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An Empirical Study of Individuals’ Investment Decision Anomalies and Heuristics

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  • Batuhan Medetoğlu

    (İstanbul Ayvansaray Üniversitesi, Finans Bankacılık ve Sigortacılık Bölümü, İstanbul, Türkiye)

  • Arif Saldanlı

    (İstanbul Üniversitesi, İktisat Fakültesi, İşletme Bölümü, İstanbul, Türkiye)

Abstract

Behavioral finance argues that individuals are not rational while making investment decisions due to some psychological, exogenous, and other factors. As a result, they end up making poor financial decisions. This study was conducted to determine factors that individual investors are exposed to while making investment decisions. A questionnaire was handed over to 532 participants as part of the study. The Statistical Package for the Social Sciences (SPSS) program was used to conduct the analysis. Questionnaire responses were first subjected to factor analysis, and later, reliability analysis was conducted to determine which factors were the most effective in participants’ investment decisions. The reliability levels of the factors in the study were observed to be above the determined limits. The factors were shown to exhibit a significant and positive relationship. According to the results obtained, factors that affect investor decisions were grouped into three categories, namely, exogenous factors and herd behavior; cognitive illusions; and demographic and socioeconomic factors. Exogenous factors and herd behavior demonstrate situations that occur independently of investors, cognitive illusions demonstrate how psychological factors affect investors, and demographic and socioeconomic factors demonstrate how characteristics influence investors’ attitudes. Consequently, situations that affect investment decisions of investors were also grouped under three factors and findings concerning investor behaviors were explained. It was determined that the factors obtained in the study reflect and explain the situations that individuals are exposed to while making investment decisions. A majority of the participants are in the same age range, which is one of the study’s limitations. The use of diverse age groups in future research is suggested.

Suggested Citation

  • Batuhan Medetoğlu & Arif Saldanlı, 2022. "An Empirical Study of Individuals’ Investment Decision Anomalies and Heuristics," Journal of Economic Policy Researches, Istanbul University, Faculty of Economics, vol. 9(1), pages 53-74, January.
    • Handle: RePEc:ist:iujepr:v:9:y:2022:i:1:p:53-74
    DOI: 10.26650/JEPR936253
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    References listed on IDEAS

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    1. Daniel Kahneman & Amos Tversky, 2013. "Prospect Theory: An Analysis of Decision Under Risk," World Scientific Book Chapters, in: Leonard C MacLean & William T Ziemba (ed.), HANDBOOK OF THE FUNDAMENTALS OF FINANCIAL DECISION MAKING Part I, chapter 6, pages 99-127, World Scientific Publishing Co. Pte. Ltd..
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    4. Lee Cronbach, 1951. "Coefficient alpha and the internal structure of tests," Psychometrika, Springer;The Psychometric Society, vol. 16(3), pages 297-334, September.
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    More about this item

    Keywords

    Finance; Behavioral Finance; Investment decisions; Anomalies; Heuristic JEL Classification : G11 ; G40 ; G41;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G40 - Financial Economics - - Behavioral Finance - - - General
    • G41 - Financial Economics - - Behavioral Finance - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making in Financial Markets

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