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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: 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…

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.

Details

Kybernetes, vol. ahead-of-print no. ahead-of-print
Type: Research Article
ISSN: 0368-492X

Keywords

Article
Publication date: 24 October 2021

Maqsood Ahmad

The aim of this paper is to systematically review the literature published in recognized journals focused on recognition-based heuristics and their effect on investment…

Abstract

Purpose

The aim of this paper is to systematically review the literature published in recognized journals focused on recognition-based heuristics and their effect on investment management activities and to ascertain some substantial gaps related to them.

Design/methodology/approach

For doing research synthesis, systematic literature review approach was applied considering research studies published within the time period, i.e. 1980–2020. This study attempted to accomplish a critical review of 59 studies out of 118 studies identified, which were published in reputable journals to synthesize the existing literature in the behavioural finance domain-related explicitly to recognition-based heuristics and their effect on investment management activities.

Findings

The survey and analysis suggest investors consistently rely on the recognition-based heuristic-driven biases when trading stocks, resulting in irrational decisions, and an investment strategy constructed by implementing the recognition-based heuristics, would not result in better returns to investors on a consistent basis. Institutional investors are less likely to be affected by these name-based behavioural biases in comparison to individual investors. However, under the context of ecological rationality, recognition-based heuristics work better and sometimes dominate the classical methods. The research scholars from the behavioural finance community have highlighted that recognition-based heuristics and their impact on investment management activities are high profile areas, needed to be explored further in the field of behavioural finance. The study of recognition-based heuristic-driven biases has been found to be insufficient in the context of emerging economies like Pakistan.

Practical implications

The skilful understanding and knowledge of the recognition-based heuristic-driven biases will help the investors, financial institutions and policy-makers to overcome the adverse effect of these behavioural biases in the stock market. This article provides a detailed explanation of recognition-based heuristic-driven biases and their influence on investment management activities which could be very useful for finance practitioners’ such as 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 its financial management strategies.

Originality/value

Currently, no recent study exists, which reviews and evaluates the empirical research on recognition-based heuristic-driven biases displayed by investors. The current study is original in discussing the role of recognition-based heuristic-driven biases in investment management activities by means of research synthesis. This paper is useful to researchers, academicians, and those working in the area of behavioural finance in understanding the role that recognition-based heuristics plays in investment management activities.

Details

Qualitative Research in Financial Markets, vol. ahead-of-print no. ahead-of-print
Type: Research Article
ISSN: 1755-4179

Keywords

Open Access
Article
Publication date: 1 November 2021

Pendo Shukrani Kasoga

The purpose of this research is to examine the effect of heuristic biases on investment decisions through multiple mediation mechanisms of risk tolerance and financial…

2490

Abstract

Purpose

The purpose of this research is to examine the effect of heuristic biases on investment decisions through multiple mediation mechanisms of risk tolerance and financial literacy in the Tanzanian stock market.

Design/methodology/approach

A sample of 316 individual investors in the Tanzanian stock market was obtained through questionnaires. The data were analyzed using structural equation modeling (SEM).

Findings

The findings show that financial literacy mediates insignificantly the effects of overconfidence, availability, anchoring and representativeness heuristics on investment decisions. Further, financial literacy does not influence the effect of risk tolerance and investment decisions. Risk tolerance is confirmed as a positive mediator of overconfidence, availability, anchoring and representativeness heuristics in investment decisions. Also, the study shows that overconfidence exerts a stronger influence on investment decisions, followed by availability, representativeness, risk tolerance, anchoring and financial literacy.

Research limitations/implications

The study deals with real investors. Therefore, it uses fewer items to measure the constructs in order to avoid respondent bias. Further research could examine the effects of heuristic biases on investment decisions by adding or modifying the items of particular constructs and studying institutional investors.

Practical implications

The findings can help individual investors to analyze and evaluate their behavior toward stock selection. Securities institutions can use this research to understand investors' behavior, evaluate future market trends and provide advice to the investors.

Originality/value

Previous studies have examined the impact of heuristics on the investment decisions of individual investors. The unique empirical analysis developed in this paper is that it examines the multiple mediation mechanisms of risk tolerance and financial literacy with respect to heuristic biases and investment decisions in the Tanzanian stock market.

Details

Journal of Money and Business, vol. 1 no. 2
Type: Research Article
ISSN: 2634-2596

Keywords

Article
Publication date: 15 August 2018

Gia-Shie Liu and Kuo-Ping Lin

The purpose of this paper is to develop a decision support system to consider geographic information, logistics information and greenhouse gas (GHG) emission information…

Abstract

Purpose

The purpose of this paper is to develop a decision support system to consider geographic information, logistics information and greenhouse gas (GHG) emission information to solve the proposed green inventory routing problem (GIRP) for a specific Taiwan publishing logistics firm.

