Does salience matter in investment decision?

Abstract

Purpose The paper takes a behavioral approach by making use of the prospect theory to unveil the impact of salience on short-term and long-term investment decisions. This paper aims to investigate the group differences for two types of investors’ groups, i.e. individual investors and professional investors. Design/methodology/approach The study uses partial least square-based structural equation modeling technique, measurement invariance test and multigroup analysis test on a unique data set of 277 active equity traders which included professional money managers and individual investors. Findings Results showed that salience has a significant positive impact on both short-term and long-term investment decisions. The impact was almost 1.5 times higher for long-term investment decision as compared to short-term decision. Furthermore, multigroup analysis revealed that the two groups (individual investors and professional investors) were statistically significantly different from each other. Research limitations/implications The study has implications for financial regulators, money managers and individual investors as it was found that individual investors suffer more with salience heuristic and may end up with sub-optimal portfolios due to inefficient diversification. Thus, investors should be cautious in fully relying on salience and avoid such bias to improve investment returns. Practical implications The study concludes with a discussion of policy and regulatory implications on how to minimize salience bias to achieve optimum and diversified portfolios. Originality/value The study has significantly contributed to the growing body of applied behavioral research in the discipline of finance.

The effect of essential information and disposition effect on shifting decision investment

“…The bias caused by this heuristic can make decisions that are taken irrational. Salience is a condition in which investors make investment decisions based on familiarity or essential information that is emotionally close to the investment object (Chaudary, 2018). Investors are willing to forego the benefits of diversification to focus on some very well-known companies.…”

“…Information obtained by investors about the company's competitiveness and its operational performance following its financial reality conditions provides essential information for investors in making the right decisions (Tarigan et al 2020). Making decisions about the information essential for investors is very decisive and is also called salience, which is one of the biases that can influence investors' investment decisions (Chaudary, 2018). The most prominent information is needed and is considered very important so that it becomes the primary consideration in making decisions.…”

“…Salience appears as a bias that falls into the heuristic group that affects investors' investment decisions. Salience is a condition in which investors make investment decisions based on familiarity or a close feeling towards an investment object or have essential information that investors consider primary (Chaudary, 2018). Salience is the essential information and is considered the most robust cognitive bias.…”

The Effect of Salience and Disposition Effect on Stock Investment Decisions on Investors in Surabaya

“…Salience is a condition in which investors make investment decisions based on familiarity or close feeling with the investment object (Chaudary, 2018). Salience can also be referred to as familiarity bias (Yalcin, Tatoglu, & Zaim, 2016) and breed investment familiarity (Huberman, 2001).…”

“…Salience is a bias that belongs to the heuristic, while the disposition effect is a bias that belongs to the prospect theory. Salience is a condition in which investors make investment decisions based on familiarity or feeling close with the investment object (Chaudary, 2018). An example of salience behavior in Indonesia is shown in the case of PT Gudang Garam, where even though the cigarette excise price increased by 24.3% (Kementrian Kesehatan RI, 2018).…”