Fallacy Bias Research Articles

Role of behavioral biases in the investment decisions of Pakistan Stock Exchange investors: Moderating role of investment experience

Despite many revolutionary asset pricing models developed over the past decades, traditional finance does not explain investor behavior very well. The purpose of this study is to examine the influence of behavioral biases on the investment decisions of investors of Pakistan Stock Exchange. In addition, the moderating influence of investment experience investigated in this study. The findings were reported using a sample of 230 individual investors, who make their own investments, typically through a mutual fund, bank, or internet broker. They make investments to achieve their unique investment objectives, such as saving for retirement, a child’s education, or increasing their overall wealth. The influence of behavioral biases on investment decisions was calculated using regression analysis. Regression results show that beta and t-values are significant and have a significant impact on investment decisions. Regression findings show that Confirmation Bias, Gamblers Fallacy Bias, Negativity Bias, Bandwagon Effect Bias, Loss Aversion Bias, and Overconfidence Bias all have a substantial impact on Investment Decisions. Status quo prejudice and endowment bias have a favorable but minor influence on Investment Decisions. Investment Experience is regarded as an essential component that contributes to successful decision making under risk and uncertainty, however the results of this study show that moderating variables have a minor influence. According to the findings, the moderating variable had no effect on the connection between behavioral biases and investment decisions. And the reason for this is that behavioral biases persist regardless of investing experience.

Heuristic Biases as Mental Shortcuts to Investment Decision-Making: A Mediation Analysis of Risk Perception

In the last two decades, research on behavioural biases has grown dramatically, fuelled by rising academic interest and zeal for publication. The present study explores the mediating role of risk perception on the relationship between heuristic biases and individual equity investors’ decision-making. The study uses Partial Least Square Structural Equation Modelling (PLS–SEM) to examine the survey data from 432 individual equity investors trading at the National Stock Exchange (NSE) in India. Risk perception is found to play a partial mediating role in the relationship amid overconfidence bias and investment decision-making, availability bias and investment decision-making, gamblers’ fallacy bias and investment decision-making and anchoring bias and investment decision-making, whereas it is found to play the full mediating role in the relationship between representativeness bias and investment decision-making. The result of the present study provides valuable insights into the different behavioural biases of capital market participants and other stakeholders such as equity investors, financial advisors, and policymakers. The present study solely relied on the heuristic biases of individual equity investors. However, in the real world, many other factors may impact the investment decision of individual equity investors. This has been considered a limitation of the study. The present study solely relied on the heuristic biases of individual equity investors. However, in the real world, many other factors may impact the investment decision of individual equity investors. This has been considered a limitation of the study.

Fallacy Bias in Casino Gaming

Fallacy bias is salient in gamblers’ minds and plays a crucial role in motivating gamblers to bet. The bias stems from people’s misconception that independent outcomes are autocorrelated. It makes an indirect but significant contribution to the revenue of casinos. However, from the perspective of corporate social responsibility, casinos should not indulge the bias. To strike the balance, casino practitioners need to understand the triggering factors of fallacy bias and whether the bias varies with gamblers’ characteristics. While gamblers’ racial difference in fallacy bias remains unknown, this study adopted non-participatory observation and analyzed the bets of 501 non-Asian and 206 Asian Roulette gamblers in an Australian casino. Results showed that non-Asian players had a stronger tendency towards gambler’s fallacy than their Asian counterparts. The influences of length and frequency of the latest outcome on the betting decisions did not vary with race. The findings provide useful implications for casino management.

A Dissociation Between Two Cognitive Biases in Acute Stress Disorder: Preliminary Evidence for the Reverse Gambling Fallacy

Rationality biases, such as the gambling fallacy (e.g., predicting future coin-tosses based on previous tosses) and the famous “Linda” conjunction fallacy (estimating the conjunction that “Linda” is both teller and feminist based on her description) have not been examined in people suffering from acute stress disorder (ASD). We analyze potential outcomes and align them with different theories. To discern the precise pattern of rationality biases in persons with ASD, we examined performance on these 2 tasks within a month of the Hayian Super-Typhoon (August 27th, 2013). Out of a sample of 1001 persons, 82 had clinical ASD and their performance was compared to the remaining 919 participants. A specific link between ASD and rationality biases revealed that although conjunction task performance was not associated with ASD diagnosis, coin-task performance was. Namely, responding “Heads” to a 6th coin-toss after 5 successive “Heads” (reverse gambling fallacy) was robustly linked with ASD diagnosis. The results align with the bridging of trauma theories claiming that trauma symptoms are generated by disequilibrium following trauma exposure, with prospect theory’s notion of chance, which is conceived as belief in equilibrium restoration. Such disequilibrium following trauma exposure is thus linked with the belief underlying reverse gambling fallacy biases, namely “what-was-will-be”. Implications regarding themes important to address in therapy are mentioned.

