of investment decision quality in commercial real estate in Uganda.

Practical implications

For practitioners in commercial real estate sector should emphasize independent evaluation of investment opportunities (framing variation), simplify information regarding investments (Cognitive heuristics), believe in own abilities (Confidence degree), be risk averse (loss aversion) and avoid making decisions based on subjective visual mind (mental accounting) and group think/herding in order to make quality investment decisions. For policymakers, the study has illuminated factors such as provision of reliable information that ought to be taken into account when promulgating policies for regulation of the commercial real estate sector. This will help investors to come up with investment decisions which are plausible.

Originality/value

Few studies have focused on investor cognitive bias and investor intuitive attributes on investment decision quality in commercial real estate. This study is the first to examine the relationship, especially in the commercial real estate sector in a developing country like Uganda.

Details

Journal of Property Investment & Finance, vol. 40 no. 2
Type: Research Article
ISSN: 1463-578X

Keywords

Article
Publication date: 29 June 2020

Nurcan Deniz

Expert evaluation is the backbone of the multi-criteria decision-making (MCDM) techniques. The experts make pairwise comparisons between criteria or alternatives in this…

Abstract

Purpose

Expert evaluation is the backbone of the multi-criteria decision-making (MCDM) techniques. The experts make pairwise comparisons between criteria or alternatives in this evaluation. The mainstream research focus on the ambiguity in this process and use fuzzy logic. On the other hand, cognitive biases are the other but scarcely studied challenges to make accurate decisions. The purpose of this paper is to propose pilot filters – as a debiasing strategy – embedded in the MCDM techniques to reduce the effects of framing effect, loss aversion and status quo-type cognitive biases. The applicability of the proposed methodology is shown with analytic hierarchy process-based Technique for Order-Preference by Similarity to Ideal Solution method through a sustainable supplier selection problem.

Design/methodology/approach

The first filter's aim is to reduce framing bias with restructuring the questions. To manipulate the weights of criteria according to the degree of expected status quo and loss aversion biases is the second filter's aim. The second filter is implemented to a sustainable supplier selection problem.

Findings

The comparison of the results of biased and debiased ranking indicates that the best and worst suppliers did not change, but the ranking of suppliers changed. As a result, it is shown that, to obtain more accurate results, employing debiasing strategies is beneficial.

Originality/value

To the best of the author's knowledge, this approach is a novel way to cope with the cognitive biases. Applying this methodology easily to other MCDM techniques will help the decision makers to take more accurate decisions.

Details

Journal of Enterprise Information Management, vol. 33 no. 5
Type: Research Article
ISSN: 1741-0398

Keywords

Article
Publication date: 23 November 2012

Sachin Wasuja, Mahim Sagar and Sushil

Specialty drug development is capital‐intensive and represents a new era for the entire health ecosystem. This “newness” has resulted in below‐par sales performance of…

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Abstract

Purpose

Specialty drug development is capital‐intensive and represents a new era for the entire health ecosystem. This “newness” has resulted in below‐par sales performance of these drugs. This paper seeks to explore the intricate relationship of product (or company), salespersons, doctors and consumers (patients) in the given scenario.

Design/methodology/approach

The study makes use of grounded theory and total interpretive structural modeling (TISM). Grounded theory is used to explore various factors of cognitive bias in selling specialty drugs. TISM is used to create a hierarchy amongst the factors and interpret the relationships amongst them.

Findings

The study proposes a cognitive bias amplification model explaining the phenomenon of cognitive bias in specialty pharmaceutical selling.

Originality/value

The study fills part of the significant research gap and addresses the issues in selling specialty drugs. The cognitive bias amplification model is helpful in providing the starting point for sales‐centric organizations to overcome the cognitive bias affecting salespersons.

Details

International Journal of Pharmaceutical and Healthcare Marketing, vol. 6 no. 4
Type: Research Article
ISSN: 1750-6123

Keywords

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