Investment Decision Making Among Gulf Investors: Behavioural Finance Perspective

Abstract

The rationality hypothesis has been a very popular topic among the academics. Being a widely accepted hypothesis as part of the traditional finance theories, an investor is deemed a rational agent and makes rational decisions by exhausting all available alternatives. However, recently, new behavioural finance theories have been gaining ground as many empirical findings, which have been left unanswered by the traditional theories, can be explained by these behavioural-approach based theories. This research examined the impact of psychological factors on risk-taking behaviour in investment decisions. In particular, this research considered the possible effects of psychological factors, namely herding, heuristics, prospect, market, self-attribution bias, and familiarity bias, in making investment decisions. The findings in this paper declared that risk-taking behaviour in investment is affected by herding factors, heuristics factors, prospect factors, market factors and self-attribution bias factors. The familiarity bias factors do not significantly affect risk-taking behaviour in financial investment. Keywords: Behavioural finance, Herding, Heuristics, Prospect, Market, Self-attribution bias, Familiarity bias

Cryptocurrency Market: Behavioral Finance Perspective

“…The herding is described as a decision-making approach characterized by imitating other peoples' behavior. It is also defined by Almansour (2015) and Almansour (2017) as a situation in which rational investors tend to act irrationally by imitating others' judgments when it comes to making such investment decisions. It is stated that the herding factors affect asset prices significantly, which is considered as part of the capital assets pricing theory.…”

“…Moreover, herding can cause some emotional biases, including conformity, congruity and cognitive conflict, home bias, and gossip theories (Almansour, 2017;Balcilar Demirer & Hammoudeh, 2012). In the equity financial market, several studies investigated the influence of herding factors on investors' investment decisions in equity markets (Alevy, Haigh & List, 2007;Almansour, 2017;Celen & Kariv, 2004;Park & Sabourian, 2011). They concluded that the herding factors significantly affected investors' investment decisions in equity markets, which means that herding factors caused emotional biases in these decisions.…”

“…Ritter (2007) described heuristics as thumb rules that could encourage decision making in an uncertain environment by reducing the difficulty of probability assessments as well as predicting values for simpler judgments. Commonly, the heuristics are considered useful and suitable when the time is limited (Waweru, Munyoki & Uliana, 2008), but sometimes it leads to biases (Almansour, 2017). Zhang et al (2018) studied the relationship between the cryptocurrency market and Dow Jones industrial average.…”

“…Second, this study is aimed at investigating the effect of behavior finance factors on investors' decisions by taking into consideration various underlying aspects and factors of behavioral finance for instance Herding Factors (HERD), Heuristics Factors (HEUR), and Prospect Factors (PROS). Previous studies focused on the herding factor and its effect on investment decisions (Alevy, Haigh & List, 2007;Almansour, 2017;Celen & Kariv, 2004;Park & Sabourian, 2011;Bouri et al 2019a). Therefore, this study is considered comprehensive in terms of taking several factors together.…”

“…The classical finance theory states that prices will not be influenced by behavior finance factors due to neutralized demand by arbitragers' transactions, thereby reducing the potential impact of emotional investors. On the contrary, the theory of behavior finance assumes that asset prices are influenced by behavior finance factors (Almansour, 2017).…”