Biases Of Investors Research Articles

Empowering Investors: Reducing Herd Bias through Financial Literacy and Self-reflective Thinking

Herd behavior, where investors mimic the trades of others rather than relying on their own information or analysis, is a widespread phenomenon that can lead to suboptimal investment decisions and market inefficiencies. Hence, understanding how to reduce this behavior is crucial for improving individual investment outcomes and sustainable market performance. Though the literature suggests that self-reflection and financial literacy have potential to mitigate herd bias, it is unclear as to how these two perspectives interact to minimize this irrational behavior. By drawing on insights from the adaptive market hypothesis, transformative learning theory, concept of bounded rationality and dual process theory, this study attempts to enhance the understanding of this phenomenon by introducing a conditional mediation model that promotes self-directed learning. It predicts that investors can reduce their herd bias through self-reflection on their past stock trading experiences, which they can practice by engaging intuitive logical thinking and strengthen further through their financial literacy. Since herding is generally predicted to be more prevalent in frontier stock markets, the study was conducted in a frontier market - the Colombo Stock Exchange. The data was obtained through a self-administered questionnaire from 253 active individual investors, and analyzed by applying the PROCESS procedure. The findings reveal the significance of self-reflection as a mediating variable across its antecedents, which provides strong evidence for its central role in reducing herd bias. Notably, the findings indicate that self-reflection has a stronger effect on reducing herd bias of investors with lower level of financial literacy. It implies that investors with low financial literacy are more susceptible to herd bias, and self-reflection facilitates them to recognize and minimize their herd bias. Accordingly, the study concludes that promoting self-reflection can empower individual investors to become more financially literate and thereby mitigate their herd bias.

Behavioral Economics and Stock Market Decision-Making: Investor Biases and Investment Strategies

This study examines the application of behavioral economics to stock market decision-making, focusing on common cognitive biases of investors and their impact on investment decisions. Unlike the complete rationality assumed in traditional economics, behavioral economics reveals the irrational behaviors that investors exhibit when facing risks and uncertainties, such as overconfidence, loss aversion, and herd effect. By examining classical theories such as prospect theory, loss aversion, and the anchoring effect, as well as specific case studies such as the 2008 global financial crisis, this study aims to reveal how these psychological biases affect investors’ decision-making process. Further, this study examines how behavioral economics theories can be used to improve investment strategies by recommending methods such as low volatility investment strategies to help investors make more rational and effective investment choices in a complex market environment. Through in-depth analysis of the core theories and cases of behavioral economics, investors are better able to identify biases in the decision-making process, thereby optimizing their investment decisions and improving long-term investment returns.

Tax Neutrality Treatment of Investment Funds in the European Union

This article examines the legal consequences and assesses the economic impact of the differing tax treatment of investment funds in Portugal, Germany and Luxembourg before and after the Allianzgi-Fonds landmark decision, by the CJEU. Before the Allianzgi-Fonds decision the Portuguese investment taxation discriminated against foreign investments by levying a withholding tax on foreign compared to domestic investments. The Allianzgi-Fonds decision prohibited this discriminatory treatment. Therefore, our article examines whether the Portuguese CIT exemption extended to non-resident UCITS will lead to tax neutrality treatment of investment funds in the EU. Overall, we confirm that the abolishment of the discriminatory withholding tax can considerably reduce the effective tax levels for cross-border investments. Moreover, the abolishment also diminishes the domestic investment bias. Nonetheless, the results do not confirm the achievement of neutrality.

Gender, Race, and Entrepreneurship: A Randomized Field Experiment on Venture Capitalists and Angels

We study gender and race in high-impact entrepreneurship using a tightly controlled randomized field experiment. We sent out 80,000 pitch emails introducing promising but fictitious start-ups to 28,000 venture capitalists and angels. Each email was sent by a fictitious entrepreneur with randomly assigned gender and race. Female entrepreneurs received 9% more interested replies than males pitching identical projects and Asians received 6% more than Whites. Our results suggest that investors do not discriminate against female or Asian entrepreneurs when evaluating unsolicited pitch emails and that future research on investor biases should focus on networks and in-person interactions. This paper was accepted by Tomasz Piskorski, finance. Funding: The grant is Social Sciences and Humanities Research Council of Canada Insight Development [Grant 430-2019-00306] “Gender and racial discrimination in venture capital” through the University of British Columbia. Supplemental Material: The online appendix and data files are available at https://doi.org/10.1287/mnsc.2024.4990 .

