Does underconfidence matter in short-term and long-term investment decisions? Evidence from an emerging market | ScienceGate (2024)

Author(s):

Maqsood Ahmad

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PurposeThe purpose of this article is to clarify the mechanism by which underconfidence heuristic-driven bias influences the short-term and long-term investment decisions of individual investors, actively trading on the Pakistan Stock Exchange.Design/methodology/approachInvestors' underconfidence has been measured using a questionnaire, comprising numerous items, including indicators of short-term and long-term investment decision. In order to establish the influence of underconfidence on the investment decisions in both the short and long run, a 5-point Likert scale questionnaire has been used to collect data from the sample of 203 investors. The collected data were analyzed using SPSS and AMOS graphics software. Hypotheses were tested using structural equation modeling technique.FindingsThis article provides further empirical insights into the relationship between heuristic-driven biases and investment decision-making in the short and long run. The results suggest that underconfidence bias has a markedly negative influence on the short-term and long-term decisions made by investors in developing markets. It means that heuristic-driven biases can impair the quality of both short-term and long-term investment decisions.Practical implicationsThis article encourages investors to avoid relying on cognitive heuristics, namely, underconfidence or their feelings when making short-term and long-term investment strategies. It provides awareness and understanding of heuristic-driven biases in investment management, which could be very useful for finance practitioners' such as investor who plays at the stock exchange, a portfolio manager, a financial strategist/advisor in an investment firm, a financial planner, an investment banker, a trader/broker at the stock exchange or a financial analyst. But most importantly, the term also includes all those persons who manage corporate entities and are responsible for making its financial management strategies. They can improve the quality of their decision-making by recognizing their behavioral biases and errors of judgment, to which we are all prone, resulting in more appropriate investment strategies.Originality/valueThe current study is the first to focus on links between underconfidence bias and short-term and long-term investment decision-making. This article enhanced the understanding of the role that heuristic-driven bias plays in the investment management and more importantly, it went some way toward enhancing understanding of behavioral aspects and their influence on the investment decision-making in an emerging market. It also adds to the literature in the area of behavioral finance specifically the role of heuristics in investment strategies; this field is in its initial stage, even in developed countries, while, in developing countries, little work has been done.

PurposeThe paper takes a behavioral approach by making use of the prospect theory to unveil the impact of salience on short-term and long-term investment decisions. This paper aims to investigate the group differences for two types of investors’ groups, i.e. individual investors and professional investors.Design/methodology/approachThe study uses partial least square-based structural equation modeling technique, measurement invariance test and multigroup analysis test on a unique data set of 277 active equity traders which included professional money managers and individual investors.FindingsResults showed that salience has a significant positive impact on both short-term and long-term investment decisions. The impact was almost 1.5 times higher for long-term investment decision as compared to short-term decision. Furthermore, multigroup analysis revealed that the two groups (individual investors and professional investors) were statistically significantly different from each other.Research limitations/implicationsThe study has implications for financial regulators, money managers and individual investors as it was found that individual investors suffer more with salience heuristic and may end up with sub-optimal portfolios due to inefficient diversification. Thus, investors should be cautious in fully relying on salience and avoid such bias to improve investment returns.Practical implicationsThe study concludes with a discussion of policy and regulatory implications on how to minimize salience bias to achieve optimum and diversified portfolios.Originality/valueThe study has significantly contributed to the growing body of applied behavioral research in the discipline of finance.

This study aims to analyze 1) whether there is an influence of financial literacy on investment decision maknig. 2) Obtain empirical evidence whether there is an Representativeness bias making on investment decisions. 3) Does Bias optimismeaffect investment decision making. In this study using Causality Design. Population and sampek are 104 respondents registered in the Indonesia Stock Exchange Investment Gallery (GIBEI) Faculty of Economics, State University of Padang. The method of analysis is multiple linear regression. The results of the study found 1) Financial literacy influences investment decisions on investment decision making.2) Optimum bias affects investment decisions on investment decision making. 3) Representativness influences investment decisions on investment decision making. 4) Together financial literacy variables, the optimum bias and representativness together influence the investment decision on investment decision making

