Influence of Behavioral Biases and Decision Making Tools on the Performance of Secondary Equity Investors

Abstract

This study aims to determine the biases exhibited by successful investors who earn high returns in equity investments and also the decision-making tools employed by them. By employing a sample of 436 secondary equity investors residing in the Chennai city of India, nine behavioral biases and five decision-making tools were measured. ANOVA test was done to compare the means and identify the biases, which were higher or lower for the successful investors, and the decision-making tools employed by them. The actual return earned, i.e., the actual realization of annual capital appreciation in equity investment in the past two years, was used as proxy for the success of the investor. The study identifies the biases and the decision-making tools that are least and most likely to be exhibited/employed by the successful investors who earn high returns from equity investments. The findings of the study would be beneficial for the equity investors who aim to maximize equity returns and minimize irrationality. Wealth managers and financial advisors would also help their clients with the right guidance to choose the appropriate decision-making techniques and be aware of the biases to improve the performance in the market.

TOPICS: Wealth management, emerging markets, equity portfolio management

Key Findings

• • The investors who earn high returns in equity investment are less likely to exhibit the mental accounting, anchoring, availability, representativeness, loss aversion and regret aversion biases.

• • The investors who earn high returns in equity investment are more prone to the overconfidence bias and the optimism bias.

• • The investors who earn high returns in equity investment are more likely to employ industry analysis and less likely to employ technical analysis or advocate’s recommendation.