The Influence of Cognitive Ability on Cognitive Biases Generated by the Representativeness Heuristic

Purpose – This study aims to investigate the influence of cognitive ability on cognitive biases generated by the representativeness heuristic. Design/methodology/approach – The data collection was performed through questionnaires in order to measure the cognitive ability of 1 , 064 Brazilian accounting students and professionals using the Cognitive Reflection Test . To perform the analysis, we used the Student ’ s t - t est, a nalysis of v ariance, correlation s, and regressions. Findings – Our initial findings indicate that cognitive ability only influences the incidence of base rate insensitivity and illusion of validity biases, indicating that the higher the cognitive ability, the lower the incidence of these biases in decision making. However, robustness tests expand this influence to misconceptions of chance and regression fallacy biases. Furthermore , we show that there is a difference of means between gender, level of education , and geographic region and the representativeness heuristic biases. Originality/value – This paper contributes to the literature on behavioral accounting considering that although investigations into this subject do exist , no study has been performed in the accounting area that involves all the cognitive biases of one heuristic in a single study.

Establishing AN Association between Risk Tolerance and Behavioral Biases among Indian Investors

Behavioral Finance Literature Has Shown A Mushroom Growth In The Recent Years. Literature Shed Specific Light On How The Concept Evolved And Later Developed To Various Stages Which Helped To Understand Various Market Anomalies And The Psychology Of Individuals Through Behavioral Biases. Behavioral Finance Tries To Explain The Logic Behind Applying Of Heuristics Or Shortcuts By Investors To Take Investment Decisions Which Still Need To Be Extensively Studied. The Study Here Attempts For Identify Presence Of Different Biases In Individual Decision Making And Their Association With The Risk Tolerance Capacity. The Results Indicate That Heuristic Biases (I.E. Representativeness Bias, Overconfidence Bias And Gamblers Fallacy Bias) Are Linked To Moderate To High Risk Tolerant Investors. While Herd Bias And Prospect Biases (Loss Aversion Bias And Mental Accounting Bias) Are Found To Be Linked With Low To Moderate Risk Tolerance Levels Of Investors. Heuristics Are Positively Correlated With Risk Tolerance However; Prospect And Herd Are Found To Be Negatively Correlated With Risk Tolerance.

The "Residential" Effect Fallacy in Neighborhood and Health Studies: Formal Definition, Empirical Identification, and Correction.

Because of confounding from the urban/rural and socioeconomic organizations of territories and resulting correlation between residential and nonresidential exposures, classically estimated residential neighborhood-outcome associations capture nonresidential environment effects, overestimating residential intervention effects. Our study diagnosed and corrected this "residential" effect fallacy bias applicable to a large fraction of neighborhood and health studies. Our empirical application investigated the effect that hypothetical interventions raising the residential number of services would have on the probability that a trip is walked. Using global positioning systems tracking and mobility surveys over 7 days (227 participants and 7440 trips), we employed a multilevel linear probability model to estimate the trip-level association between residential number of services and walking to derive a naïve intervention effect estimate and a corrected model accounting for numbers of services at the residence, trip origin, and trip destination to determine a corrected intervention effect estimate (true effect conditional on assumptions). There was a strong correlation in service densities between the residential neighborhood and nonresidential places. From the naïve model, hypothetical interventions raising the residential number of services to 200, 500, and 1000 were associated with an increase by 0.020, 0.055, and 0.109 of the probability of walking in the intervention groups. Corrected estimates were of 0.007, 0.019, and 0.039. Thus, naïve estimates were overestimated by multiplicative factors of 3.0, 2.9, and 2.8. Commonly estimated residential intervention-outcome associations substantially overestimate true effects. Our somewhat paradoxical conclusion is that to estimate residential effects, investigators critically need information on nonresidential places visited.

Latent structure in random sequences drives neural learning toward a rational bias

People generally fail to produce random sequences by overusing alternating patterns and avoiding repeating ones-the gambler's fallacy bias. We can explain the neural basis of this bias in terms of a biologically motivated neural model that learns from errors in predicting what will happen next. Through mere exposure to random sequences over time, the model naturally develops a representation that is biased toward alternation, because of its sensitivity to some surprisingly rich statistical structure that emerges in these random sequences. Furthermore, the model directly produces the best-fitting bias-gain parameter for an existing Bayesian model, by which we obtain an accurate fit to the human data in random sequence production. These results show that our seemingly irrational, biased view of randomness can be understood instead as the perfectly reasonable response of an effective learning mechanism to subtle statistical structure embedded in random sequences.

