Vol. 6 (01) pp. 621-631 DOI: 10.21474/IJAR01/6265

REVIEW OF BEHAVIORAL BIASES - AN INDIVIDUAL EQUITY INVESTOR PERSPECTIVE.

and
  • Research Associate, Loyola Institute of Business Administration, Loyola College, Chennai, Tamil Nadu, India.
  • Director, Loyola Institute of Business Administration, Loyola College, Chennai, Tamil Nadu, India.
35 Downloads 158 Views
Crossref

Download Full Paper (PDF)

Abstract

Research has proved that investors in the equity market are not consistently rational. Emotions influence their decision making process in the complex environment of equity market, in the form of behavioral biases. This paper reviews five important behavioral biases exhibited by investors in the equity market. The behavioral biases reviewed include, representativeness, anchoring, gambler?s fallacy, availability and optimism. The literature available for each of the biases is reviewed and hence this paper draws attention to a new dimension in finance.

Keywords

Article Analytics

References

  1. Sharpe, W. F. (1964). Capital asset prices: A theory of market equilibrium under conditions of risk. The Journal of Finance, 19(3), 425-442.
  2. Markowitz, H. (1952). Portfolio selection. The Journal of Finance, 7(1), 77-91.
  3. Fama, Eugene F. (1965a). Random walks in stock market prices. Financial Analysts Journal, 21(5), 55-59.
  4. Fama, E. F. (1965b). The behavior of stock-market prices. Journal of Business, 34-105.
  5. Fama, E. F. (1970). Efficient capital markets: A review of theory and empirical work. The Journal of Finance, 25(2), 383-417.
  6. Thaler, R. H. (Ed.). (2005). Advances in behavioral finance. New Jersey: Princeton University Press.
  7. Shiller, R. J. (1999). Human behavior and the efficiency of the financial system. Handbook of Macroeconomics, 1, 1305-1340.
  8. Phung, A. (2010). Behavioral finance. Retrieved from Investopedia website: http://i.investopedia.com/inv/pdf/tutorials/BehavioralFinance.pdf
  9. Gupta Ramesh (1991). Portfolio management: The process and its dynamics (WP1991-03-01_00999). Working Paper, Indian Institute of Management, Ahmedabad.
  10. Iyer, S. B., & Bhaskar, R. K. (2002). Investor's psychology: A study of investor behavior in the Indian capital market. Finance India, 16(4), 1357-1376.
  11. Harlow, W. V., & Brown, K. C. (1990). The role of risk tolerance in the asset allocation process: A new perspective. USA: The research foundation of the institute of chartered financial analysts
  12. Lease, R. C., Lewellen, W. G., & Schlarbaum, G. G. (1974). The individual investor: attributes and attitudes. The Journal of Finance, 29(2), 413-433.
  13. Blume, M. E., & Irwin Friend (1978). The changing role of the individual investor: A twentieth century report fund. New York: John Wiley and sons.
  14. Daniel, K., Hirshleifer, D., & Teoh, S. H. (2002). Investor psychology in capital markets: Evidence and policy implications. Journal of Monetary Economics, 49(1), 139-209.
  15. Coval, J. D., & Moskowitz, T. J. (1999). Home bias at home: Local equity preference in domestic portfolios. The Journal of Finance, 54(6), 2045-2073.
  16. Kang, J. K. (1997). Why is there a home bias? An analysis of foreign portfolio equity ownership in Japan. Journal of Financial Economics, 46(1), 3-28.
  17. Lewis, K. K. (1999). Trying to explain home bias in equities and consumption. Journal of Economic Literature, 571-608.
  18. Benartzi, S. (2001). Excessive extrapolation and the allocation of 401(k) accounts to company stock. The Journal of Finance, 56(5), 1747-1764.
  19. Huberman, G. (2001). Familiarity breeds investment. Review of Financial Studies, 14(3), 659-680.
  20. Tversky, A., & Kahneman, D. (1991). Loss aversion in riskless choice: A reference-dependent model. The Quarterly Journal of Economics, 1039-1061.
  21. Carhart, M. M. (1997). On persistence in mutual fund performance. The Journal of Finance, 52(1), 57-82.
