scholarly journals Behavioral biases in pension fund trustees’ decision making

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.

Do investors exhibit behavioral biases in investment decision making? A systematic review

2018 ◽  
Vol 10 (2) ◽  
pp. 210-251 ◽  
Author(s):  
Syed Aliya Zahera ◽  
Rohit Bansal
Keyword(s):  
Decision Making ◽  
Behavioral Finance ◽  
Institutional Investors ◽  
Investment Decision ◽  
Research Work ◽  
Investment Decisions ◽  
Financial Advisors ◽  
Content Type ◽  
Behavioral Biases ◽  
Investment Decision Making

Purpose The purpose of this paper is to study and describe several biases in investment decision-making through the review of research articles in the area of behavioral finance. It also includes some of the analytical and foundational work and how this has progressed over the years to make behavioral finance an established and specific area of study. The study includes behavioral patterns of individual investors, institutional investors and financial advisors. Design/methodology/approach The research papers are analyzed on the basis of searching the keywords related to behavioral finance on various published journals, conference proceedings, working papers and some other published books. These papers are collected over a period of year’s right from the time when the most introductory paper was published (1979) that contributed this area a basic foundation till the most recent papers (2016). These articles are segregated into biases wise, year-wise, country-wise and author wise. All research tools that have been used by authors related to primary and secondary data have also been included into our table. Findings A new era of understanding of human emotions, behavior and sentiments has been started which was earlier dominated by the study of financial markets. Moreover, this area is not only attracting the, attention of academicians but also of the various corporates, financial intermediaries and entrepreneurs thus adding to its importance. The study is more inclined toward the study of individual and institutional investors and financial advisors’ investors but the behavior of intermediaries through which some of them invest should be focused upon, narrowing down population into various variables, targeting the expanding economies to reap some unexplained theories. This study has identified 17 different types of biases and also summarized in the form of tables. Research limitations/implications The study is based on some of the most recent findings to have a quick overview of the latest work carried out in this area. So far very few extensive review papers have been published to highlight the research work in the area of behavioral finance. This study will be helpful for new researches in this field and to identify the areas where possible work can be done. Practical implications Practical implication of the research is that companies, policymakers and issuers of securities can watch out of investors’ interest before issuing securities into the market. Social implications Under the Social Implication, investors can recognize several behavioral biases, take sound investment decisions and can also minimize their risk. Originality/value The essence of this paper is the identification of 17 types of biases and the literature related to them. The study is based on both, the literature on investment decisions and the biases in investment decision-making. Such study is less prevalent in the developing country like India. This paper does not only focus on the basic principles of behavioral finance but also explain some emerging concepts and theories of behavioral finance. Thus, the paper generates interest in the readers to find the solutions to minimize the effect of biases in decision-making.

Evaluation of behavioral biases affecting investment decision making of individual equity investors by fuzzy analytic hierarchy process

2019 ◽  
Vol 12 (3) ◽  
pp. 297-314 ◽  
Author(s):  
Jinesh Jain ◽  
Nidhi Walia ◽  
Sanjay Gupta
Keyword(s):  
Decision Making ◽  
Behavioral Finance ◽  
Investment Decision ◽  
Investment Decisions ◽  
Analytic Hierarchy ◽  
Content Type ◽  
Behavioral Biases ◽  
Investment Decision Making ◽  
Overconfidence Bias ◽  
Hierarchy Process

Purpose Research 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/approach The 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. Findings The 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/implications Although 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 implications The 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/value The 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.

