Behavioral biases on institutional investors: a literature review

Abstract

Purpose The purpose of this paper is to evaluate published institutional investor research focused on home bias, disposition effect, and herding behavior in recognized journals and to ascertain some substantial gaps with regard to them. Design/methodology/approach Recently published studies between 2005 and 2014, which intend to examine behavioral biases on institutional investors, have been reviewed through juxtaposing them under the three fundamental titles and figuring them according to the explanation why these biases occurs. Findings The research examining home bias has identified the presence of this effect on institutional investors and explained it with information or culture. Yet, the existence of disposition effect has not been found in the extant research. These studies have estimated disposition effect through overconfidence and experience. Also, extant studies have provided evidence of herding behavior, attributing this behavior to pursuing same published information and protecting their reputation and career. Originality/value Currently, no study, which reviews and evaluates the empirical research body on behavioral biases displayed institutional investors, exists. To the authors’ knowledge, this is the first paper which highlights the empirical evidence on these bias and summarizes the explanations in these studies for these biases exhibited by institutional investors. This could contribute to the researchers focusing on behavioral biases on institutional investors by providing them with a meaningful figuralization regarding their evidence and explanation.

Do investors exhibit behavioral biases in investment decision making? A systematic review

“…The results show that financial literacy reduces the herding behavior but increase the overconfidence in the investors. Aren et al (2016) have evaluated published institutional investors research in recognized journals. It studies herding, disposition effect and home bias.…”

A systematic review of ordinary people, behavioural financial biases

“…However, the "theory of behavioural finance"; considers that the choice of financial products by the ordinary investor is based on their psychological and sociological as well as emotional preparation. Moreover, household bias associated with information and culture affects its behaviour, due to the acceptance of published data and the protection of reputation (Aren et al, 2016). This theory, therefore, considers irrational behaviour as the essence of making financial decisions.…”

“…In short, Behavioural Economics extracts from behavioural psychology new theories and pieces of evidence for individual choices and decision-making. The basic principles of traditional finance, like the rational behaviour of markets and participants, are challenged under Behavioural Finance to explain markets and investors' current anomalies, caused by biases in human decision-making (Sharma & Dibrugarh, 2014;Hirshleifer, 2015;Shiller, 2003) Theories like prospect theory (Kahneman & Tversky, 1979), mental accounting (Thaler, 1980), disposition effect (Gupta & Ahmed, 2016;Richards et al, 2011), overconfidence (Matsumoto et al, 2013;Michailova et al, 2017), anchoring (Chandra, 2008;Gupta & Ahmed, 2016;Sadi et al, 2011) and some others assist to explain the causes of biases (Aren et al, 2016;Bogan et al, 2013;Hackbarth, 2008;Howard, 2014;Lacalle, 2018;Zhou & Pham, 1984).…”

Influence of Behavioural Biases on Investment Decision Making in Bhubaneswar Region

“…Moods, emotions and sentiments do affect the financial behaviour of the individuals [6]. Information culture creates home bias, herding behaviour among institutional investors [7].…”