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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

Book part
Publication date: 24 October 2019

Tarek Ibrahim Eldomiaty, Panagiotis Andrikopoulos and Mina K. Bishara

Purpose: In reality, financial decisions are made under conditions of asymmetric information that results in either favorable or adverse selection. As far as financial…

Abstract

Purpose: In reality, financial decisions are made under conditions of asymmetric information that results in either favorable or adverse selection. As far as financial decisions affect growth of the firm, the latter must also be affected by either favorable or adverse selection. Therefore, the core objective of this chapter is to examine the determinants of each financial decision and the effects on growth of the firm under conditions of information asymmetry.

Design/Methodology/Approach: This chapter uses data for the non-financial firms listed in S&P 500. The data cover quarterly periods from 1989 to 2014. The statistical tests include linearity, fixed, and random effects and normality. The generalized method of moments estimation method is employed in order to examine the relative significance and contribution of each financial decision on growth of the firm, respectively. Standard and proposed proxies of information asymmetry are discussed.

Findings: The results conclude that there is a variation in the impact of financial variables on growth of the firm at high and low levels of information asymmetry especially regarding investment and financing decisions. A similar picture emerges in the cases of firm size and industry effects. In addition, corporate dividen d policy has a similar effect on firm growth across all asymmetric levels. These findings prove that information asymmetry plays a vital role in the relationship between corporate financial decisions and growth of the firm. Finally, the results contribute to the vast literature on the estimation of information asymmetry by demonstrating that the classical and standard proxies for information asymmetry are not consistent in terms of the ability to differentiate between favorable or adverse selection (which corresponds to low and high level of information asymmetry).

Originality/Value: This chapter contributes to the related literature in two ways. First, this chapter offers updated empirical evidence on the way that financing, investment, and dividends decisions are made under conditions of favorable and adverse selection. Other related studies deal with each decision separately. Second, the study offers new proxies for measuring information asymmetry in order to reach robust estimates of the effects of financial decisions on growth of the firm under conditions of agency problems.

Article
Publication date: 10 February 2022

Robert Kwame Dzogbenuku, George Kofi Amoako and Albert Martins

This study seeks to assess the mediating role of financial service branding on investment decisions from the perspective of financial service investors.

Abstract

Purpose

This study seeks to assess the mediating role of financial service branding on investment decisions from the perspective of financial service investors.

Design/methodology/approach

Field data were obtained from 403 individuals and corporate investors in financial service institutions who invested savings and pensions funds into short to medium term financial instruments from an emerging market in sub-Saharan Africa (SSA). Data were analysed using the partial least squares structural equation modelling technique (PLS-SEM).

Findings

Branding significantly mediates return on investment (ROI) decisions. However, the ROI did not have a significant direct effect on investment decisions. ROI has a significant indirect effect on investment decisions due to branding influence on investors.

Research limitations/implications

Data collected was cross sectional. Future research can use longitudinal data for better long term planning. Study can also be done in other emerging economies to determine how the financial sector characteristics for each country can be a source of difference from branding and investment standpoint.

Practical implications

Although consumer investment decisions are logically influenced largely by ROI, investors place savings and pensions into financial instruments largely managed by reliable corporate brands with solid reputation known as safe havens for hedging lifetime investments.

Originality/value

This study covers the research gap in brand power and the reputation of financial service institutions as well as the investment decisions of financial service investors in emerging Sub-Saharan African.

Details

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

Keywords

Article
Publication date: 22 February 2021

Imran Khan, Mustafa Afeef, Shahid Jan and Anjum Ihsan

The purpose of this paper is to investigate the effect of heuristic biases, namely, availability bias and representativeness bias on investors’ investment decisions in the…

1035

Abstract

Purpose

The purpose of this paper is to investigate the effect of heuristic biases, namely, availability bias and representativeness bias on investors’ investment decisions in the Pakistan stock exchange, as well as the moderating role of long-term orientation.

Design/methodology/approach

Using a structured questionnaire, a total of 374 responses have been collected from individual investors trading in PSX. The relationship was tested by applying the partial least square structural equation model using SmartPLS 3.2.2. Further, Henseler and Chin’s (2010) product indicator approach for moderation analysis was applied to the data set.

