Search results
1 – 10 of 519This article aims to systematically review the literature published in recognized journals focused on cognitive heuristic-driven biases and their effect on investment management…
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
Keywords
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…
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
Keywords
This paper aims to survey literature on behavioral economics and finance, with particular emphasis on a selection of models, methods and tools that this strand of thought uses to…
Abstract
Purpose
This paper aims to survey literature on behavioral economics and finance, with particular emphasis on a selection of models, methods and tools that this strand of thought uses to approach and explain observable phenomena.
Design/methodology/approach
After a brief discussion on the meaning and context of behavioral economics, the manuscript identifies five topics of special interest: time preference, heuristics, emotions, finance and macro behavior. For each of these topics, relevant models, methods and tools are identified and scrutinized.
Findings
Behavioral economics and finance establish an effective bridge between orthodox economic thinking and new and revolutionary methods of analysis. Exploring the intricacies of human behavior can frequently be done by adapting the trivial and conventional intertemporal utility maximization models that economists insistently resort to, but to fully grasp such intricacies, a step forward is required. Agent-based models and other tools from complexity sciences constitute the analytical arsenal that is needed to improve our understanding of how behavioral issues attach to heterogeneity, local interaction, path-dependence, out-of-equilibrium dynamics and emergence.
Originality/value
Although surveys on behavioral economics and finance abound in the specialized literature, this study has the peculiarity of emphasizing five relevant topics that are particularly illustrative of the pivotal role of behavioral science in promoting the transition from the strict neoclassical perspective to a less mechanic and more organic view of economics and finance.
Details
Keywords
Virgílio Vasconcelos Souza, Lucas Lopes Ferreira Souza, Oderlene Oliveira, Elnivan Moreira de Souza and Juliana Silva Costa
The purpose of this research is to analyze the influence of heuristics on Brazilian investors' behavior in the decision-making process.
Abstract
Purpose
The purpose of this research is to analyze the influence of heuristics on Brazilian investors' behavior in the decision-making process.
Design/methodology/approach
The authors apply the partial least squares structural equation modeling methodology. This sample is composed of 220 investors.
Findings
The heuristics of overconfidence and anchoring positively influence investors' decision-making, while loss aversion negatively influences it. The herd effect exhibits no influence. The results also support the idea that decision-making positively influences investors' performance. Investors feel secure in their attitudes regarding financial decision-making, even if their decisions are not always rational as they are affected by biases.
Originality/value
This article explains the influence of heuristics on investors' decision-making and performance in the Brazilian context during the COVID-19 pandemic.
Details
Keywords
Maqsood Ahmad, Qiang Wu and Yasar Abbass
This study aims to explore and clarify the mechanism by which recognition-based heuristic biases influence the investment decision-making and performance of individual investors…
Abstract
Purpose
This study aims to explore and clarify the mechanism by which recognition-based heuristic biases influence the investment decision-making and performance of individual investors, with the mediating role of fundamental and technical anomalies.
Design/methodology/approach
The deductive approach was used, as the research is based on behavioral finance's theoretical framework. A questionnaire and cross-sectional design were employed for data collection from the sample of 323 individual investors trading on the Pakistan Stock Exchange (PSX). Hypotheses were tested through the structural equation modeling (SEM) technique.
Findings
The article provides further insights into the relationship between recognition-based heuristic-driven biases and investment management activities. The results suggest that recognition-based heuristic-driven biases have a markedly positive influence on investment decision-making and negatively influence the investment performance of individual investors. The results also suggest that fundamental and technical anomalies mediate the relationships between the recognition-based heuristic-driven biases on the one hand and investment management activities on the other.
Practical implications
The results of the study suggested that investment management activities that rely on recognition-based heuristics would not result in better returns to investors. The article encourages investors to base decisions on investors' financial capability and experience levels and to avoid relying on recognition-based heuristics when making decisions related to investment management activities. The results provides awareness and understanding of recognition-based heuristic-driven biases in investment management activities, which could be very useful for decision-makers and professionals in financial institutions, such as portfolio managers and traders in commercial banks, investment banks and mutual funds. This paper helps investors to select better investment tools and avoid repeating the expensive errors that occur due to recognition-based heuristic-driven biases.
