The Effect of Hueristics, Prospect and Herding Factors on Investment Performance

Abstract

This paper investigates the impact of three behavioral factors (Heuristics, Prospects, and Herding) on investment performance of individual investors. It uses a sample of 477 individual investors from Pakistani stock market to collect data by structured questionnaire. By employing regression analysis, it found weak but statistically significant relationship between these factors and performance. Heuristics and Herding are found to be positively related to investment performance, but Prospect is negatively related. This paper demonstrates the impact of irrational behaviors of agents on investment performance. This paper contributes broadly to the field of behavioral finance which explains irrational behavior as the product of certain cognitive and/or emotional biases in our thinking. This paper informs managers and shall help them understand and manage the issue of behavioral biases in financial decision making. Further research should target other ways of data collection, large array of biases and new analysis techniques to contribute to the literature on behavioral finance.