The role of house money effect and availability heuristic in investor behavior

Abstract

Purpose The house money effect is proposed to describe that people appear to consider large or unexpected wealth gains to be distinct from the rest of their wealth, and are thus more willing to gamble with such gains than they ordinarily would be. On the other hand, the availability heuristic describes that people tend to have a cognitive and systematic bias due to their reliance on easily available or associational information. The purpose of this paper is to employ these behavioral perspectives in an empirical model regarding the January anomaly to explore investor behavior in Taiwanese stock market with bonus culture and well-known electronics industry. Design/methodology/approach This study uses the conventional and standard dummy variable regression model, as employed in prior studies, and further includes some control variables for firm, industry and macro-economic level factors. Moreover, 19 industrial indices for Taiwanese stock market over the period January 1990 to December 2014 are included in this study to examine the hypotheses, except for the 1997 Asian financial crisis and the global financial crisis period of 2007-2009 to avoid the potential effect. On the other hand, the authors also use the entire sample period of 1990-2014 for understanding whether the magnitude of January effect is different. Findings The empirical results indicate that Chinese bonus payments in January induce a strong January effect in the Taiwanese stock market, especially when most listed firms have positive earnings growth in the preceding year, suggesting a house money effect. Moreover, this study further provides some preliminary evidence that the higher January returns due to bonus culture are apparent only in the electronics industry when both Chinese New Year and bonus payments are in January, implying the role of availability heuristic based on the electronics stocks in investor behavior before the impending stock exchange holidays. Some robust tests show qualitative support. Research limitations/implications The major contribution of this study is to extend the existing research by incorporating cultural and industrial factors with behavioral finance, thus enriching the literature on the causes of seasonality for Asian stock markets. Practical implications This study also has behavioral implications of investments for investors in the Taiwanese stock market, especially for foreign institutional investors which pay close attention to this market. Originality/value This study first applies and examines the culture bonus hypothesis with regard to how employees who receive culture bonuses in January can change their attitudes toward risk and induce the January effect from the concept of mental accounting. Moreover, this study further proposes and examines the extended culture bonus hypothesis related to how the January effect due to culture bonus is different for the electronics and non-electronics industries when taking into account the stock market holidays from the concept of availability heuristic.

Employees’ judgment and decision making in the banking industry

“…However, when availability is not associated with the objective probability of the event, a systematic judgment error occurs. Factors that affect the availability heuristic include biases based on retrievability of instances, biases based on the effectiveness of a search set, biases based on imaginability and illusory correlation (Chen et al , 2017).…”

“…Decision making in the banking industry has a high likelihood of forming biases due to heuristics in decision making because of uncertainty, complexity, ambiguity of policy goals and fallibility of information (Pousa et al , 2017). In particular, considering the ripple effect of a financial policy, it is crucial to conduct systematic research on whether heuristics and biases exist in the decision making processes of the policy makers who oversee financial decision making (Chen et al , 2017).…”

Behavioral Accounting: A Bibliometric Analysis of Literature Outputs in 2013–2022

“…In particular, the use of foreign languages influences the perception of the financial terms "e.g., the fair value" in the IFRS, which conditions communication policies and language strategies (Hellmann & Tsunogay, 2021). The stream is associated with a broad debate concerning the choices of investors in the stock market, sometimes driven by rationality (asset-pricing models, accrual approach to obtain a positive sentiment of investors, investment choice linked to the bonus culture) (Park, 2018;Nasiri et al, 2021;Chen et al, 2017) and other times by irrational logic based instead on: overconfidence, regret aversion, anchoring biases, loss aversion and anchoring, representativeness, gambler's fallacy, and mental accounting, mental accounting and availability biases (Isidore & Christie, 2018). Mental accounting refers to behavioral biases and investment attitudes that, during COVID-19, is conditioned by hindsight, overconfidence and self-attribution, representativeness, and anchoring to influence trading activity and recommendation intentions (Talwar et al, 2021).…”

A Literature Review on Availability Heuristic Implicated in Different Fields

“…One study that is often cited in research on availability heuristics is that of Ross and Sicoly [7], who found the egocentric perception of availability plays an important role in judging the contributions of joint products. Some studies illustrate how the availability heuristic affects the behaviors of financial investors [8][9][10]. Some studies highlight the impact of availability heuristics on risk perception and on the assessment of precaution [11][12][13].…”