  22. Grinblatt, M., Titman, S., & Wermers, R. (1995). Momentum investment strategies, portfolio performance, and herding: A study of mutual fund behavior. The American Economic Review, 1088-1105.
  23. Sirri, E. R., & Tufano, P. (1998). Costly search and mutual fund flows. The Journal of Finance, 53(5), 1589-1622.
  24. Barber, B., & Odean, T. (2000). The courage of misguided convictions: The trading behavior of individual investors. Financial Analysts Journal, 55(6), 41-55.
  25. De Bondt, W. F., & Thaler, R. H. (1994). Financial decision-making in markets and firms: A behavioral perspective (Working Paper No. 4777). Massachusetts: National bureau of economic research.
  26. Kempf, A., & Ruenzi, S. (2006). Status quo bias and the number of alternatives: An empirical illustration from the mutual fund industry. The Journal of Behavioral Finance, 7(4), 204-213.
  27. Longstaff, F. A., Santa-Clara, P., & Schwartz, E. S. (2001). Throwing away a billion dollars: The cost of suboptimal exercise strategies in the swaptions market. Journal of Financial Economics, 62(1), 39-66.
  28. Benartzi, S., & Thaler, R. H. (2001). Naive diversification strategies in defined contribution saving plans. American Economic Review, 79-98.
  29. Chang, E. C., Cheng, J. W., & Khorana, A. (2000). An examination of herd behavior in equity markets: An international perspective. Journal of Banking and Finance, 24(10), 1651-1679.
  30. Hirshleifer, D., & Hong Teoh, S. (2003). Herd behavior and cascading in capital markets: A review and synthesis. European Financial Management, 9(1), 25-66.
  31. Agrawal, K. (2012). A conceptual framework of behavioral biases in finance. The IUP Journal of Behavioral Finance, 9(1), 7-18.
  32. Kahneman, D., & Tversky, A. (1979). Prospect theory: An analysis of decision under risk. Econometrica: Journal of the Econometric Society, 263-291.
  33. Machina, M. J. (1982). Expected utility analysis without the independence axiom. Econometrica: Journal of the Econometric Society, 277-323.
  34. Odean, T. (1999). Do investors trade too much?. American Economic Review, 89(5), 1279-1298.
  35. Odean, T. (1998b). Are investors reluctant to realize their losses?. The Journal of Finance, 53(5), 1775-1798.
  36. Kahneman, D. (1973). Attention and effort. Englewood Cliffs, NJ: Prentice-Hall.
  37. Riccardi, V., & Simon, H. K. (2000). What is behavioral finance?. Business, Education & Technology Journal, 2(2), 1-9.
  38. Olsen, R. A. (1998). Behavioral finance and its implications for stock-price volatility. Financial Analysts Journal, 54(2), 10-18.
  39. Barberis, N., & Thaler, R. (2003). A survey of behavioral finance. Handbook of the Economics of Finance, 1, 1053-1128.
  40. Statman, M. (1999). Behavioral finance: Past battles and future engagements. Financial Analysts Journal, 18-27.
  41. Kahneman, D., & Tversky, A. (1972). Subjective probability: A judgment of representativeness. Cognitive Psychology, 3(3), 430-454.
  42. Kahneman, D., & Tversky, A. (1973). On the psychology of prediction. Psychological Review, 80(4), 237.
  43. Barberis, N., & Thaler, R. (2003). A survey of behavioral finance. Handbook of the Economics of Finance, 1, 1053-1128.
  44. Barberis, N., Shleifer, A., & Vishny, R. (1998). A model of investor sentiment. Journal of Financial Economics, 49(3), 307-343.
  45. Jayaraj (2013). The factor model for determining the individual investment behavior in India. Journal of Economics and Finance, 1(4), 21-32.
  46. Tversky, A., & Kahneman, D. (1974). Judgment under uncertainty: Heuristics and biases. Science, 185(4157), 1124-1131
  47. Chandra, A., & Kumar, R. (2011). Determinants of individual investor behavior: An orthogonal linear transformation approach (MPRA Paper No.29722). MPRA, Munich personal RePEc archive. Retrieved from http://mpra.ub.uni-muenchen.de/29722/