Findings

The results revealed that availability bias and representativeness bias have a significant and positive influence on the investment decisions of investors. Furthermore, a significant moderating effect of long term orientation on the effect of representativeness bias on investment decision is observed. This suggests that investors’ long term orientation weaken the effect of representativeness bias on investment decision. However, no significant moderating effect was observed for availability bias.

Originality/value

The paper provides novel insights on the role of heuristic-driven biases on the investment decisions of individual investors in the stock market. Particularly, it enhanced the understanding of behavioral aspects of investment decision-making in an emerging market.

Details

Qualitative Research in Financial Markets, vol. 13 no. 2
Type: Research Article
ISSN: 1755-4179

Keywords

Article
Publication date: 6 January 2021

Ben Kwame Agyei-Mensah

The purpose of this study is to investigate the influence of board characteristics on firms’ investment decisions.

1146

Abstract

Purpose

The purpose of this study is to investigate the influence of board characteristics on firms’ investment decisions.

Design Methodology Approach

The study used data sourced from annual reports of firms listed on the Ghana Stock Exchange from 2014 to 2018. Descriptive analysis was performed to provide the background statistics of the variables examined. This was followed by a regression analysis which forms the main data analysis.

Findings

The multiple regression analysis results indicated that the proportion of independent directors and financial experts on the board are negatively related to firm investment. These findings imply that independent directors and financial experts on the board can help firms reduce overinvestment and improve investment efficiency.

Originality Value

The extant literature shows that the board of directors are an effective mechanism to reduce agency problems in firm decisions and operating performance. However, there has been little research on the role of the board of directors in corporate investment policy.

Details

Corporate Governance: The International Journal of Business in Society, vol. 21 no. 4
Type: Research Article
ISSN: 1472-0701

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: 21 December 2020

Maqsood Ahmad and Syed Zulfiqar Ali Shah

This paper aims to show how overconfidence influences the decisions and performance of individual investors trading on the Pakistan Stock Exchange (PSX), with the…

1763

Abstract

Purpose

This paper aims to show how overconfidence influences the decisions and performance of individual investors trading on the Pakistan Stock Exchange (PSX), with the mediating role of risk perception and moderating role of financial literacy.

Design/methodology/approach

The deductive approach was used, as the research is based on the theoretical framework of behavioural finance. A questionnaire and cross-sectional design were employed for data collection from the sample of 183 individual investors trading on the PSX. Hypotheses were tested through correlation and regression analysis. The Baron and Kenny method was used to test the mediation effect of risk perception and the moderation effect of financial literacy. The results of mediation and moderation were also authenticated through the PROCESS and structural equation modelling (SEM) technique.

Findings

The results suggest that risk perception fully mediates the relationships between the overconfidence heuristic on the one hand, and investment decisions and performance on the other. At the same time, financial literacy appears to moderate these relationships. The results suggest that overconfidence can impair the quality of investment decisions and performance, while financial literacy and risk perception can improve their quality.

Practical implications

The paper encourages investors to base decisions on their financial capability and experience levels and to avoid relying on heuristics or their sentiments when making investments. It provides awareness and understanding of heuristic biases in investment management, 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 heuristic biases. They can improve their performance by recognizing their biases and errors of judgment, to which we are all prone, resulting in better investment decisions and a more efficient market. The paper also highlights the importance on relying on professional knowledge, giving it greater weight than feelings and biases.

Originality/value

The current study is the first to focus on links between overconfidence, financial literacy, risk perception and individual investors' decisions and performance. This article enhanced the understanding of the role that heuristic-driven bias plays in the investment management, and more importantly, it went some way towards enhancing understanding of behavioural aspects and their influence on the investment decision-making and performance in an emerging market. It also adds to the literature in the area of behavioural finance specifically the role of heuristics in investment strategies; this field is in its initial stage, even in developed countries, while, in developing countries, little work has been done.

Details

Journal of Economic and Administrative Sciences, vol. 38 no. 1
Type: Research Article
ISSN: 1026-4116

Keywords

Article
Publication date: 15 June 2020

Maqsood Ahmad

The purpose of this article is to clarify the mechanism by which underconfidence heuristic-driven bias influences the short-term and long-term investment decisions of…

1032

Abstract

Purpose

The purpose of this article is to clarify the mechanism by which underconfidence heuristic-driven bias influences the short-term and long-term investment decisions of individual investors, actively trading on the Pakistan Stock Exchange.