Assessment of cognitive biases and biostatistics knowledge of medical residents: a multicenter, cross-sectional questionnaire study

PurposeThe aim of this study is to determine the perceived familiarity of medical residents with statistical concepts, assess their ability to integrate these concepts in clinical scenarios, and investigate their susceptibility to the gambler's fallacy and the conjunction fallacy.MethodsA multi-institutional, cross-sectional survey of Greek medical residents was performed. Participants were asked to indicate their familiarity with basic statistical concepts and answer clinically oriented questions designed to assess their biostatistics knowledge and cognitive biases. Univariate, bivariate, and multivariate statistical models were used for the evaluation of data.ResultsOut of 153 respondents (76.5% response rate), only two participants (1.3%) were able to answer all seven biostatistics knowledge questions correctly while 29 residents (19%) gave incorrect answers to all questions. The proportion of correct answers to each biostatistics knowledge question ranged from 15 to 51.6%. Residents with greater self-reported familiarity were more likely to perform better on the respective knowledge question (all p<0.01). Multivariate analysis of the effect of individual resident characteristics on questionnaire performance showed that previous education outside Greece, primarily during medical school, was associated with lower biostatistics knowledge scores (p<0.001). A little more than half of the respondents (54.2%) answered the gambler's fallacy quiz correctly. Residents with higher performance on the biostatistics knowledge questions were less prone to the gambler's fallacy (odds ratio 1.38, 95% confidence intervals 1.12–1.70, p=0.003). Only 48 residents (31.4%) did not violate the conjunction rule.ConclusionsA large number of medical residents are unable to correctly interpret crucial statistical concepts that are commonly found in the medical literature. They are also especially prone to the gambler's fallacy bias, which may undermine clinical judgment and medical decision making. Formalized systematic teaching of biostatistics during residency will be required to de-bias residents and ensure that they are proficient in understanding and communicating statistical information.

An Examination of Factors Driving Chinese Gamblers’ Fallacy Bias

Gambling is a leisure activity, which is enjoyed by many people around the world. Among these people, Chinese are known for their high propensity to gamble and are highly sought after by many casinos. In this exploratory study, the effect of two types of fallacy bias-positive recency and negative recency-on the betting behavior of Chinese gamblers is investigated. Although the influence of fallacy bias on a betting decision is well documented, little is known about the interaction of the factors that dictate fallacy bias. Drawing from an analysis of 2,645 betting decisions, the results show that Chinese gamblers primarily endorse positive recency, especially when the latest outcome is more frequent. This is contrary to most findings on Western subjects in which negative recency is more common. Current findings have meaningful implications to casino gaming entertainment businesses and public policymakers.

An effect of inter-trial duration on the gambler's fallacy choice bias

The gambler's fallacy is defined as the avoidance of a winning outcome in a stochastic environment with a constant probability. We tested the possibility that the gambler's fallacy in humans is responsive to the amount of time between choice allocations. Two groups of subjects were placed in a six-choice betting game in which the choices were clustered into two "patches." Groups were defined by the length of time - 2s or 6s - between trials. On any given trial subjects allocated six points among the alternatives, and retained any points that were bet on the winning alternative. Both groups showed evidence of the gambler's fallacy bias. However, the bias was stronger in the 6-s ITI group than in the 2-s ITI group. This difference was found primarily to be due to differences in the number of subjects showing an opposing bias to the gambler's fallacy, namely a preference for the most recent winning alternative. This choice bias is termed the hot hand fallacy. Our findings contradict predictions derived from a foraging heuristic and from traditional accounts of the gambler's fallacy.

Allocating time to future tasks: The effect of task segmentation on planning fallacy bias

The scheduling component of the time management process was used as a "paradigm" to investigate the allocation of time to future tasks. In three experiments, we compared task time allocation for a single task with the summed time allocations given for each subtask that made up the single task. In all three, we found that allocated time for a single task was significantly smaller than the summed time allocated to the individual subtasks. We refer to this as the segmentation effect. In Experiment 3, we asked participants to give estimates by placing a mark on a time line, and found that giving time allocations in the form of rounded close approximations probably does not account for the segmentation effect. We discuss the results in relation to the basic processes used to allocate time to future tasks and the means by which planning fallacy bias might be reduced.

Biases in casino betting: The hot hand and the gambler’s fallacy

AbstractWe examine two departures of individual perceptions of randomness from probability theory: the hot hand and the gambler's fallacy, and their respective opposites. This paper's first contribution is to use data from the field (individuals playing roulette in a casino) to demonstrate the existence and impact of these biases that have been previously documented in the lab. Decisions in the field are consistent with biased beliefs, although we observe significant individual heterogeneity in the population. A second contribution is to separately identify these biases within a given individual, then to examine their within-person correlation. We find a positive and significant correlation across individuals between hot hand and gambler's fallacy biases, suggesting a common (root) cause of the two related errors. We speculate as to the source of this correlation (locus of control), and suggest future research which could test this speculation.