  48. Epley, N., & Gilovich, T. (2001). Putting adjustment back in the anchoring and adjustment heuristic: Differential processing of self-generated and experimenter-provided anchors. Psychological Science, 12(5), 391-396.
  49. Block, R. A., & Harper, D. R. (1991). Overconfidence in estimation: Testing the anchoring-and-adjustment hypothesis. Organizational Behavior and Human Decision Processes, 49(2), 188-207.
  50. Shiller, R. J. (1999). Human behavior and the efficiency of the financial system. Handbook of Macroeconomics, 1, 1305-1340.
  51. George, T. J., & Hwang, C. Y. (2004). The 52‐week high and momentum investing. The Journal of Finance, 59(5), 2145-2176.
  52. Cen, L., Hilary, G., & Wei, K. J. (2013). The role of anchoring bias in the equity market: Evidence from analysts? earnings forecasts and stock returns. Journal of Financial and Quantitative Analysis, 48(01), 47-76.
  53. Pompian, M. M. (2006). Behavioral finance and wealth management: How to build optimal portfolios that account for investor biases. New Jersey: John Wiley & Sons.
  54. Pompian, M. M. (2008). Using behavioral investor types to build better relationships with your clients. Journal of Financial Planning, 21(10), 64-76
  55. Kahneman, D., & Riepe, M. W. (1998). Aspects of investor psychology. The Journal of Portfolio Management, 24(4), 52-65.
  56. Tversky, A., & Kahneman, D. (1971). Belief in the law of small numbers. Psychological Bulletin, 76(2), 105-110
  57. Kahneman, D., & Tversky, A. (1972). Subjective probability: A judgment of representativeness. Cognitive Psychology, 3(3), 430-454.
  58. Johnson, J., & Tellis, G. J. (2005). Blowing bubbles: Heuristics and biases in the run-up of stock prices. Journal of the Academy of Marketing Science, 33(4), 486-503.
  59. Kudryavtsev, A., Cohen, G., & Hon-Snir, S. (2013). ?Rational? or ?intuitive?: Are behavioral biases correlated across stock market investors?. Contemporary Economics, 7(2), 31-53.
  60. Johnson, J., Tellis, G. J., & MacInnis, D. J. (2005). Losers, winners, and biased trades. Journal of Consumer Research, 32(2), 324-329.
  61. Shefrin, H., & Statman, M. (1985). The disposition to sell winners too early and ride losers too long: Theory and evidence. The Journal of Finance, 40(3), 777-790
  62. Kudryavtsev, A., Cohen, G., & Hon-Snir, S. (2013). ?Rational? or ?intuitive?: Are behavioral biases correlated across stock market investors?. Contemporary Economics, 7(2), 31-53.
  63. Shua, L., Qiaob, Y., Zhengyuc, T., & Jiand, Z. (2006). Psychological experimental study on hot-hand effect and gambler's fallacy. Economic Research Journal, 8, 58-69.
  64. Daniel, K., Hirshleifer, D., & Teoh, S. H. (2002). Investor psychology in capital markets: Evidence and policy implications. Journal of Monetary Economics, 49(1), 139-209.
  65. Massa, M., & Simonov, A. (2005). Behavioral biases and investment. Review of Finance, 9(4), 483-507.
  66. Kliger, D., & Kudryavtsev, A. (2010). The availability heuristic and investors' reaction to company-specific events. The Journal of Behavioral Finance, 11(1), 50-65.
  67. Da Silva Rosa, R., & Durand, R. B. (2008). The role of salience in portfolio formation. Pacific-Basin Finance Journal, 16(1), 78-94.
  68. Barber, B. M., & Odean, T. (2008). All that glitters: The effect of attention and news on the buying behavior of individual and institutional investors. Review of Financial Studies, 21(2), 785-818.
  69. Klibanoff, P., Lamont, O., & Wizman, T. A. (1998). Investor reaction to salient news in closed‐end country funds. The Journal of Finance, 53(2), 673-699.
  70. Cheng, P. Y. K. (2010). Improving financial decision making with unconscious thought: A transcendent model. Journal of Behavioral Finance, 11(2), 92-102.
  71. Weinstein, N. D. (1980). Unrealistic optimism about future life events. Journal of Personality and Social Psychology, 39(5), 806-820.
  72. Fabre, B., & Fran?ois-Heude, A. (2009). Optimism and overconfidence investors' biases: A methodological note. Finance, 30(1), 79-119.
