Studying the Overconfidence and Representativeness Biases of Individual Investors in Tehran Stock Exchange

Document Type : Research Paper

Authors

1 Ph.D. Candidate, Department of Financial Management, Faculty of Management and Accounting, University of Shahid Beheshti, Tehran, Iran

2 Associate Prof., Department of Financial Management, Faculty of Management, University of Alzahra, Tehran, Iran

3 Associate Prof., Department of Financial Management, Faculty of Management and Accounting, University of Shahid Beheshti, Tehran, Iran

Abstract

Objective: This research examines the overconfidence, representativeness and disposition effect biases among individual investors of the Tehran Stock Exchange. The purpose of this research is to investigate the extent to which these biases are prevalent among investors and their relation with investors' performance.  Methods: For this purpose, we examined the portfolio statements of individual investors in the stock market during a five-year period, from 2012 to 2016. We have used multiple indicators to measure the behavioral bias and to examine the relationship between behavioral bias and investors' performance by the portfolio study method.  Results: The results show that overconfidence, representativeness and disposition effect are relatively prevalent among investors. There is also a significant relationship between the overconfidence and representativeness biases and the performance of investors, although this relationship is not significant for the disposition effect. Specifically, investors with a higher portfolio turnover, as well as a more concentrated portfolio, have earned higher returns. Also, investors who bought past winning stocks have had higher average returns. Conclusion: Behavioral bias is relatively common among investors, and these biases can affect the performance of the investors.  
 

