The impact of behavioral factors on investment decision and performance: Exploring multiple mediation mechanisms

Abstract

Behavioral finance is the new-fangled discipline of research in finance. Behavioural finance examines individual investors and market behavior through application of psychology. It addresses the question that how investors behave in the market rather than how they should behave. To address this question, behavioral finance relaxes the assumptions of standard finance and claims the efficient market hypothesis. Behavioral finance also identifies the stock market anomalies that serve as the cornerstone for allowing the market to deviate from the efficient market hypothesis. The market is a combination of buyers and sellers. Therefore, investors‘ behavior is the key notion to generate anomalies in the stock exchange that deviates the market from efficient market hypothesis and makes market inefficient. Asian markets and it‘s individual investors are irrational in contrast to other regions. Therefore, it is necessary to investigate the investors‘ behavior and their performance regarding risk, return, and satisfaction. Subsequently, this study proposed two models in this dissertation named model 1 (heuristics) and model 2 (Prospects) and Chapter 5 entails the results of both these models. The primary objective of this dissertation is to investigate the investor‘s behavior toward their investment performance about stock market anomalies. This current research centers on applying the multi-mediation model in the context of behavioral finance. Hence, the major problem addressed in this study is ―How appropriate is the multi mediation hypotheses model for measuring individual investors‘ investment performance while using stock market anomalies‖? Previous studies have examined the direct impact of behavioral factors on the investment performance of individuals. In contrast, this study examines mediated links through fundamental, technical, and calendar stock market anomalies. Findings rely on data collected through surveys and obtained 324 responses. Confirmatory factor analysis was applied to analyze the collected data. Results show that two mechanisms, fundamental anomalies and calendar anomalies mediate the heuristics–investment performance link, and technical anomalies are not significant mediators of impact on investment performance of individuals. Of the four heuristics components, Availability and representativeness are the strongest predictor of investment performance, followed by fundamental anomalies. Overconfidence is a strong predictor of investment performance of individuals followed by calendar anomalies. Furthermore, the findings imply that two processes, Fundamental and calendar anomalies mediate four prospect dimensions-investment performance link. Among four dimensions of prospect regret aversion and self-control is the strongest predictor of investment performance followed by calendar anomalies. Regret aversion is also strongest predictor of investment x performance via fundamental anomalies. Practical implications are discussed separately in the analysis. This study concludes that anomalies and investors‘ behavior plays a key role in the investment decisions if they use the heuristics and prospects within pertinent bounds. A unique conclusion is that multi mediation analysis can reveal the detailed nature of regular patterns rooted in behavioral finance. Thus, a multi mediations model can be used for future research to investigate the investors‘ behavior and market anomalies. However, it will not be used to measure the traditional finance hypotheses.