Kin investment biases of aunts and uncles: associations with phenotypic resemblance and sociodemographic characteristics.

Higher investment in maternal than paternal aunts and uncles is explained by the "paternity uncertainty hypothesis". Regardless of laterality, however, aunts show a greater degree of investment than uncles, which is attributed to sex-specific reproductive strategies. Resemblance cues can be used as indicators of genetic relatedness. The central hypothesis of the current study was that perceived phenotypic resemblance between aunts/uncles and niblings would be associated with aunts' and uncles' investment. The association was predicted to be stronger with respect to patrilateral than matrilateral aunts and uncles and stronger with respect to patrilateral aunts than patrilateral uncles. 243 Iranians aged between 15 and 50 participated in a retrospective analysis and filled out a 52-item questionnaire focusing on the solicitude, emotional closeness, and contact frequency between aunts/uncles and their nephews/nieces. In addition, the participants had to rate their phenotypic resemblance with their aunts and uncles. Aunts' and uncles' solicitude, emotional closeness, and contact frequency were differentially expressed according to sex and laterality. Maternal aunts showed the significantly highest emotional closeness, contact frequency, and investment, while the opposite was true for paternal uncles. Moreover, investment was correlated with phenotypic resemblance. Such association was stronger for patrilateral than matrilateral aunts and uncles, and concerning solicitude it was stronger for patrilateral aunts than patrilateral uncles. The resemblance-based kin recognition mechanism among aunts and uncles was self- rather than family-referent. In conclusion, phenotypic similarity can be used as a cue to genetic kinship and is correlated with the investment of aunts and uncles. However, such associations also depend on the degree of genetic relatedness and the differential kin investment provided by each sex.

The Ex-Dividend Effect for Reported Listed Companies in Taiwan

Past literature shows that investors use mental account when they are facing dividend distribution. That is, investors focus on dividend distribution and irrationally ignore the tradeoff of dividend payment and price decrease. The dividend is thus deemed as bonus to investors. Furthermore, investors tend to buy ex-dividend stocks after the ex-dividend day due to the expectation of price recovery. The buying forces around the ex-dividend day persistently push the price. After the ex-dividend, investors gradually become rational. The stocks thus are priced based on the fundametals. The overprice of stocks due to the ex-dividend events may consequently decreases. Past litearture regarding ex-dividend focuses on the announcemnet effect and ex-divend effect on the ex-dvidend day. The contribution of this project is to combine the issues of ex-dividend and media coverage to investigate whether the investing behavior bias of investors is strengthened after the coverage of ex-dividend news by media. Past literature has confirmed that investors refer to the media coverage when they are making stock picking decisions. However, the past literature did not further investigate the reaction of investors to the ex-dividend news. This study fills the gap of the literature to combine these two issues, which may provide a referecne for investors when they are making investing decisions.

Analysis of Behavioral Biases Affecting Investment Decisions of Individual Investors using Analytical Hierarchy Process

Individual investors exhibiting irrational behaviors may encounter a difficult situation in financial markets. Investor trends, also known as behavioral trends, have been introduced under different headlines in different studies. Overconfidence, representation, anchoring, regret aversion, and herding were included in the research study. In this study, it was aimed to determine the order of importance of investor biases of individual investors trading in Borsa Istanbul. For this purpose, a survey questionnaire was applied to individual investors trading in BIST. Analytical Hierarchy Process was utilized in testing the research model. A total of 411 participants contributed to the study. As a result of the study, regret aversion bias and overconfidence bias were the leading biases to which individual investors attached importance. However, the criterion (C41) “I feel sorrow for the long-losing stocks I hold.” was found to rank highest among all sub-criteria. This sub-criterion is part of regret aversion bias. Regret aversion bias was also the main criterion ranking highest among all criteria. Upon considering the other sub-criteria of regret aversion bias; C42, C43, and C44 sub-criteria were found to rank second, fourth, and eleventh, respectively. C12 criterion, which ranked third, was seen to belong to overconfidence bias, and this bias ranked second among the main criteria. This research would contribute to a better comprehension of the behavioral biases that affect the decision-making of individual investors trading in BIST. The obtained results of the study are thought to contribute to the behavioral finance literature.

Intergroup time bias and aversive racism in the medical context.