Keywords

Main Subjects

References

References
Badri, A., Gudarzi, N. (2013). "Behavioral finance, representativeness bias and basic accounting variables, evidence of Tehran Stock Exchange". Journal of Empirical studies of financial accounting, 11 (43), 57-88. (in Persian)
Badri, A., Kucheki, A. (2013). Trading volume and stock return, evidence of Tehran Stock Exchange Based on behavioral financial analysis. Journal of financial accounting, 5 (18), 1-24. (in Persian)
Barber, B.M. & Odean, T. (2000). Trading Is Hazardous to Your Wealth: The Common Stock Investment Performance of Individual Investors. Journal of Finance, 55, 773-806.
Barber, B.M. & Odean, T. (2001), Boys Will Be Boys: Gender, Overconfidence, and Common Stock Investment. Quarterly Journal of Economics, 116, 261-292.
Barber, B.M. & Odean, T. (2011). The Behavior of Individual Investors. Electronic copy available at: http://ssrn.com/abstract=1872211.
Barber, B.M., Odean, T. & Zhu, N. (2009). Do Retail Trades Move Markets? Review of Financial Studies, 22 (3) .151-186.
Barberis, N., Huang, M. (2009). Preferences with frames: A new utility specification that allows for the framing of risks. Journal of Economic Dynamics and Control, 33, 1555–1576.
Chen, G., Kim, K., Nofsinger, J. & Rui, O. (2007). Trading Performance, Disposition Effect, Overconfidance, Representative Bias, and Experience of Emerging Market Investors, Journal of Behavioral Decision Making, 20, 425-451.
De Bondt, J.B., Thaler, R. (1995). Financial decision making in markets and firms: a behavior perspective. Handbooks of Operations Research and Management Science.
Dhar, R., & Kumar, A. (2001). A non-random walk down the main street: Impact of price trends on trading decisions of individual investors. Working paper. International Center for Finance, Yale School of Management, New Haven, CT.
Fallahpoor, S., Abdollahi, G. (2011). Identification and weighting behavioral biases of investors in Tehran Stock Exchange. Journal of financial research, 13 (31), 99-120. (in Persian)
Fan, J.X., Xiao, J.J., (2005). A cross-cultural study in risk tolerance: comparing Chinese and Americans. SSRN Paper.
Feng, L., Seasholes, M.S. (2005). Do investor sophistication and trading experience eliminate behavioral biases in financial markets? Review of Finance, 9 (3), 305–351.
Genesove, D., Mayer, C. (2001). Loss aversion and seller behavior: Evidence from the housing market. The Quarterly Journal of Economics, 116 (4), 1233–1260.
Ghalibaf, H., Kordi, M., Ajdari, F. (2013). Overconfidence of Investment Managers and Performance Indicators for Mutual Funds, Journal of Financial Management Strategy, 1 (1), 1-22. (in Persian)
Goetzmann, W.N., Kumar, A. (2008). Equity portfolio diversification. Review of Finance, 12 (2), 433–463.
Grinblatt, M., Keloharju, M. (2001). What makes investors trade? The Journal of Finance, 56 (3), 589– 616.
Heath, C., Tversky, A. (1991). Preference and belief: ambiguity and competence in choice under uncertainty. Journal of Risk Uncertain, 4 (3), 5–28.
Henderson, V. (2012). Prospect theory, liquidation, and the disposition effect. Management Science, 58 (3), 445–460.
Hens, T., Vlcek, M. (2011). Does prospect theory explain the disposition effect? Journal of Behavioral Finance, 12 (4), 141–157.
Ivkovic, Z., Sialm, C., & Weisbenner, S. (2008). Portfolio Concentration and the Performance of Individual Investors. Journal of Financial and Quantitative Analysis, 43 (1), 613-656.
Jamshidi, N., & Galibaf Asl, H. (2018). Studying the Effect of Investors’ Personality on their Business Behavior and Investment Performance: Evidences of Tehran Stock Exchange.Financial Research Journal, 20(1), 75-90. (in Persian)
Ji, L., & Zhang, Z. (2006). To buy or sell: Cultural differences in stock market decisions based on price trends. Working paper, Queen’s University, Kingston, Ontario.
Jin, L., Scherbina, A. (2011). Inheriting losers. The Review of Financial Studies, 24, 786–820
Kacperuzyk, M., Sialm, C. & Zheng, L. (2005) On the Industry Concentration of Actively Managed Equity Mutual Funds. Journal of Finance, 60, 1983-2012.
Kahneman, D., Tversky, A. (1979). Prospect Theory: An Analysis of Decision under Risk. Econometrica, 47, (2), 263-291.
Kyle, A.S., Ou-Yang, H., Xiong, W., (2006). Prospect theory and liquidation decisions. Journal of Economic Theory, 129, 273–288.
Odean, T. (1999). Do Investors Trade too Much? American Economic Review, 89 (5), 1279-1298.
Odean, T. (1998). Are Investors Reluctant to Realize Their Losses? Journal of Finance, 5, 1775-1798.
Prosad, J., Kapoor, S., Sengupta, J., Rouchoudhary, S. (2017), Overconfidence and Disposition Effect in Indian Equity Market: An Empirical Evidence. Journal of Global Business Review, 1 (3), 74-97
Seifollahi, R., Kordloyi, H., Dashti, N. (2015). A Comparative Study of the Behavioral Factors in the Investment of Financial Assets. Journal of Investment Knowledge, 4 (15), 33-52. (in Persian)
Shefrin, H. (2010). Behavioralizing Finance. Foundations and Trends in Finance, 4(1-2), 1-184.
Shefrin, H., Statman, M., (1985). The disposition to sell winners too early and ride losers too long: Theory and evidence. The Journal of Finance, 40, 777–790.
Statman, M. (2010). The cultures of risk tolerance. SSRN Paper No.:1647086.
Tekce, B., Yılmaz, N. (2015). Are individual stock investors overconfident? Evidence from an emerging market. Journal of Behavioral and Experimental Finance, 5, 35–45.
Yates, J. F., Zhu, Y., Ronis, D. L., Wang, D. F., Shinotsuka, H., & Toda, W. (1989). Probability judgment accuracy: China, Japan, and the United States. Organizational Behavior and Human Decision Processes, 43, 147–171.
 
 
 
 
 
 
 
 
 
Financial Research Journal
Volume 21, Issue 2
2019
Pages 143-164

Files

Share

How to cite

Statistics