PurposeThis paper aims to examine the role personal values play in investment decision-making processes among Ghanaian shareholders.Design/methodology/approachIn consequence of the recent emergence of the issue of corporate governance practices in Ghana, and the kind of the research objective of this paper, a mix of qualitative and quantitative methods was used. These methods were used in two stages. The first stage was qualitative, which purposively selected 20 individual shareholders to solicit their perspectives on how personal values influence investment decisions. Their responses were used to construct the content of this enquiry. The second stage, which was quantitative, used stratified sampling technique to select 503 individual shareholders to confirm the responses obtained from stage one of the enquiry.FindingsThe findings of the study reveal that individual shareholders in Ghana hold value priorities and that honesty, a comfortable life and family security play a significant role in their lives and their investment decision-making processes, and the kind of companies they choose to invest in. Also, to Ghanaian individual shareholders, there is a clear distinction between a comfortable life and a prosperous life in the sense that they are not incentivized more by the latter but by the former in their investment decisions.Practical implicationsThe results can inform corporate directors and managers what values are considered in investment decisions, and that it is not purely financial. With these results, they can be informed that while some financial values are important, it is just to live a comfortable life and not a prosperous life. This may influence these directors and managers to have a more long-run focus and to have more of a corporate social responsibility (CSR) focus by putting implementable measures in place to tackle corporate responsibility issues and to take up a responsibility for their CSR feat. Also, the results can be used for public policy in that if regulators find out that more CSR-type information is important to investors, they might require additional CSR-type disclosures in financial statements.Originality/valueThis paper contributes to the knowledge on the stakeholder perspective of corporate governance that individual shareholders’ personal values have influence on their investment decisions and the choice of companies they invest in.

PurposeResearch in the area of behavioral finance has demonstrated that investors exhibit irrational behavior while making investment decisions. Investor behavior usually deviates from logic and reason, and consequently, investors exhibit various behavioral biases which impact their investment decisions. The purpose of this paper is to rank the behavioral biases influencing the investment decision making of individual equity investors from the state of Punjab, India. This research would provide valuable insight into the different behavioral biases to investors and other participants of the capital market and help them in improving investment decisions.Design/methodology/approachThe research is conducted on the individual equity investors of Punjab, India. Fuzzy analytic hierarchy process was applied to rank the factors influencing the decision making of individual equity investors of Punjab. The primary factors considered for the study are overconfidence bias, representative bias, anchoring bias, availability bias, regret aversion bias, loss aversion bias, mental accounting bias and herding bias.FindingsThe three most influential criteria were herding bias, loss aversion bias and overconfidence bias. The five most influential sub-criteria were “I readily sell shares that have increased in value (C61),” “News about the company (Newspapers, TV and magazines) affects my investment decision (C84),” “I invest each element of my investment portfolio separately (C71)” and “I usually hold loosing stock for long time, expecting trend reversal (C52).”Research limitations/implicationsAlthough sample survey conducted in the present study was based on a limited sample selected from a particular area that truly represented the total population, it is considered as the limitation of this study.Practical implicationsThe outcome of this research provides investors with a better understanding of behavioral biases that influence their decision making. This study provides them a guideline on different behavioral biases that they should consider while making investment decisions.Originality/valueThe research model is based on the available literature on behavioral finance and the research results and findings would add value to the existing knowledge base.

PurposeThe purpose of this study was to gain a better understanding of pension fund managers investment thinking when confronted with challenging investment decisions. The study focuses on the theoretical question of how dual thinking processes in experts’ investment decision-making emerge. This question has attracted interest in economic psychology but has not yet been answered. Here, it is explored in the context of pension funds.Design/methodology/approachThe sample included 22 pension fund managers. The authors explored their decision-making by applying the critical incident interview technique, which entailed collecting investment decisions that fund managers retrieved from recent memory (Flanagan, 1954). Questions concerned the investment situation, the decision-making process and the challenges and uncertainties the fund managers faced.FindingsMany of the 61 critical incidents examined concerned challenging (mostly stock) investments based on extensive analysis (e.g. reliance on external analysts for advice; analysis of massive amounts of hard company and stock market information; scrutiny of company reports and personal meetings with CEOs). However, fund managers to a high degree based their decisions on soft information judgments such as experience and qualitative judgements of teams. The authors found heuristics, intuitive thinking, biases (sunk cost effects) and social influences in investment decision-making.Research limitations/implicationsThe sample is small and not randomly selected.Practical implicationsThe authors suggest anti-bias training and better acquaintance with human forecasting limitations for pension fund managers.Originality/valuePension fund managers’ investment thinking has not previously been investigated. The authors show the types of investment situations in which analytical and intuitive thinking and biases occur.

The study examined emotional biases and its effect on investor’s decision making in Nigeria Primary data were employed and the population consists of clients of the top 10 stockbroking firms registered by the Nigerian Stock Exchange as at 31st January, 2018. These firms were selected because they contributed to 68.72% of total value of transactions as at 31st January, 2018. Data on emotional biases and investment decision making among investors in Nigeria were obtained through structured questionnaire which was administered to 30 clients of each stockbroking firm, totalling 300. Data analysis was done using percentages and logistic regression analysis. Findings showed that emotional biases, represented by loss-aversion bias, overconfidence bias, regret-aversion bias and herding bias were prevalent to Nigerian investors and also significantly influenced investor’s decision making in Nigeria. The study suggests that investors should improve the understanding of various emotional biases and traits exhibited by them, adopt a suitable decision technique to avoid this and seek experts’ opinion when making investment decisions.