Time is fundamental to organizing all aspects of human life. When invested in relationships, it has a psychological meaning as it indicates how much individuals value others and their interest in maintaining social relationships. Previous research has identified an intergroup time bias (ITB) in racialized social relations, defined as a discriminatory behavior in which White individuals invest more time in evaluating White than Black individuals. This research proposes an aversive racism explanation for the ITB effect and examines its consequences in the medical context. In four experimental studies (N = 434), we found that White medical trainees invested more time in forming impressions of White (vs. Black) male patients. Study 5 (N = 193) further revealed more time investment in diagnosing, assessing pain, and prescribing opioids for White than Black male patients. This biased time effect mediated the impact of patients' skin color on health care outcomes, leading to greater diagnostic accuracy and pain perception, and lower opioid prescriptions. A meta-analytical integration of the results (Study 6) confirmed the ITB effect reliability across experiments and that it is stronger in participants with an aversive racist profile (vs. consistently prejudiced or nonprejudiced). These findings provide the first evidence that bias in time investment favoring White (vs. Black) patients is associated with aversive racism and impacts medical health care outcomes. Furthermore, these results offer insights into the sociopsychological meaning of time investment in health care and provide a theoretical explanation for an understudied insidious form of discrimination that is critical to comprehending the persistency of racial health care disparities. (PsycInfo Database Record (c) 2024 APA, all rights reserved).

Behavioral Biases in Investment: Overconfidence, Disposition Effect, and Herding Behavior

This section introduces the research by outlining the importance of understanding behavioral biases in investment decisions, particularly within the context of retail investors in Pakistan. This research work primarily intends to find out the influence of behavioral biases over investors' investment decisions. The population of this research are individual investors investing in Pakistan Stock Exchange. The research design of this study is quantitative. The sample size of current research was 400 individual investors. The survey assessed several types of biases, including overconfidence, disposition effect, and herding behavior. The result outcome indicated that with an increased number of such biases present, it significantly influences the investment decisions of investors. This study specifically indicates that respondents are often subject to overconfidence, the disposition effect, and herding behavior, and finally the factors that lead to relatively poor investment decisions. These results underline the identification and need for tackling these biases within the financial decision-making domain. Financial professionals, comprising advisors and educators, are better placed with skills on how to design strategies that deter more adverse consequences of these biases. They can enhance investment quality in decision-making by well-directed training programs and advisory services. Therefore, this study underscores the pivotal role that behavioral finance plays in improving investor outcomes and calls for the rectification of behavioral bias to attain more informed and rational investment decisions.

Anomalies, option volume, and disagreement

AbstractWe document robust amplification of stock market anomaly returns associated with elevated option trading volume driven by disagreement trades. Consistent with the correction of mispricing associated with biased beliefs, anomaly returns are higher when disagreement option volume is high prior to earnings announcements. Additionally, we demonstrate that disagreement‐based option volume is negatively related to future stock returns among stocks that are overpriced based on anomaly characteristics. Our findings also concentrate in stocks that are also difficult to short, emphasizing the combined impact of investor bias and shorting costs. Leveraging the staggered adoption of eXtensible Business Reporting Language, we establish a plausibly identified link between investor disagreement and short‐horizon mispricing in stocks.

Is Chinese Mutual Fund a Good Choice of Investment?

With the development of Chinese economy, Chinese household are wealthier and looking for good investing instrument. Meanwhile, Chinese mutual fund industry has grown to be the biggest category of asset management. Therefore, whether Chinese mutual fund is a good choice of investment become worth discussion. This article explore this question from 4 angles: the average performance, the performance persistence, the behavioral biases of mutual fund managers, and obstacles for investors from realizing profits. And we find Chinese mutual funds on average can beat their benchmark and their performance persists at least in the following year. However, mutual fund managers could be overconfidence especially after achieving good performance, and there are also behavioral biases of investors preventing them from making profit through mutual funds. In conclusion, even though Chinese mutual fund on average have relatively good returns, realizing profit through them is not an easy job.