Originality/value
The current study is the first to focus on links recognition-based heuristic-driven biases, fundamental and technical anomalies, investment decision-making and performance of individual investors. This article enhanced the understanding of the role that recognition-based heuristic-driven biases plays in investment management. More importantly, the study went some way toward enhancing understanding of behavioral aspects and the aspects' influence on investment decision-making and performance in an emerging market.
Details
Keywords
An understanding of the role of decision-making has been emphasised since the seminal works on human information processing and professional judgements by accountants. The…
Abstract
Purpose
An understanding of the role of decision-making has been emphasised since the seminal works on human information processing and professional judgements by accountants. The interest in these topics has been reignited by the increasing digitisation of the financial reporting and auditing processes. Whilst the behavioural research on accounting is well-established, the application of seminal works in cognitive psychology and behavioural finance is lacking, especially from recent research endeavours. The purpose of this paper is to provide a synthesis of theories relating to accounting behavioural research by evaluating them against the theories of cognitive psychology.
Design/methodology/approach
Using theory synthesis, this research draws seemingly isolated strands of research into a coherent framework, underpinned by cognitive psychology.
Findings
Evidence from accounting and auditing behavioural research is largely consistent with the psychology and finance research on cognitive limitations and errors. There remains a lacuna in accounting behavioural research on debiasing techniques. Such research, if underpinned by a single, cohesive theoretical framework, is likely to have practical relevance.
Research limitations/implications
The current research has theoretical implications for the accounting decision-making and uncertainty research. Areas for future research, based on identified gaps in the current accounting behavioural research, are also proposed.
Details
Keywords
Thiago Da Silva Telles Constantino, Antônio Carlos Magalhães Da Silva and Maria Aline Moreira De Oliveira Constantino
Most scientific research has focused on understanding Ponzi schemes from the point of view of the schemes and their operators, based on qualitative analysis. This paper aims to…
Abstract
Purpose
Most scientific research has focused on understanding Ponzi schemes from the point of view of the schemes and their operators, based on qualitative analysis. This paper aims to analyze Ponzi schemes from the perspective of their investors, emphasizing behavioral aspects, which have been little explored in the scientific literature, especially in quantitative research. In this way, the authors sought to understand the effects of heuristics and cognitive biases in understanding investor behavior.
Design/methodology/approach
A logistic regression was carried out with Brazilian investors, some of them participants in Ponzi schemes, who answered a structured questionnaire by means of a survey.
Findings
The authors found that social pressures, overconfidence and deliberate ignorance lead to credulity, generating little risk analysis and the desire to make a lot of money quickly.
Practical implications
Helping investors improve their levels of information through financial education and self-knowledge about their behavior. Contribute to the competent authorities in the search for improvements in the information displayed to investors.
Social implications
Understanding the mechanisms used when making a financial decision from the point of view of investors in general, but especially those exposed to Ponzi schemes, has the mission of enlightening them about the importance of financial education and the weight of psychological factors so that they can reduce the effects of heuristics and analysis biases when faced with a financial decision.
Originality/value
The basis of this work will be the inclusion of psychological variables and financial education, adapting existing models in an attempt to demonstrate the effects they may or may not have on mental accounting in the specific case of investors
Details
Keywords
Maria Dodaro and Lavinia Bifulco
The purpose of this paper is to explore two financial inclusion measures adopted within the local welfare context of the city of Milan, Italy, examining their functioning and…
Abstract
Purpose
The purpose of this paper is to explore two financial inclusion measures adopted within the local welfare context of the city of Milan, Italy, examining their functioning and underpinning representations. The aim is also to understand how such representations take concrete shape in the practices of local actors, and their implications for the opportunities and constraints regarding individuals' effective inclusion. To this end, this paper takes a wide-ranging look at the interplay between the rise of financial inclusion and the individualisation and responsibilisation models informing welfare policies, within the broader context of financialisation processes overall.
