DO COGNITIVE BIASES INFLUENCE INVESTMENT DECISIONS BASED ON TECHNICAL FACTORS?

Dhruva Sharma

doi:10.55955/320003

Authors

Dr. Dhruva Jyoti Sharma Assistant Professor, Girijananda Chowdhury University https://orcid.org/0000-0003-0527-2657

DOI:

https://doi.org/10.55955/320003

Keywords:

Behavioural finance, Emotional biases, technical analysis, Investment decision

Abstract

Objective: The purpose of this research is to examine the influence of investors' Cognitive biases on the technical analysis component of investment decisions made by retail investors in Guwahati, Assam, India. Design/Methodology/Approach: Technical analysis of investment decisions is the dependent variable, whereas cognitive biases are the independent factors evaluated. To determine the bearing of these biases on the choice to invest, multinomial logistic regression is used. Findings: 1. Confirmation and Hindsight bias and Herding bias impacts investment decision based on Price Action analysis. 2. Herding bias impacts investment decision based on Relative Strength Index analysis.

References

Ackert, Lucy & Deaves, Richard. (2009). Behavioural Finance: Psychology, Decision-Making, and Markets

Baker, Kent and John Nofsinger. (2002). Psychological Biases of Investors. Financial Service Review, 11, 97-116

Barber, B. M., & Odean, T. (2001). Boys will be Boys: Gender, Overconfidence, and Common Stock Investment. The Quarterly Journal of Economics, 116(1), 261–292 DOI: https://doi.org/10.1162/003355301556400

Bessembinder, H., & Chan, K. (1995). The profitability of technical trading rules in the Asian stock markets. Pacific-basin finance journal, 3(2-3), 257-284. DOI: https://doi.org/10.1016/0927-538X(95)00002-3

Bessembinder, H., & Chan, K. (1998). Market efficiency and the returns to technical analysis. Financial management, 5-17. DOI: https://doi.org/10.2307/3666289

Brock, W., Lakonishok, J., & LeBaron, B. (1992). Simple Technical Trading Rules and the Stochastic Properties of Stock Returns. The Journal of Finance, 47(5), 1731–1764. https://doi.org/10.2307/2328994 DOI: https://doi.org/10.1111/j.1540-6261.1992.tb04681.x

Cootner, P. H. (1962). Stock prices: Random vs. systematic changes. Industrial Management Review (pre-1986), 3(2), 24.

Cowles 3rd, A. (1933) Can Stock Market Forecasters Forecast? Econometrica: Journal of the Econometric Society, 1, 309-324. DOI: https://doi.org/10.2307/1907042

https://doi.org/10.2307/1907042 DOI: https://doi.org/10.2307/1907042

Dale, C., & Rosemarie Workman. (1980). The Arc Sine Law and the Treasury Bill Futures Market. Financial Analysts Journal, 36(6), 71–74. http://www.jstor.org/stable/4478403 DOI: https://doi.org/10.2469/faj.v36.n6.71

Doya, K. (2008). Modulators of decision making. Nat Neurosci 11, 410–416. retrieved from https://doi.org/10.1038/nn2077 on 25th of April, 2023 DOI: https://doi.org/10.1038/nn2077

Fama, E. F., & Blume, M. E. (1966). Filter Rules and Stock-Market Trading. The Journal of Business, 39(1), 226–241. http://www.jstor.org/stable/2351744 DOI: https://doi.org/10.1086/294849

Festinger, L. (1957). Social comparison theory. Selective Exposure Theory, 16, 401.

Garg, Ashish & Goulding, Christian & Harvey, Campbell & Mazzoleni, Michele. (2020). Breaking Bad Trends. SSRN Electronic Journal. 10.2139/ssrn.3594888. DOI: https://doi.org/10.2139/ssrn.3594888

Gilboa, Itzhak. (2010). Rational Choice

Glaser, M., & Weber, M. (2003). Momentum and turnover: evidence from the German stock market. Schmalenbach Business Review, 55, 108-135. DOI: https://doi.org/10.1007/BF03396669

Jensen, M.C. and Benington, G.A. (1970). Random walks and technical theories: some additional evidence. The Journal of Finance, 25: 469-482. https://doi.org/10.1111/j.1540-6261.1970.tb00671.x DOI: https://doi.org/10.1111/j.1540-6261.1970.tb00671.x

Jensen, Michael C., and William H. Merckling (1994). The nature of man. Journal of Applied Corporate Finance 7:2, 4–19 DOI: https://doi.org/10.1111/j.1745-6622.1994.tb00401.x

Kwon, Ki-Yeol & Kish, Richard. (2002). Technical Trading Strategies and Return Predictability: NYSE. Applied Financial Economics. 12. 639-53. 10.1080/09603100010016139. DOI: https://doi.org/10.1080/09603100010016139

Levy, R.A. (1967). Relative strength as a criterion for investment selection. The Journal of Finance, 22: 595-610. https://doi.org/10.1111/j.1540-6261.1967.tb00295.x DOI: https://doi.org/10.1111/j.1540-6261.1967.tb00295.x

Martin, E., & Polivka, A.E. (1995). Diagnostics for redesigning survey questionnaires measuring work in the current population survey. Public Opinion Quarterly, 59, 547-567. DOI: https://doi.org/10.1086/269493

Montier, James (2002). Cognitive Dissonance. http://cognitive-dissonance.Behaviouralfinance.net/ Retrieved: February 2022.