Biases in Indonesian Stock Investor Behavior

Research Aims: to explore behavioral biases of stock investors in their decision making and find which bias is the most often experienced by Indonesia investor. Investor behavior plays an important role in making investment decisions in the capital market. The less the biases, the better the decision.Design/methodology/approach: Using qualitative approach, semi-structure interview was conducted with 5 Indonesia investor. All five participants are Indonesian and aged between 34-69 years old. The interviews begin with some general questions and are followed by addressing more questions arising from the previous discussion. The transcriptions of interviews from respondents use the verbatim approach.Research Findings: Several biases that we have found are herding, loss aversion, disposition effect, anchoring and availability biases. Herding is the one that happens more often. From those 5 behavioral biases from the result of the interviews, herding is the one that happens more often. This study suggests that herding is note-worthy, that is, this bias needs to be explored more deeply. This research also found that better educational background and knowledge can reduce the biases in decision making.Theoretical Contribution/Originality: This research was using qualitative approach explore investor bias in Indonesia. Keywords: Investor bias, herding, risk aversion, disposition effect, anchoring and availability

Dinamika Gender dan Kinerja Perusahaan: Eksplorasi Peran Dewan Wanita dengan Kualifikasi Akuntansi

Although research topics related to gender influence are quite common, there are still inconsistencies in the results Many countries have implemented gender quotas on company boards, whereas Indonesia has not adopted this policy yet. So this research was conducted to determine the influence of female directors and commissioners on company performance as well as the influence of the moderating variable of women on the board with accounting qualifications. This research uses a purposive sampling method. The objects of this research are all non-financial companies listed on the IDX from 2018 to 2022, accompanied by purposive sampling criteria. This research applies panel data regression analysis methods and uses the SPSS and EViews statistical programs. The results of this research found that female directors and commissioners do not have a positive influence on company performance. Meanwhile, moderating variables can moderate the relationship between independent and dependent variables. However, the direction of moderation obtained shows opposite results to previous research. This can occur due to investor bias, where investors feel unsure about the competence of female board members.

Behavioral Bias of Equity Investors in Different Market Conditions and Events in Pakistan Stock Exchange (PSX)

The herding behavior of equity investors in the Pakistan Stock Exchange (PSX) is examined in this study. There are two ways to look at herding behavior: first, in different market conditions, like bull and bear, extreme and less extreme, high and low trading volume, and high and low volatility; second, in different events, like the month of Ramadan, the financial crisis of 2007–2008, and the Covid-19 pandemic. Financial herding behaviour is when equity investors follow the actions of other equity investors without making their own decisions because they lack information or they think others have more trustworthy information. Regression analysis using Newey West Consistent Estimators is performed on Pakistan Stock Exchange (PSX) daily stock market data ranging from January 2001 to June 2021. The study found that the herding behavior among equity investors is absent during extreme market conditions, less extreme market conditions, high trading volume, high market volatility, and low market volatility; however, it is present during low trading volume, the month of Ramadan, financial crisis (2007-2008) and during Covid-19 pandemic as well.

A Study on the Impact of Demographics Variable on Mental Accounting Bias of Individual Investors in Financial Decision

It has been asserted that investors' preferences for equities are influenced by their desires, cognitive flaws, and emotions. A succinct introduction to behavioural finance is given in this article. Research that rejects the conventional premises of expected utility maximisation with logical investors in efficient markets is referred to as behavioural finance. The study of psychology, according to financial economists, can explain stock market anomalies, market booms, and crashes as well as shed significant light on how unpredictable and erratic human behaviour can be. This has the potential to challenge the conventional wisdom that financial markets operate efficiently. Mental accounting bias is depicted in investor behaviour where Investors split their funds into many mental account tiers of a portfolio pyramid in order to achieve objectives like securing their retirement funds, paying for their kid's college, or being able to travel the world. In accordance with the organization's power, the law, and its obligation commitments, the paper outlines ideas to improve the efficacy of financial decisions and identifies the psychological effects' limitations. In Practical, proposals about the adoption, execution, and evaluation of financial decisions were made considering scarce funds and rising need.

Understanding Mutual Fund Investors’ Behaviour Using an Extended Model of Goal-directed Behaviour

The study explores and understands the behavioural process followed by individual investors who choose or do not choose to invest in mutual funds (MFs) employing the extended model of goal-directed behaviour (MGB). The study design comprises building and testing a theoretically integrated MGB in the context of MFs investing decisions by incorporating a moderating variable, Regret Averse Bias in MGB. Partial least squares structural equation modelling (PLS-SEM) was utilized for the present study. The study’s outcomes revealed that the attitude of investors positively affected their desire to invest in MFs. The findings about emotions indicated the regulatory-focused approach of investors. They revealed the positive influence of negative emotions and no impact of positive emotions on an individual’s desire to invest in MFs. This confirmed the positive influence of financial self-efficacy (FSE) on the desire to invest and actual behaviour. Finally, the study established the moderating effect of regret aversion bias of investors on the association between the desire to invest and behavioural intention (BI). The study addresses the need to probe the relationship between anticipated emotions (AEs), regulatory focuses and behaviour strategies, as pointed out in earlier related literature.