Design/methodology/approach

A GIRP mathematical model is first constructed to help this specific publishing logistics firm to approximate to the optimal distribution system design. Next, two modified Heuristic-Tabu combination methods that combine savings approach, 2-opt and 1-1 λ-interchange heuristic approach with two modified Tabu search methods are developed to determine the optimum solution.

Findings

Several examples are given to illustrate the optimum total inventory routing cost, the optimum delivery routes, the economic order quantities, the optimum service levels, the reorder points, the optimum common review interval and the optimum maximum inventory levels of all convenience stores in these designed routes. Sensitivity analyses are conducted based on the parameters including truck loading capacity, inventory carrying cost percentages, unit shortage costs, unit ordering costs and unit transport costs to support optimal distribution system design regarding the total inventory routing cost and GHG emission level.

Originality/value

The most important finding is that GIRP model with reordering point inventory control policy should be applied for the first replenishment and delivery run and GIRP model with periodic review inventory control policy should be conducted for the remaining replenishment and delivery runs based on overall simulation results. The other very important finding concerning the global warming issue can help decision makers of GIRP distribution system to select the appropriate type of truck to deliver products to all retail stores located in the planned optimal delivery routes depending on GHG emission consumptions.

Article
Publication date: 1 January 2012

Panagiotis Zaharias and Panayiotis Koutsabasis

The purpose of this paper is to discuss heuristic evaluation as a method for evaluating e‐learning courses and applications and more specifically to investigate the…

1594

Abstract

Purpose

The purpose of this paper is to discuss heuristic evaluation as a method for evaluating e‐learning courses and applications and more specifically to investigate the applicability and empirical use of two customized e‐learning heuristic protocols.

Design/methodology/approach

Two representative e‐learning heuristic protocols were chosen for the comparative analysis. These protocols augment the “traditional” heuristic sets so as to cover technology‐enhanced learning properties. Two reviewers that have considerable experience in usability evaluation as well as in e‐learning were involved in this comparative analysis. Coverage, distribution and redundancy were employed as three basic criteria for conducting the evaluation

Findings

The main results of the study indicate that both heuristic protocols exhibit wide coverage of potential usability problems. The distribution of usability problems is uneven to a large number of heuristics for both heuristic sets, which reveals that some heuristics are more general than others.

Originality/value

This study shows the empirical application of two heuristic protocols in a usability evaluation of e‐learning applications. Furthermore, it provides a comparison of the two heuristic sets according to a set of criteria and provides a first set of suggestions regarding further development and validation of these heuristic sets.

Article
Publication date: 1 October 1999

William Hardin

Behavioral research is an accepted research paradigm in business disciplines outside of finance including management, marketing and accounting. This paper looks at these…

2833

Abstract

Behavioral research is an accepted research paradigm in business disciplines outside of finance including management, marketing and accounting. This paper looks at these disciplines and proposes goals for increasing acceptance of this form of research in real estate. Primary goals include investigation of actual heuristic use, concentration on expert decision makers, either as a group or in comparison to novices, incorporation of additional theory advocating functional heuristics, incorporation of real estate specific theory and identifying both theoretically and empirically when, why and how heuristic use may bias the decision process.

Details

Journal of Property Investment & Finance, vol. 17 no. 4
Type: Research Article
ISSN: 1463-578X

Keywords

Article
Publication date: 1 April 2005

Teemu Ylikoski

To describe consumers’ heuristic and analytical searches for a pre‐purchase information acquisition, and to assess the correspondence of flexibility of information task…

2029

Abstract

Purpose

To describe consumers’ heuristic and analytical searches for a pre‐purchase information acquisition, and to assess the correspondence of flexibility of information task and the information found with a search.

Design/methodology/approach

Propositions based on current research in web use and consumer studies. Tracked records of searches are used for descriptive analysis of transitional patterns in the data. Regression is used for statistical verification of the information provided by searches.

Findings

Consumer searches center on chaining events, indicating heavy reliance on hyperlink navigation between web sites. Formal searches are seldom used, although when employed, tend to have a high level of diagnosticity. The emphasis on heuristic behavior is logical, as the way consumer information is currently presented on the internet rewards for this type of behavior. Use of heuristic search increases the likelihood of access to flexibly presented information.

Research limitations/implications

Consumers favor heuristic trial‐and‐error searches even in focused fact‐finding search tasks, which are typically considered the domain of analytical seeking. Consumers seem to benefit most from apparently inefficient, reactive and heuristic searches, because these are more likely to provide information in a format that the consumer can adapt. Convenience sample limits generalizability of findings.

