Abstract
This paper aims to investigate the impact of behavioral biases and financial literacy on investment performance in an emerging stock market context. Based on data collected from a sample of 196 Moroccan investors operating in Casablanca stock exchange, we test the research hypotheses using structural equation modeling. Out of the four heuristics examined in our proposed conceptual framework (i.e. overconfidence, representativeness, anchoring and herding), only overconfidence and representativeness had a significant positive impact on financial performance. Our results also suggest a significant positive impact of financial literacy on representativeness, while it was found negatively associated with overconfidence. This research paper is the first of its kind to investigate the existence of heuristics in an African, Arab and emerging market. As well, the current study is among the earliest attempts to examine how behavioral biases relate to investors performance.Keywords: Heuristics; financial literacy; investment performance; stock market; SEM.JEL Classification: G02.DOI: https://doi.org/10.32479/ijefi.11318
Highlights
In simple terms, the field of Finance can be understood as the study of how scare resources are first allocated, managed, acquired, and invested over a certain period of time
This suggests that the more experience and financial knowledge a Moroccan investor has, the less likely they are to be overconfidence, but the more likely they are to believe that future returns can be determined using past returns
When it comes to the herding and anchoring biases, the results suggest that they are not present within our sample group, as the P-values for H3, H4, H8 and H9 are all >0.05
Summary
The field of Finance can be understood as the study of how scare resources are first allocated, managed, acquired, and invested over a certain period of time. When the hypothesis holds to be true, an investor can in no way earn more than the riskadjusted average return on a certain investment strategy. Despite the many revolutionary asset-pricing models that have been created over the years, such as the Capital Asset Pricing Model and other risk-based pricing models, traditional finance doesn’t really do a good job in explaining the behavior of investors (Rabin and Thaler, 2001). The major presumption is that since investors value wealth, they will be rational when making financial decisions. This presumption doesn’t explain many problems that are commonly found within the market. Why stock returns vary across securities for reasons besides risk? Or more importantly, why did the Global Financial Crisis occur, and how can another potential financial crisis be averted?
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