Role of Locus of Control in the Relationship between Behavioral Biases and Investment Decision

The current study focuses on three heuristics commonly used in decision making; anchoring bias and representative bias with investor’s numeracy capability. This research explains the relationship between biases of investors in investment decision making of Pakistan Stock Exchange. The research also identifies the moderating role of locus of control between behavioral biases and decision making. Data was taken from 400 investors of Pakistan Stock Exchange. The results of the study revealed that representative bias and anchoring bias has a positive impact on investment decisions of the investors. However, the results also revealed that individual’s numeric capabilities do not affect his/her investment decision. Locus of control is used as a moderator in the study. Results show that presence of internal locus of control enhances the impact of biases on their investment decisions. Nonetheless, locus of control does not moderate the relationship between individual’s numeric capabilities and investment decisions. This study is helpful for both individual investors and the regulator in understanding the role of biases in the investment decision making.

Behavioral biases of cryptocurrency investors: a prospect theory model to explain cryptocurrency returns

PurposeThe study aims to test prospect theory (PT) predictions in the cryptocurrency (CC) market. It proposes a new asset pricing model that explores the potential of prospect theory value (PTV) as a significant predictor of CC returns.Design/methodology/approachThe study comprehensively analyses a large sample set of 1,629 CCs, representing more than 95% of the CC market. The study uses a portfolio analysis approach, employing univariate and bivariate sorting techniques with equal-weighted and value-weighted portfolios. The study also employs ordinary least squares (OLS) regression, panel data methods and quantile regression (QR) to estimate the models.FindingsThis study demonstrates an average inverse relationship between PTV and CC returns. However, this relationship exhibits asymmetry across different quantiles, indicating that investor reactions vary based on market conditions. Moreover, PTV provides more robust predictions for smaller CCs characterized by high volatility and illiquidity. Notably, the findings highlight the dominant role of the probability weighting (PW) component in PT for predicting CC behaviors, suggesting a preference for lottery-like characteristics among CC investors.Originality/valueThe study is one of the early studies on CC price dynamics from the PT perspective. The study is the first to apply a QR approach to analyze the cross-section of CCs using a PT-based asset pricing model. The results shed light on CC investors' decision-making processes and risk perception, offering valuable insights to regulators, policymakers and market participants. From a practical perspective, a trading strategy centered around the PTV effect can be implemented.

Investors in the Bangladeshi stock market: issues, behavioural biases and circumvention strategies

Purpose This study aims to explore the underlying issues of behavioural biases in relation to stock market participation and the challenges of individual investors in Bangladesh. The study identifies behavioural biases affecting individuals’ stock market participation, their circumvention strategies and the importance of financial knowledge in encouraging the participation of individuals in the stock market. Design/methodology/approach Semi-structured interviews were used in this study to gather information from industry researchers, individual investors, brokers and institutional advisors. Twenty-two experts were contacted, and 13 agreed to participate in the interviews. The study then uses the thematic analysis method to report its findings. Findings This research shows that investors’ behavioural biases (such as loss aversion, herding, trust, gambler’s fallacy and risk tolerance) are among Bangladesh’s primary drivers of stock market participation. Circumvention strategies (such as poor corporate governance and agency costs) also play a part in individuals’ participation. These influences are in addition to the obvious factors of investment risks, poor infrastructure, poor regulation enforcement and the need for more sufficient investment products. Research limitations/implications This study conducted 13 interviews with expert subjects, which is a small sample size. However, the findings achieved saturation and cannot be ignored. Future research should use quantitative or experimental methods with a large sample size to validate the current findings. Originality/value This study is pioneering in the Bangladesh stock market, exploring the behavioural biases of investors’ participation in the market. This paper provides valuable insights into investor participation by discovering the underlying behavioural biases that have been continually ignored; these insights may also be relevant in frontier markets in Asian countries.

Disposition Effect Bias in Investment and Important Factors Behind This Phenomenon

Disposition Effect Bias in Investment and Important Factors Behind This Phenomenon