Neelakantan.P.R. (2015). “behavioral finance-a special study on investor psychology”. Kanchipuram: SCSVMV University

Neely, Christopher & Rapach, David & Tu, Jun & Zhou, Guofu. (2013). Forecasting the Equity Risk Premium: The Role of Technical Indicators. Management Science. 60. 10.2139/ssrn.1568267. DOI: https://doi.org/10.1287/mnsc.2013.1838

Nickerson, R. S. (1998). Confirmation bias: A ubiquitous phenomenon in many guises. Review of general psychology, 2(2), 175-220. DOI: https://doi.org/10.1037//1089-2680.2.2.175

Nunnaly,J.C.(1978).Psychometric theory(2nd ed.). New York: McGraw-Hill.

Odean, Terrance. 1999. "Do Investors Trade Too Much?" American Economic Review, 89 (5): 1279-1298.DOI: 10.1257/aer.89.5.1279Persky, J (1995). The Ethology of Homo Economicus. Journal of Economic Perspectives, 9 (2): 221-231 DOI: https://doi.org/10.1257/aer.89.5.1279

Persky, Joseph. 1995. "The Ethology of Homo Economicus." Journal of Economic Perspectives, 9 (2): 221-231.DOI: 10.1257/jep.9.2.221 DOI: https://doi.org/10.1257/jep.9.2.221

Pompian, M. M., & Wood, A. S. (2006). Behavioral Finance and Wealth Management: How to Build Optimal Portfolios for Private Clients.

Rabin, M. (2002), Inference by believers in the law of small numbers, Quarterly Journal of Economics 117, Pg. 775-816. DOI: https://doi.org/10.1162/003355302760193896

Ratner, Mitchell & Leal, Ricardo. (1999). Test of technical trading strategies in emerging equity markets of Latin America and Asia. Journal of Banking & Finance. 23. 1887–1905. 10.1016/S0378-4266(99)00042-4. DOI: https://doi.org/10.1016/S0378-4266(99)00042-4

Scharfstein, D. S., & Stein, J. C. (1990). Herd behavior and investment. The American economic review, 465-479.

Shiller, R. J. (2000). The American Journal of Economics and Sociology, 59(3), 537–540. http://www.jstor.org/stable/3487895 DOI: https://doi.org/10.1111/1536-7150.00042

Slovic, P. (1969). Analyzing the expert judge: A descriptive study of a stockbroker's decision process. Journal of Applied Psychology, 53, 255-263 DOI: https://doi.org/10.1037/h0027773

Slovic, P. (1972). Psychological Study of Human Judgment: Implications for Investment Decision-Making. Journal of Finance, 1972, vol. 27, issue 4, 779-99 DOI: https://doi.org/10.1111/j.1540-6261.1972.tb01311.x

Statman Meir (1999). Behavioural Finance: Past Battles and Future Engagements. Financial Analyst Journal, (Nov-Dec 1999) 55:6, 18-27 DOI: https://doi.org/10.2469/faj.v55.n6.2311

Sullivan, R., Timmermann, A. and White, H. (1999). Data-Snooping, Technical Trading Rule Performance, and the Bootstrap. The Journal of Finance, 54: 1647-1691. https://doi.org/10.1111/0022-1082.00163 DOI: https://doi.org/10.1111/0022-1082.00163

Thaler, R.H. (1985). Mental accounting and consumer choice.Mark.Sci.4, 199–217. DOI: https://doi.org/10.1287/mksc.4.3.199

Thaler, R. H. (1999). Mental accounting matters. Journal of Behavioral decision making, 12(3), 183-206. DOI: https://doi.org/10.1002/(SICI)1099-0771(199909)12:3<183::AID-BDM318>3.0.CO;2-F

Tversky, A., & Kahneman, D. (1974). Judgment under uncertainty: Heuristics and biases. Science, 185(4157), 1124–1131. https://doi.org/10.1126/science.185.4157.1124 DOI: https://doi.org/10.1126/science.185.4157.1124

Van Horne, J. C., & George G. C. Parker. (1967). The Random-Walk Theory: An Empirical Test. Financial Analysts Journal, 23(6), 87–92. http://www.jstor.org/stable/4470248 DOI: https://doi.org/10.2469/faj.v23.n6.87

Van Horne, J. C., & George G. C. Parker. (1968). Technical Trading Rules: A Comment. Financial Analysts Journal, 24(4), 128–132. http://www.jstor.org/stable/4470382 DOI: https://doi.org/10.2469/faj.v24.n4.128

Welch, I., & Goyal, A. (2008). A Comprehensive Look at the Empirical Performance of Equity Premium Prediction. The Review of Financial Studies, 21(4), 1455–1508. http://www.jstor.org/stable/40056859 DOI: https://doi.org/10.1093/rfs/hhm014

White, H. (2000). A Reality Check for Data Snooping. Econometrica, 68(5), 1097–1126. http://www.jstor.org/stable/2999444 DOI: https://doi.org/10.1111/1468-0262.00152