Starting points for a new researcher in behavioral finance

2016 ◽  
Vol 12 (1) ◽  
pp. 92-103 ◽  
Author(s):  
Jim Yuh Huang ◽  
Joseph C.P. Shieh ◽  
Yu-Cheng Kao
Keyword(s):  
Literature Review ◽  
Financial Markets ◽  
Behavioral Finance ◽  
Research Papers ◽  
Content Type ◽  
The Past ◽  
Significant Area ◽  
Considerable Impact ◽  
Number Of Publications ◽  
New Literature

Purpose – The purpose of this paper is to systematically consolidate and analyze papers in behavioral finance in the past 20 years, and to provide an overall introduction to scholars and professionals in the industry who may be interested in behavioral finance in the future. Design/methodology/approach – The research is based on searching keywords in databases of ISI Web of Science (WOS). Survey data covers the period from 1995 to 2013, with 124 journals and 347 articles. The authors are committed to finding the number of publications and times cited in the field of behavioral finance to measure the contribution of active researchers. Findings – More research papers in behavioral finance are emerging, making it a significant area of study. Most of the papers can be classified as empirical or theory. The number of papers in the review class should be increased to assist scholars and professionals in understanding behavioral finance and its application. A number of personal and institutional main contributors have been making a considerable impact on the field of behavioral finance. With the vigorous development of financial markets all around the world, more and more scholars are becoming involved in behavioral finance research. Research limitations/implications – Articles published earlier than 1995 or not included in the WOS database cannot be included in the research; however, this does not diminish the contribution of older scholars in any way. Moreover, the research does not include non-SCI/SSCI articles. Originality/value – Unlike a traditional literature review, which classifies and elaborates different research paths (Subrahmanyam, 2007), the research adopts the ISI WOS database as a tool for analysis. This new literature review methodology enables us to systematically consolidate and analyze papers in behavioral finance.

scholarly journals GROUP BEHAVIORAL BIASES AFFECT FINANCIAL DECISIONS UNLIKE INDIVIDUAL BEHAVIORAL BIASES

2020 ◽  
Vol 15 (1) ◽  
Author(s):  
Marcelo Henriques de Brito ◽  
Paula Esteban do Valle Jardim
Keyword(s):  
Decision Making ◽  
Group Dynamics ◽  
Behavioral Finance ◽  
Institutional Investors ◽  
Group Behavior ◽  
Individual Investors ◽  
Cognitive Errors ◽  
Financial Decisions ◽  
Behavioral Biases ◽  
Group Members

This work presents a new approach to behavioral finance with a theoretical contribution by suggesting and discussing with examples a list of group behavioral biases along with established individual behavioral biases, bringing, hence, an additional outlook on how behavioral biases affect financial decisions. While individual behavioral biases are detected in individuals acting alone, group behavioral biases require the scrutiny of group behavior. This awareness may be particularly important to institutional investors, whose decisions basically stem from a committee or a group that will exhibit behavioral biases depending on how the group members interact between themselves when making a decision, which may include negotiation activities and not necessarily be related to personality or hierarchy. The focus on individual investors deciding on personal investments explain the need of work already developed in behavioral finance, which focus on individual behavioral biases, which may be a consequence from either cognitive errors or emotional biases. However, decisions from institutional investors basically stem from a committee or a group that will exhibit behavioral biases depending on how the group members interact between themselves when making a decision. To address the challenge of identifying causes and consequences for unexpected or unsuitable financial decision-making within a group, this work initially retrieves previous work on individual behavioral biases, linking emotional biases and cognitive errors to the “system 1” and “system 2” decision-making framework. Then, a conceptual contribution of this paper, which may be particularly relevant for institutional investors, is to explain with examples - after research and experience - which are the group behavioral biases and their impact upon financial decisions. Individual behavioral biases already acknowledged in other works on behavioral finance are contrasted in this work to the suggested group behavioral biases. Furthermore, this work suggests that there are two broad types of group behavioral biases: group dynamics biases and information-acceptance biases. Each broad type is subdivided into biases related to the structure of the group and biases related to how the group decision-making procedure occurs. Group dynamics biases related to the manner the group is structured are the following: kin bias (belonging bias), harmony bias, and competition bias. On the other hand, group dynamics biases may be sorted according to five different decision-making procedures, namely: herding, fad bias, Plato bias (denial bias), scarcity bias, and home bias.

