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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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

The purpose of this paper is to examine preferences of Chinese individual and institutional investors to cash dividends and stock dividends. Using categorized daily holding information from the TOPVIEW database, the authors test how percentage holdings of individuals and institutional investors change, respectively, around annual report dates and registration dates.

The results show that individuals and institutional investors often express heterogeneous preferences to dividends. After controlling for firm size and market performance, the authors find that the higher the ratio of stock dividend is, the more likely institutional investors will increase their overall holdings of the stock-dividend-paying firm in the week after annual report date, but they do not prefer to do so around registration dates. Meanwhile, the higher the ratio of stock dividend is, the more likely individual investors will increase their overall holdings of the stock-dividend-paying firm in the week before registration date, but do not prefer to do so after annual report dates. Such patterns do not exist for cash-dividend-paying firms.

The results imply that different types of investors chase high stock-dividend-paying firms at different stages of dividend events. The findings are consistent with the hypothesis of “price illusion,” but do not lend support to the signaling hypothesis of stock dividends.

This paper uses categorized data of daily share holdings to test how different types of minority shareholders respond to stock dividends and cash dividends for the first time. It sheds lights on the on-going academic debate about the “stock dividend puzzle” in China.

The purpose of this paper is to investigate whether there is any difference across individual investors, domestic and foreign institutional investors in trading volume responses to analyst reports. The authors also examine the determinants of trading volume responses using firm as well as forecast characteristics.

The authors use trading data from the Korean equity market. The authors divide investors into three classes of investors; namely, individual investors, domestic institutional investors, and foreign institutional investors. The authors then examine whether the trading responses to analyst reports vary across investor types, and how firm characteristics and characteristics of analyst reports influence the trading activities on the release dates across investor types.

Individual investors are the most responsive investor group, being responsive to analyst reports on small, neglected firms with large inside ownership as well as to analyst reports with optimistic forecasts. Domestic institutional investors are responsive to reports on neglected firms with high return volatility while foreign institutional investors show least responses.

There are few studies that investigate whether the trading responses to analyst reports vary across investor types and how firm characteristics and characteristics of analyst reports influence the trading activities on the release dates across investor types. Taking advantage of the trading volume data for the three main investor types in the Korean stock market, the authors study the trading volume responses for each investor type and make comparisons across investor types.

The purpose of this paper is to develop an in-depth contextualized understanding of individual investors’ buying decision in Indian stock market. Specifically, it provides answers to: how do individual investors make buying decision in stock market; and how and when do biases set in during such decisions. The paper also brings forward some aspects of individual’s journey as an investor.

Given the exploratory nature of this study, the paper takes a step away from typically used variance approach and instead uses a process approach. The authors do in-depth one-on-one interview, where each respondent shares his/her lived experiences as an investor retrospectively. To understand buying decision, each respondent is asked to elaborate three significant buying transactions carried out by him/ her in stock market.

Socio-cultural factors are found to have significant influence in inducing respondents to enter market. “Safe” vs “Risky” mental account emerges as the prominent stock categorization done by Indian investors. Three building blocks, namely, Identification, Rationalization and Further Validation emerge as the building blocks that culminate into buying decision of individual investors. The biases are seen to play a dual role in such decisions; as Attention Boosters and Rationales.

This study, to the best of authors’ knowledge, is first of its kind which amalgamates behavioral biases with phenomenon such as attention and Rationalization, to understand “how” behavioral biases set in during buying decision of individual investors.

The purpose of this study is to examine the role of financial and nonfinancial information in determining individual investor's investment decisions by analyzing the mediating effect of corporate reputation.

The approach of this study is deductive; therefore, the quantitative strategy is used for data collection. Primary data are collected from individual investors actively involved in stock trading at Pakistan Stock Exchange (PSX). Structural equation modeling is used to assess structural relationships.

The key findings of this study posit that financial and nonfinancial information positively influence an individual investor's investment decision. This study also provides empirical evidence confirming the mediating role of corporate reputation. Categorically, the findings indicate that financial and nonfinancial information remain significant to build perceived corporate reputation and influence investor's investment decisions.

he proposed model presents novel insight into the individual investor's investment decision in the context of Pakistan. The findings of this study remain robust for firms listed on the stock exchange and individual investors involved in stock trading. The results of this study are substantial to individual investor's and broker for making informed financial choices. Moreover, the firms listed on the PSX can use the findings to establish improved corporate reputation through reporting detailed financial and nonfinancial information.

