Does Heuristic Behavior Leave Anomalies in the Capital Market?

Lazuarni, Shafiera; Asri, Marwan

doi:10.22146/jieb.45652

Cited by 6 publications

(7 citation statements)

References 36 publications

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“…Individual investors often use recognition-based heuristics when trading in the stock market; they reduce the mental effort in the decision-making process, but that leads to errors in judgment and, as a result, anomalies persist in the market; due to these anomalies, investors make irrational investment decisions, and their investment performance was affected adversely. The findings are consistent with research by Lazuarni (2019) who found that heuristic biases are reasons for the existence of the technical and fundamental anomalies in the stock market, which negatively affect the investment performance of investors.…”

Section: Discussionsupporting

confidence: 91%

Probing the impact of recognition-based heuristic biases on investment decision-making and performance

Ahmad

Abbass

2022

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PurposeThis 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/approachThe 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.FindingsThe 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 implicationsThe 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/valueThe 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.

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Section: Discussionsupporting

confidence: 91%

Probing the impact of recognition-based heuristic biases on investment decision-making and performance

Ahmad

Abbass

2022

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“…Anchoring bias, a cognitive bias that impacts decision-making, plays a crucial role in human behavior [48]. The simplifying behavior of information can impact the occurrence of anomalies in the capital market, and these anomalies may not always negatively affect investment performance [49]. The correlation between the proximity of stock prices to their 52week high and PEAD diminishes when stocks have a high proportion of foreign investor ownership.…”

Section: Literature Reviewmentioning

confidence: 99%

Effect of Behavioral Biases and Financial Literacy on Investors’ Investment Decision-making in Kerala, India

2024

AIR

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The effect of behavioral biases and financial literacy on investment decision-making among individual investors in the Bombay Stock Exchange and National Stock Exchange were investigated in this research. The study explores the relationships between behavioral biases such as herding, overconfidence, and anchoring, and market anomalies, including fundamental and technical anomalies. Utilizing a structured questionnaire with a sample size of 220 and employed structural equation modeling (SEM) using AMOS, to evaluate the hypotheses outlined in conceptual framework. The findings reveal significant associations between these biases and anomalies, highlighting their substantial influence on investment decisions. Notably, herding bias (HB) and anchoring bias (AB) positively influence both fundamental anomalies (FA) and technical anomalies (TA), while overconfidence bias (OB) negatively impacts fundamental anomalies (FA). Moreover, financial literacy is identified as a crucial moderator, affecting the decision-making process. While limitations exist, such as potential biases in data collection, the study underscores the importance of addressing behavioral biases and enhancing financial literacy to promote informed investment strategies and market stability. These findings contribute to enhancing financial knowledge and market efficiency.

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“…A person's propensity to depend on knowledge that is already available is known as the availability cognitive heuristic. Decision-making, especially under uncertainty, is carried out through availability heuristics because the experience is inherent in the memory of the decision-maker (Lazuarni and Asri 2019). It concentrates on retrieving information from memory.…”

Section: Availability Heuristicmentioning

confidence: 99%

Does the Investor’s Trading Experience Reduce Susceptibility to Heuristic-Driven Biases? The Moderating Role of Personality Traits

Chalissery¹,

Tabash

Nishad³

et al. 2023

JRFM

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The aim of this study was to evaluate whether trading experience reduces exposure to heuristic-driven biases, namely availability bias, anchoring and adjustments bias, representativeness bias, and confirmation biases of individual investors operating in the Indian stock market, through the moderating role of the Big Five personality traits. To achieve these research objectives, primary data were collected through a structured questionnaire. The sample consisted of 408 individual investors trading on the Indian stock market, who were selected on a convenient basis. Confirmatory factor analysis and Cronbach’s alpha were used to measure the validity and reliability of the data. Further analysis was conducted using Pearson’s correlation and multiple regression. The results of this study prove that increased trading experience does not always reduce the susceptibility to heuristic biases. Increased trading experience reduces the susceptibility to availability, and anchoring and adjustment heuristics of individual investors operating on the Indian stock market. The present study has some relevant implications for investors, portfolio managers, financial advisors, and other interested persons in the stock market.

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Does Heuristic Behavior Leave Anomalies in the Capital Market?

Abstract: ARTICLE INFO

Cited by 6 publications

References 36 publications

Probing the impact of recognition-based heuristic biases on investment decision-making and performance

Probing the impact of recognition-based heuristic biases on investment decision-making and performance

Effect of Behavioral Biases and Financial Literacy on Investors’ Investment Decision-making in Kerala, India

Does the Investor’s Trading Experience Reduce Susceptibility to Heuristic-Driven Biases? The Moderating Role of Personality Traits

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