Do Investor Sophistication and Trading Experience Eliminate Behavioral Biases in Financial Markets?

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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Do Individual Behavioral Biases Affect Financial Markets and the Macroeconomy?

SSRN Electronic Journal ◽

10.2139/ssrn.2893013 ◽

2016 ◽

Cited By ~ 1

Author(s):

Harjoat Singh Bhamra ◽

Raman Uppal

Keyword(s):

Financial Markets ◽

Behavioral Biases

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ANALYSIS OF THE DISPOSITION EFFECT: ASYMMETRY AND PREDICTION ACCURACY

The Journal of Prediction Markets ◽

10.5750/jpm.v7i1.596 ◽

2013 ◽

Vol 7 (1) ◽

pp. 27-42

Author(s):

Florian Teschner

Keyword(s):

Decision Making ◽

Financial Markets ◽

Market Efficiency ◽

Behavioral Finance ◽

Prediction Accuracy ◽

Disposition Effect ◽

Prediction Market ◽

Behavioral Biases ◽

Individual Traders ◽

Economic Indices

The disposition effect describes investors’ common tendency of selling a winning investment too soon and holding on to losing investments too long. We analyze the disposition effect in a prediction market for economic indices. We show that the effect for individual traders as well as on an aggregated level. Furthermore we find a significant asymmetry of the disposition effect. The effect can almost exclusively be attributed to the percentage of gains realized (PGR). Additionally we link the aggregated disposition effect and market efficiency. A common hypothesis of the behavioral finance literature is that if participants make systematically biased decisions, market efficiency will suffer. Our setup is well-suited to studying the behavioral aspects of decision making because, in contrast to financial markets (i) the value of shares in our market is ultimately known and (ii) we can measure the participants’ behavioral biases (i.e the disposition effect). Against intuition we find no correlation between the disposition effect and prediction accuracy - a proxy for market efficiency.

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Behavioral Biases Never Walk Alone

Journal of Sports Economics ◽

10.1177/1527002514560575 ◽

2016 ◽

Vol 18 (2) ◽

pp. 99-125 ◽

Cited By ~ 6

Author(s):

Isabel Abinzano ◽

Luis Muga ◽

Rafael Santamaria

Keyword(s):

Financial Markets ◽

Media Coverage ◽

Trading Volume ◽

Necessary Condition ◽

Economic Returns ◽

Behavioral Biases ◽

Clear Cut ◽

Overconfidence Bias ◽

The Impact ◽

Betting Odds

This article presents evidence of the impact of overconfidence bias in asset prices drawn from a study based on data from tennis betting exchanges. A series of betting strategies in tournaments with a clear-cut favorite are shown to yield significant economic returns. The impact of overconfidence bias on betting odds increases with trading volume, media coverage, and levels of disagreement between overconfident and cumulative prospect theory bettors. Just as in traditional financial markets, arbitrage limits are shown to be a necessary condition for the impact of behavioral biases on prices.

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Institutional Investors

10.1093/acprof:oso/9780190269999.003.0004 ◽

2017 ◽

Cited By ~ 1

Author(s):

Alexandre Skiba ◽

Hilla Skiba

Keyword(s):

Behavioral Finance ◽

Institutional Investors ◽

Large Body ◽

Individual Investors ◽

Trading Behavior ◽

Institutional Trading ◽

Behavioral Biases ◽

Investor Sophistication ◽

The Common ◽

Momentum Trading

A large body of behavioral finance literature focuses on the behavioral biases of individual investors in their trading choices. The research shows that sophistication is related to the level at which these behavioral biases influence investors’ trading choices. This chapter reviews the literature on institutional investors’ trading behavior and finds that, consistent with the level of investor sophistication, institutional investors are less subject to the common behavioral biases. However, some behavioral biases are also present in institutional trading, and more so among less sophisticated practitioners. Evidence also shows that institutional investors engage in some trading choices such as herding, momentum trading, and under-diversification, which could be symptoms of behavioral biases. Based on the reviewed research, these trading behaviors are not value reducing. Overall, evidence indicates that institutional investors are less subject to behavioral biases, making markets more efficient.

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A STUDY ON EFFECT OF BEHVIORAL BIASES ON INVESTOR’S PREFERENCE REGARDING 80C TAX SAVING INSTRUMENTS IN SURAT CITY

BSSS Journal of Management ◽

10.51767/jm1206 ◽

2021 ◽

Vol 12 (1) ◽

pp. 60-69

Author(s):

Hiral D Mehta ◽

◽

Dr. Jitesh Parmar ◽

Keyword(s):

Financial Markets ◽

Sample Size ◽

Sampling Method ◽

Investment Decision ◽

Investment Decisions ◽

Survey Method ◽

Behavioural Finance ◽

Financial Decisions ◽

Behavioral Biases

Behavioural finance is a new theoretical field which seeks to apply the understandings of the psychologists to recognize the behaviour of both investors and financial markets. It concentrates upon how investor is aware and acts on information to take investment decisions and that their behaviours reason them to make changed Selection about their financial decisions. Investors do not act sensibly in taking verdicts relating to investment. They have positive weaknesses like cognitive and emotional which take a predominating function in taking investment decision of individuals. They have behavioral biases in the event of taking investment decision. In this present paper researchers examines “Effect of Behvioral Biases on Investor’s Preference Regarding 80C Tax Saving Instruments in Surat City.”. Researcher has studied behavioral biases of investors investing in 80C tax saving instruments by conducting the survey with sample size of 100 investors through a wellstructured questionnaire in Surat city. The sampling method used was convenient sampling through personal survey method by contacting investors of Surat city. The purpose of this study was to find out behavioral biases of investors while investing in tax saving 80C instruments in Surat City.

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Behavioral biases in pension fund trustees’ decision making

Review of Behavioral Finance ◽

10.1108/rbf-05-2018-0049 ◽

2019 ◽

Vol 11 (2) ◽

pp. 128-143

Author(s):

Leonardo Weiss-Cohen ◽

Peter Ayton ◽

Iain Clacher ◽

Volker Thoma

Keyword(s):

Decision Making ◽

Financial Markets ◽

Behavioral Finance ◽

Asset Allocation ◽

Institutional Investors ◽

Pension Fund ◽

Content Type ◽

Behavioral Biases ◽

The Past ◽

State Of Affairs

PurposeBehavioral finance research has almost exclusively investigated the decision making of lay individuals, mostly ignoring more sophisticated institutional investors. The purpose of this paper is to better understand the relatively unexplored field of investment decisions made by pension fund trustees, an important subset of institutional investors, and identify future avenues of further exploration.Design/methodology/approachThis paper starts by setting out the landscape in which pension fund trustees operate and make their decisions, followed by a literature review of the extant behavioral finance research applicable to similar situations.FindingsDespite receiving training and accumulating experience in financial markets, these are limited and sparse; therefore, pension fund trustees are unlikely to be immune from behavioral biases. Trustees make decisions in groups, are heavily reliant on advice and make decisions on behalf of others. Research in those areas has uncovered many inefficiencies. It is still unknown how this specific context can affect the psychological effects on their decisions.Research limitations/implicationsGiven how much influence trustees’ decisions have on asset allocation and by extension in financial markets, this is a surprising state of affairs. Research in behavioral finance has had a marked influence on policy in the past and so we anticipate that exploring the decisions made within pension funds may have wide ramifications for the industry.Originality/valueAs far as the authors are aware, no behavioral research has empirically tested pension fund trustees’ decisions to investigate how the combination of group decisions, advice and surrogacy influence their decisions and, ultimately, the sustainability of our pensions.

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