Hindsight bias and investment decisions making empirical evidence form an emerging financial market

Abstract

We studied the hindsight bias and investor decision making by employing the novel approach asset selection effect and sign of return effect. The study investigated the hindsight bias and investor decision making through questionnaires. The respondents are divided into three groups namely bank financial managers, stock market investors and students. The statistical significance of the asset selection effect and sign of return effect is tested by proportional z-test. Furthermore, the correlation of the memory error and recall error is also determined. The overall perceived error (hindsight bias) relationship is checked with the confidence in recall and confidence in estimate. We found strong evidence of hindsight bias in all respondents groups and its worst consequence on investment decision making. The bank financial managers were found less exposed to hindsight bias in comparison to stock market investors in asset selection effect. However, in sign of return effect the financial managers were more hindsight biased than the stock market investors. The relationship of hindsight bias and confidence in recall and confidence in estimate also confirms that all the respondents were hindsight biased and more confident in their estimate and less confident in their recall. All the respondents claim that they knew the phenomenon all along are wrong in their estimate. The respondents were unable to learn from previous errors and unable to detect their errors in estimate and recall. This error in prediction leads the investor to bear the risk above their accepted level which is harmful to their wealth.Keywords: hindsight bias; asset selection effect; sign of return effect; estimate error; recall error; overall perceived error

Unravelling Behavioural Biases in Individual and Institutional Investors Investment Decision- making: Intersection of Bibliometric and Systematic Literature Review

“…Bhatt and Chauhan (2014) conducted a study examining the diverse behavioural factors that influence investors’ financial decisions in the stock market. These factors encompass overconfidence, representativeness, framing, regret aversion (Singh & Nag, 2016), gamblers’ fallacy, hindsight (Hussain et al, 2013; Subash 2012;), availability bias (Nofsinger & Varma, 2013), conservatism, herding, anchoring, cognitive dissonance (Kanojia et al, 2018) and mental accounting (Shefrin & Thaler, 1988). Investors are prone to cognitive and psychological errors, which can lead to irrational decision-making.…”

Are Retail Investors in Emerging Economies SRI Ready?

“…Financial literacy makes an investor more confident about his/her actions, as stated by Stajkovic and Luthans (1998). As researched by Goetzmann and Kumar (2005), Hastings and Mitchell (2020), Lusardi and Mitchell (2007) and Hussain et al (2013), if we want to enhance financial welfare, we must enhance financial literacy. Aydemir and Aren (2017) go further to infer that financial literacy is a moderating variable in explaining differences in investment decisions of retail investors, meaning how retail investors decide to invest, what aspects affect their investment decisions, how to bear unanticipated shocks, etc.…”

Measuring Competition in Banking Sector in Oman

“…The outcome indicated that the range of 0 and 1 is the value so it concluded that the structure was monopolistic. Hussain et al (2013) Demsetz (1973) and Pelzman (1977) argued that the efficiency measure was the source of focus rather than market power. They found that the company's competencies might be different and thus this may create uneven market shares as well as a high level of focus.…”