Design/methodology/approach
This paper draws on the sociology of public action approach and provides a qualitative analysis of two case studies, a social microcredit service and a financial education programme, based on direct observation and semi-structured interviews conducted with key policy actors.
Findings
This paper sheds light on the rationale behind two financial inclusion services and illustrates how the instruments involved incorporate and tend to reproduce, individualising logics that reduce the problem of financial exclusion, and the social and economic vulnerability which underlies it, to a matter of personal responsibility, thus fuelling depoliticising tendencies in public action. It also discusses the contradictions underlying financial inclusion instruments, showing how local actors negotiate views and strategies on the problems to be addressed.
Originality/value
The paper makes an original contribution to the field of sociology and social policy by focusing on two under-researched instruments of financial inclusion and improving understanding of the finance-welfare state nexus and of the contradictions underpinning attempts at financial inclusion of the most vulnerable.
Details
Keywords
Muhammad Ashfaq, Attayah Shafique and Viktoriia Selezneva
The purpose of this study is to explore and understand, how strong financial literacy influences the cognitive biases of students in Germany while investing. Second, it also…
Abstract
Purpose
The purpose of this study is to explore and understand, how strong financial literacy influences the cognitive biases of students in Germany while investing. Second, it also evaluates the most influential cognitive biases that students encounter when undertaking their investment decisions within this environment.
Design/methodology/approach
A quantitative approach is used to assess the relationship between financial literacy and students’ investment-related cognitive biases by using the frameworks proposed by Clercq (2019) and Pompian (2012).
Findings
The results advocate that the students’ financial literacy positively impacts their cognitive biases within the investment process. It additionally revealed the most significant biases regarding students’ investment decision-making and proposed the possible reasons behind their behavioral distortions.
Research limitations/implications
The study provides a detailed review of the behavioral tendencies of the younger generation while investing and creates recommendations for prospective researchers.
Originality/value
This research lies at the junction of the behavioral finance field, suggesting that it assists in developing a theoretical framework of cognitive biases within students’ financial decisions. Furthermore, it serves as an addition to the financial management subject course that would provide valuable insights about, first and foremost, financial literacy and subsequently, the theory behind the investment process.
Details
Keywords
H. Kent Baker, Sujata Kapoor and Tanu Khare
Financial professionals are increasingly important in the Indian financial system. Our study examines the association between the Big Five personality traits and Indian financial…
Abstract
Purpose
Financial professionals are increasingly important in the Indian financial system. Our study examines the association between the Big Five personality traits and Indian financial professionals' behavioral biases when making investment decisions.
Design/methodology/approach
After testing our questionnaire's reliability and validity, we used it to obtain the sample responses. We used multiple regression analysis and other statistical tools to identify the relationships between the Big Five personality traits and behavioral biases.
Findings
Our findings reveal a high level of extraversion and conscientiousness, a moderate level of agreeableness and openness and a low neuroticism level among financial professionals. The results show a significant association between neuroticism, extraversion, openness and all behavioral biases except anchoring bias. The neuroticism trait has a statistically significant relationship with all behavioral biases examined, whereas agreeableness and conscientiousness traits lack a significant association with behavioral biases. The openness trait is associated with many emotional biases and cognitive heuristics, while the extraversion trait has a significantly positive relationship with availability bias.
Research limitations/implications
Future researchers could analyze primary (survey) and secondary investor data from brokerage houses. Using a larger sample could provide more generalizable findings. Researchers could also consider other aspects of investment decision-making using various asset classes. Understanding financial professionals' personality traits and behavioral biases could help them develop strategies to suit client needs.
Originality/value
This study provides the first comprehensive examination of the association between personality traits and behavioral biases of Indian financial professionals.
Details