Institutional investor behavioral biases: syntheses of theory and evidence

2017 ◽  
Vol 40 (5) ◽  
pp. 578-603 ◽  
Author(s):  
Zamri Ahmad ◽  
Haslindar Ibrahim ◽  
Jasman Tuyon
Keyword(s):  
Behavioral Finance ◽  
Institutional Investors ◽  
Design Methodology ◽  
Institutional Investor ◽  
Heuristics And Biases ◽  
Theoretical Underpinning ◽  
Content Type ◽  
Behavioral Biases ◽  
Irrational Behavior ◽  
Behavioral Heuristics

Purpose This paper aims to review the theory and empirical evidence of institutional investor behavioral biases in the lenses of behavioral finance paradigm. It surveys the research specifically focusing on behavioral biases among institutional investors in investment management activities worldwide. Design/methodology/approach A literature survey is done to gather and synthesize evidence on behavioral biases of institutional investors. Findings The survey and analysis reveal the following findings. First, the theoretical underpinning of investors’ irrational behavior has been neglected in behavioral finance research. Second, the behavioral heuristics and biases are dynamic and complex. Third, understanding behavioral biases’ origin, causes and effects requires interdisciplinary perspectives from the fields of psychology, sociology and biology. Originality/value The analysis and alternative perspectives drawn in this paper provide new insights into the field of behavioral finance and aims to suggest researchers, practitioners and regulators on the next course of actions.

ANALYSIS OF THE DISPOSITION EFFECT: ASYMMETRY AND PREDICTION ACCURACY

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.

A post-global financial crisis (GFC) framework for strategic planning, assessment and management decision making for US sustainable commercial real estate

2017 ◽  
Vol 35 (6) ◽  
pp. 589-618 ◽  
Author(s):  
Pernille Hoy Christensen
Keyword(s):  
Decision Making ◽  
Financial Crisis ◽  
Real Estate ◽  
Performance Indicators ◽  
Institutional Investors ◽  
Global Financial Crisis ◽  
Real Estate Market ◽  
Commercial Real Estate ◽  
Content Type ◽  
Sustainability Initiatives

Purpose The purpose of this paper is to understand both the facts and the values associated with the breadth of issues, and the principles related to sustainable real estate for institutional investors. Sustainable real estate is a growing sector within the commercial real estate industry, and yet, the decision-making practices of institutional investors related to sustainability are still not well understood. In an effort to fill that gap, this research investigates the post-global financial crisis (GFC) motivations driving the implementation of sustainability initiatives, the implementation strategies used, and the predominant eco-indicators and measures used by institutional investors. Design/methodology/approach This paper presents the results of a three-round modified Delphi study conducted in the USA in 2011-2012 investigating the nature of performance measurements and reporting requirements in sustainable commercial real estate and their impact on the real estate decision-making process used by institutional investors. Two rounds of in-depth interviews were conducted with 14 expert panelists. An e-questionnaire was used in the third round to verify qualitative findings. Findings The key industry drivers and performance indicators influencing institutional investor decision making were associated with risk management of assets and whether initiatives can improve competitive market advantage. Industry leaders advocate for simple key performance indicators, which is in contrast to the literature which argues for the need to adopt common criteria and metrics. Key barriers to the adoption of sustainability initiatives are discussed and a decision framework is presented. Practical implications This research aims to help industry partners understand the drivers motivating institutional investors to uptake sustainability initiatives with the aim of improving decision making, assessment, and management of sustainable commercial office buildings. Originality/value Building on the four generations of the sustainability framework presented by Simons et al. (2001), this research argues that the US real estate market has yet again adjusted its relationship with sustainability and revises their framework to include a new, post-GFC generation for decision making, assessment, and management of sustainable real estate.