Studies based on subjective measures in finance are lacking. This study contributes to the existing literature of behavioral finance by analyzing variations in investor's investment decisions explained by informational factors. The proposed model testifies the mediating role of corporate reputation in guiding investor's investment decisions, which has been overlooked by past studies. Therefore, this study seeks to fill this gap in the context of the PSX.

Considering the role of analysts in disseminating information, the paper explains the idiosyncratic volatility puzzle of China's stock market. As the largest developing country, China's research can provide meaningful reference for the research of financial markets in other new countries.

From the perspective of behavior, establishing a direct link between individual investor attention and stock price overvaluation.

The authors find that there is a significant idiosyncratic volatility puzzle in China's stock market. Due to the role of mispricing, individual investor attention significantly enhances the idiosyncratic volatility effect, that is, as individual investor attention increases, the greater the idiosyncratic volatility, the lower the expected return. Attention can explain the idiosyncratic volatility puzzle in China's stock market. In addition, due to the role of information production and dissemination, securities analysts can reduce the degree of market information asymmetry and enhance the transparency of market information.

China is the second largest economy in the world, and few scholars analyze it from the perspective of investors' attention. The authors believe this paper has the potential in contributing to the academia.

This paper investigates whether individual investors are attentive to stock splits and whether higher split ratios (stronger private information signals) reduce the disposition effect.

This study employs stock split events and transaction data in the Indonesia Stock Exchange (IDX) from January 2004 to December 2017. The authors measure individual investors' attention using buy-initiated trades. To test the effect of split signal on disposition effect, the authors regress individual investors' sell-initiated trades on past stock returns.

Unlike Birru (2015), the authors find that individual investors are attentive to stock splits, especially when stock split ratios are high. In turn, stock splits tend to weaken the disposition effect. The higher the stock split ratios, the weaker the disposition effect.

This study has a limitation in that the authors exclude all stock splits with dividend events around the split date. These stock splits cover 37% of all splits in Indonesia.

Practically, individual investors should look for stock-related information to reduce disposition bias.

To the best of authors’ knowledge, this study is the first to test individual investors' attention on stock splits based on their buy-initiated trades. This study is also the first to test the impact of stock split ratios on the disposition effect reduction. This study's findings enrich the scant literature on individual investors' attention and how to reduce their disposition effect bias.

This paper investigates individual investors' responses to stock underpricing and how their trading decisions are affected by analysts' forecasts and recommendations.

This empirical study uses mutual fund fire sales as an exogenous source that causes stock underpricing and analysts' forecasts and recommendations as price-correcting information. The study further uses regression analysis to examine individual investors' responses to fire sales and how their responses vary with price-correcting information.

The authors first show that individual investors respond to mutual fund fire sales by significantly decreasing net buys, and this effect appears to be prolonged. Next, the authors find that the decrease of net buys diminishes following analysts' price-correcting earnings forecast revisions and stock recommendation changes. Hence, the authors suggest that individual investors are not “wise” enough to recognize flow-driven underpricing; however, this response is weakened by analysts' price-correcting information.

There is an ongoing debate in the literature about whether individual investors should be portrayed as unsophisticated traders or informed traders who can predict future returns. The authors study a unique information event and provide new evidence related to both perspectives. Overall, our evidence suggests that the “unsophisticated traders” perspective is predominant, whereas a better information environment significantly reduces individual investors' information disadvantage. This finding could be of interest to both academic researchers and regulators.

The main thrust of the present study is to look into the trading patterns of behavior and investment performance exhibited by individual and institutional investor categories in the Qatar Exchange (QE). The paper aims to discuss these issues.

The present study uses daily aggregated investment flows made separately by each investor group, as well as daily closing price observations of the QE stock composite index. The trading patterns of investor categories are examined by estimating a bivariate vector autoregressive process of order p, VAR (p). To determine whether each category performs well or poorly over the entire sample period, each investor category's cumulative returns are estimated and analyzed.

The empirical results reveal that institutional investors pursue positive feedback trading strategies, whereas individual investors tend to be negative feedback traders. Both investor categories appear to be engaged in herding behavior. Additionally, institutional investors perform well over almost the entire sample period. In contrast, individual investors' negative market timing ability dominates their overall poor performance.

The investment performance gap found between institutional investors and individual investors in the Qatari capital market may reflect a large information asymmetry in favour of the former category. Indeed, the poor performance of individual investors implies that their trading activities are generally driven by factors and considerations that are irrelevant to fundamentals. Moreover, their irrational trading decisions may play some role in the formation of asset price bubbles.

The present study makes the first attempt to provide empirical evidence on the investment patterns and performance of individual and institutional investors trading on the Qatari capital market.