  73. Bracha, A., & Brown, D. J. (2012). Affective decision making: A theory of optimism bias. Games and Economic Behavior, 75(1), 67-80.
  74. Ciccone, S. J. (2011). Investor optimism, false hopes and the January effect. Journal of Behavioral Finance, 12(3), 158-168.
  75. Dimson, E., Marsh, P., & Staunton, M. (2004). Irrational optimism. Financial Analysts Journal, 60(1), 15-25.
  76. Moore, D. A., Kurtzberg, T. R., Fox, C. R., & Bazerman, M. H. (1999). Positive illusions and forecasting errors in mutual fund investment decisions. Organizational Behavior and Human Decision Processes, 79(2), 95-114.
  77. Manglik, G. (2006). Countering over-confidence and over-optimism by creating awareness and experiential learning amongst stock market players. Social Science Research Network. Retrieved from http://dx.doi.org/10.2139/ssrn.954861
  78. Stout, L. A. (1995). Are stock markets costly casinos? Disagreement, market failure, and securities regulation. Virginia Law Review, 81(3), 611-712.
  79. Diether, K. B., Malloy, C. J., & Scherbina, A. (2002). Differences of opinion and the cross section of stock returns. The Journal of Finance, 57(5), 2113-2141.
  80. Stout, L. A. (2000). Stock prices and social wealth (Discussion Paper No. 301). Harvard Law School, Cambridge, MA. Retrieved from http://www.law.harvard.edu/programs/olin_center/
  81. Miller, E. M. (1977). Risk, uncertainty, and divergence of opinion. The Journal of Finance, 32(4), 1151-1168.
  82. Morris, S. (1996). Speculative investor behavior and learning. The Quarterly Journal of Economics, 1111-1133.
  83. Scherbina, A. (2001). Stock prices and differences of opinion: Empirical evidence that prices reflect optimism. Working Paper, Kellogg Graduate School of Management, Northwestern University. Retrieved from http://dx.doi.org/10.2139/ssrn.267665
  84. Jiang, G., Lee, C. C., & Zhang, Y. (2005). Information uncertainty and expected returns. Review of Accounting Studies, 10(2/3), 185-221.
  85. Doukas, J. A., Kim, C. F., & Pantzalis, C. (2002). A test of the errors?in?expectations explanation of the value/glamour stock returns performance: Evidence from analysts? forecasts. The Journal of Finance, 57(5), 2143-2165.
  86. La Porta, R. (1996). Expectations and the cross‐section of stock returns. The Journal of Finance, 51(5), 1715-1742.
  87. Puri, M., & Robinson, D. T. (2007). Optimism and economic choice. Journal of Financial Economics, 86(1), 71-99.
  88. Marciukaityte, D., Szewczyk, S. H., & Varma, R. (2005). Investor overoptimism and private equity placements. Journal Of Financial Research, 28(4), 591-608
  89. Yi, B., El-Badawi, M. H., & Lin, B. (2008). Pre-issue investor optimism and post-issue underperformance. Financial Analysts Journal, 64(5), 77-87.
  90. Jaimovich, N., & Rebelo, S. (2007). Behavioral theories of the business cycle. Journal of the European Economic Association, 5(2‐3), 361-368.
  91. Bennet, E., Selvam, M., Vivek, N., & Shalin, E. E. (2012). The impact of investor?s sentiment on the equity market: Evidence from Indian stock market. African Journal of Business Management, 6(32), 9317-9325.
  92. Heaton, J. B. (2002). Managerial optimism and corporate finance. Financial management, 31(2), 33-45.
  93. Strong, N., & Xu, X. (2003). Understanding the equity home bias: Evidence from survey data. Review of Economics and Statistics, 85(2), 307-312.

How to Cite This Article

Renu Isidore. R and P. Christie. (2018); REVIEW OF BEHAVIORAL BIASES - AN INDIVIDUAL EQUITY INVESTOR PERSPECTIVE., Int. J. of Adv. Res., 6 (01), 621-631, ISSN 2320-5407. DOI: https://doi.org/10.21474/IJAR01/6265

Corresponding Author

Renu Isidore R
Research Associate at Loyola Institute of Business Administration
Creative Commons Attribution 4.0 This work is licensed under a Creative Commons Attribution 4.0 International License.