Ambiguity aversion and experiential learning: implications for long-term savings decisions

2020 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Bryan Foltice ◽  
Rachel Rogers
Keyword(s):  
Decision Making ◽  
Experiential Learning ◽  
Asset Allocation ◽  
Ambiguity Aversion ◽  
Sample Population ◽  
Allocation Decision ◽  
Content Type ◽  
Learning Modules ◽  
Return Data

PurposeThis paper evaluates potential methods for reducing ambiguity surrounding returns on equity to improve long-term savings decisions.Design/methodology/approachWe evaluate 221 undergraduate students in the US and first assess the degree of ambiguity aversion exhibited by individuals in the sample population as they decide between a risky (known probability) option and ambiguous (unknown probability) option pertaining to their chances of winning $0 or $1 in a hypothetical lottery. Similarly, we test whether sampling historical return data through learning modules influences long-term decision making regarding asset allocation within a retirement portfolio.FindingsAllowing participants to experience the underlying probability through sampling significantly influences behavior, as participants were more likely to select the ambiguous option after sampling. Here, we also find that participants who receive interactive learning modules – which require users to manually alter the asset allocation to produce a sample of historical return data based on the specific allocation entered in the model – increase their post-learning equity allocations by 10.1% more than individuals receiving static modules. Interestingly, we find no significant evidence of ambiguity aversion playing a role in the asset allocation decision.Originality/valueWe find that decision-making related to ambiguous and risky options can be substantially influenced by experiential learning. Our study supplements previous literature, providing a link between research on the effect of ambiguity on stock market participation and implementation of educational programs to improve the asset allocation decision for young adults.

Challenging investment decision-making in pension funds

2019 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Carl-Christian Trönnberg ◽  
Sven Hemlin
Keyword(s):  
Decision Making ◽  
Critical Incident ◽  
Pension Fund ◽  
Investment Decision ◽  
Investment Decisions ◽  
Pension Funds ◽  
Content Type ◽  
Fund Managers ◽  
Intuitive Thinking ◽  
Investment Decision Making

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.

A study of prominence for disposition effect: a systematic review

2019 ◽  
Vol 11 (1) ◽  
pp. 2-21 ◽  
Author(s):  
Syed Aliya Zahera ◽  
Rohit Bansal
Keyword(s):  
Mutual Funds ◽  
Behavioral Finance ◽  
Mutual Fund ◽  
Institutional Investors ◽  
Disposition Effect ◽  
Individual Investors ◽  
Content Type ◽  
Experimental Market ◽  
The Individual ◽  
The Impact

Purpose The purpose of this paper is to study the disposition effect that is exhibited by the investors through the review of research articles in the area of behavioral finance. When the investors are hesitant to realize the losses and quick to realize the gains, this phenomenon is known as the disposition effect. This paper explains various theories, which have been evolved over the years that has explained the phenomenon of disposition effect. It includes the behavior of individual investors, institutional investors and mutual fund managers. Design/methodology/approach The authors have used the existing literatures from the various authors, who have studied the disposition effect in either real market or the experimental market. This paper includes literature over a period of 40 years, that is, Dyl, 1977, in the form of tax loss selling, to the most recent paper, Surya et al. (2017). Some authors have used the PGR-PLR ratio for calculating the disposition effect in their study. However, some authors have used t-test, ANNOVA, Correlation coefficient, Standard deviation, Regression, etc., as a tool to find the presence of disposition effect. Findings The effect of disposition can be changed for different types of individual investors, institutional investors and mutual funds. The individual investors are largely prone to the disposition effect and the demographic variables like age, gender, experience, investor sophistication also impact the occurrence of the disposition effect. On the other side, the institutional investors and mutual funds managers may or may not be affected by the disposition effect. Practical implications The skilled understanding of the disposition effect will help the investors, financial institutions and policy-makers to reduce the adverse effect of this bias in the stock market. This paper contributes a detailed explanation of disposition effect and its impacts on the investors. The study of disposition effect has been found to be insufficient in the context of Indian capital market. Social implications The investors and society at large can gains insights about causes and influences of disposition effect which will be helpful to create sound investment decisions. Originality/value This paper has complied the 11 causes for the occurrence of disposition effect that are found by the different authors. The paper also highlights the impact of the disposition effect in the decision-making of various investors.

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