Originality/value

While there is an increasing body of knowledge concerning internet use for finding information, fewer studies have focused on consumer uses of the web in search. This paper provides new information of online consumers, an increasingly important topic.

Details

Internet Research, vol. 15 no. 2
Type: Research Article
ISSN: 1066-2243

Keywords

Article
Publication date: 9 October 2017

Reijo Savolainen

The purpose of this paper is to elaborate the picture of strategies and tactics for information seeking and searching by focusing on the heuristic elements of such…

1010

Abstract

Purpose

The purpose of this paper is to elaborate the picture of strategies and tactics for information seeking and searching by focusing on the heuristic elements of such strategies and tactics.

Design/methodology/approach

A conceptual analysis of a sample of 31 pertinent investigations was conducted to find out how researchers have approached heuristics in the above context since the 1970s. To achieve this, the study draws on the ideas produced within the research programmes on Heuristics and Biases, and Fast and Frugal Heuristics.

Findings

Researchers have approached the heuristic elements in three major ways. First, these elements are defined as general level constituents of browsing strategies in particular. Second, heuristics are approached as search tips. Third, there are examples of conceptualizations of individual heuristics. Familiarity heuristic suggests that people tend to prefer sources that have worked well in similar situations in the past. Recognition heuristic draws on an all-or-none distinction of the information objects, based on cues such as information scent. Finally, representativeness heuristic is based on recalling similar instances of events or objects and judging their typicality in terms of genres, for example.

Research limitations/implications

As the study focuses on three heuristics only, the findings cannot be generalized to describe the use of all heuristic elements of strategies and tactics for information seeking and searching.

Originality/value

The study pioneers by providing an in-depth analysis of the ways in which the heuristic elements are conceptualized in the context of information seeking and searching. The findings contribute to the elaboration of the conceptual issues of information behavior research.

Details

Journal of Documentation, vol. 73 no. 6
Type: Research Article
ISSN: 0022-0418

Keywords

Article
Publication date: 11 November 2020

Maqsood Ahmad, Syed Zulfiqar Ali Shah and Yasar Abbass

This article aims to clarify the mechanism by which heuristic-driven biases influence the entrepreneurial strategic decision-making in an emerging economy.

1011

Abstract

Purpose

This article aims to clarify the mechanism by which heuristic-driven biases influence the entrepreneurial strategic decision-making in an emerging economy.

Design/methodology/approach

Entrepreneurs' heuristic-driven biases have been measured using a questionnaire, comprising numerous items, including indicators of entrepreneurial strategic decision-making. To examine the relationship between heuristic-driven biases and entrepreneurial strategic decision-making process, a 5-point Likert scale questionnaire has been used to collect data from the sample of 169 entrepreneurs who operate in small- and medium-sized enterprises (SMEs). The collected data were analyzed using SPSS and Amos graphics software. Hypotheses were tested using structural equation modeling (SEM) technique.

Findings

The article provides empirical insights into the relationship between heuristic-driven biases and entrepreneurial strategic decision-making. The results suggest that heuristic-driven biases (anchoring and adjustment, representativeness, availability and overconfidence) have a markedly negative influence on the strategic decisions made by entrepreneurs in emerging markets. It means that heuristic-driven biases can impair the quality of the entrepreneurial strategic decision-making process.

Practical implications

The article encourages entrepreneurs to avoid relying on cognitive heuristics or their feelings when making strategic decisions. It provides awareness and understanding of heuristic-driven biases in entrepreneurial strategic decisions, which could be very useful for business actors such as entrepreneurs, managers and entire organizations. Understanding regarding the role of heuristic-driven biases in entrepreneurial strategic decisions may help entrepreneurs to improve the quality of their decision-making. They can improve the quality of their decision-making by recognizing their behavioral biases and errors of judgment, to which we are all prone, resulting in a more appropriate selection of entrepreneurial opportunities.

Originality/value

The current study is the first to focus on links between heuristic-driven bias and the entrepreneurial strategic decision-making in Pakistan—an emerging economy. This article enhanced the understanding of the role that heuristic-driven bias plays in the entrepreneurial strategic decisions and more importantly, it went some way toward enhancing understanding of behavioral aspects and their influence on entrepreneurial strategic decision-making in an emerging market. It also adds to the literature in the area of entrepreneurial management specifically the role of heuristics in entrepreneurial strategic decision-making; this field is in its initial stage, even in developed countries, while, in developing countries, little work has been done.

Details

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

Keywords

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