Design/methodology/approach

Investors' underconfidence has been measured using a questionnaire, comprising numerous items, including indicators of short-term and long-term investment decision. In order to establish the influence of underconfidence on the investment decisions in both the short and long run, a 5-point Likert scale questionnaire has been used to collect data from the sample of 203 investors. The collected data were analyzed using SPSS and AMOS graphics software. Hypotheses were tested using structural equation modeling technique.

Findings

This article provides further empirical insights into the relationship between heuristic-driven biases and investment decision-making in the short and long run. The results suggest that underconfidence bias has a markedly negative influence on the short-term and long-term decisions made by investors in developing markets. It means that heuristic-driven biases can impair the quality of both short-term and long-term investment decisions.

Practical implications

This article encourages investors to avoid relying on cognitive heuristics, namely, underconfidence or their feelings when making short-term and long-term investment strategies. It provides awareness and understanding of heuristic-driven biases in investment management, 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. 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 more appropriate investment strategies.

Originality/value

The current study is the first to focus on links between underconfidence bias and short-term and long-term investment decision-making. This article enhanced the understanding of the role that heuristic-driven bias plays in the investment management and more importantly, it went some way toward enhancing understanding of behavioral aspects and their influence on the investment decision-making in an emerging market. It also adds to the literature in the area of behavioral finance specifically the role of heuristics in investment strategies; 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

Article
Publication date: 2 March 2020

Mahfuzur Rahman and Soon Sheng Gan

This study aims to investigate the behavioural factors that affect individual investment decisions among Generation Y in Malaysia.

1631

Abstract

Purpose

This study aims to investigate the behavioural factors that affect individual investment decisions among Generation Y in Malaysia.

Design/methodology/approach

Five human behaviours such as trait anger, trait anxiety, overconfidence, herding factor and self-monitoring have been examined using a sample of 502 respondents.

Findings

The results reveal that trait anxiety and overconfidence are negatively related to investment decisions while self-monitoring is positively associated. Trait anger and herding behaviour do not significantly affect investment decision. The results also show that investment decision-making is significantly distinct when examined by gender, employment status and income allocation. Among these three variables, the result shows that only self-employed individuals and those in the 5–10 per cent income allocation group are marginally positive vis-à-vis investment decision-making.

Originality/value

The outcomes of this study will expand investors' knowledge about the financial decision-making process.

Details

Managerial Finance, vol. 46 no. 8
Type: Research Article
ISSN: 0307-4358

Keywords

Article
Publication date: 5 October 2010

Silvia Jordan and Corinna Treisch

Research to date has reported ambiguous results on the influence of tax concessions on retirement savings decisions. The purpose of this paper is to investigate the…

1566

Abstract

Purpose

Research to date has reported ambiguous results on the influence of tax concessions on retirement savings decisions. The purpose of this paper is to investigate the influence of tax concessions on private retirement investment decisions by analyzing actual retirement decision processes and the rationales behind these decisions in‐depth.

Design/methodology/approach

Qualitative semi‐structured interviews on actual retirement savings decisions were conducted with private investors (17) and their respective bank advisors (5). Decision‐making rationales are analysed by means of semantic and causal coding of verbal data as well as by highlighting the complexities of decision processes represented in individual investment narratives.

Findings

Results indicate that taxes do not matter much, neither during the decision to join a private retirement plan, nor when choosing a specific investment product. Financial planning for retirement consists of saving disposable income instead of the required savings premium and choosing a secure type of investment which yields more than a savings account. Savers do not base their decisions on calculating and comparing rates of return or tax benefits. Instead, comparatively unqualified relatives as well as bank advisors and the desire for trust and security are of major relevance.

Research limitations/implications

The generalization of results is limited in so far as they refer to a relatively small interview sample. The study shall thus prompt further research that takes the decision‐making context and the interrelation between several context factors systematically into account.

Originality/value

The study is of value in that it highlights the difficulties private investors' experience when making actual – rather than hypothetical – retirement savings decisions and the rationales behind seemingly “imperfect” decisions. It shows that retirement savings decisions are heavily linked with the social decision‐making context. These results are closely linked to the recent debate on “responsibilization”, critical perspectives on the tendency of states to hold individuals increasingly accountable for aspects of market governance and social security.

Details

Qualitative Research in Financial Markets, vol. 2 no. 3
Type: Research Article
ISSN: 1755-4179

Keywords

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