Behavioral Biases and Investor Behavior: Predicting the Next Step of a Random Walk (Revisited)

Model of Bias-Driven Trend Followers and Interaction with Manipulators

International Journal of Information Technology & Decision Making ◽

10.1142/s0219622014500485 ◽

2017 ◽

Vol 16 (02) ◽

pp. 573-590

Author(s):

Ke Liu ◽

Kin Keung Lai ◽

Jerome Yen ◽

Qing Zhu

Keyword(s):

Financial Markets ◽

Behavioral Finance ◽

Real Data ◽

Investor Behavior ◽

Individual Investors ◽

Investment Performance ◽

Behavioral Biases ◽

The Common ◽

And Performance ◽

Manipulation Detection

Stock investors are not fully rational in trading and many behavioral biases that affect them. However, most of the literature on behavioral finance has put efforts only to explain empirical phenomena observed in financial markets; little attention has been paid to how individual investors’ trading performance is affected by behavioral biases. As against the common perception that behavioral biases are always detrimental to investment performance, we conjecture that these biases can sometimes yield better trading outcomes. Focusing on representativeness bias, conservatism and disposition effect, we construct a mathematical model in which the representative trend investor follows a Bayesian trading strategy based on an underlying Markov chain, switching beliefs between trending and mean-reversion. By this model, scenario analysis is undertaken to track investor behavior and performance under different patterns of market movements. Simulation results show the effect of biases on investor performance can sometimes be positive. Further, we investigate how manipulators could take advantage of investor biases to profit. The model’s potential for manipulation detection is demonstrated by real data of well-known manipulation cases.

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The Relationship of Behavioral Factors with Investment Performance of Individual Investors in the Nepali Stock Market

Prithvi Academic Journal ◽

10.3126/paj.v4i0.37016 ◽

2021 ◽

Vol 4 ◽

pp. 66-83

Author(s):

Kripa Kunwar

Keyword(s):

Factor Analysis ◽

Stock Market ◽

Investor Behavior ◽

Individual Investors ◽

Herd Behavior ◽

Behavioral Factors ◽

Investment Performance ◽

Behavioral Biases ◽

Market Factors ◽

The Impact

In recent years, the market anomalies and irrational behavior of investors have influenced the stock market worldwide. The impact of investor behavior on the stock market is more prominent in small and less efficient capital markets. The study is based on the questionnaire survey of 203 investors from Kathmandu and Pokhara. The study uses Exploratory Factor Analysis (EFA) to explore the underlying dimensions of investor behavior employing Principal Component Analysis and Varimax rotation. The suitability of the data for the factor analysis has been examined using KMO and Barlett’s Test of Sphericity. The EFA extracted four factors of investor behavioral dimensions categorized as: heuristics, prospects, market factors and herding effect. The factor scores obtained from the EFA was used to examine the correlation of these behavioral factors with investment performance. The results reveal that behavioral biases like heuristics, prospects, market factor and herding effect are present among individual investors in Nepal. Among the factors, the investment performance of investors is found to be influenced by heuristics and market factors. The heuristic behaviors are found to have the highest and positive influence on the investment performance. Finally, the results depict that following the herd behavior in the market and prospects does not result in the improved investor performance. The findings are helpful to understand the role of investor behavior in the stock market and formulation of appropriate policies that limit the possibility of behavioral biases affecting the stock market adversely.

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