Hindsight bias and investment decisions making empirical evidence form an emerging financial market

2013 IJRSM – Volume 2 Issue 2

Author/s:

Hussain, Muntazir*
International Islamic University Islamabad, Pakistan (muntazirjan@gmail.com)

Shah, Syed Zulfiqar Ali
International Islamic University Islamabad, Pakistan (zulfiqar.shah@iiu.edu.pk)

Latif, Khalid
International Islamic University Islamabad, Pakistan (Khalidlatif382@yahoo.com)

Bashir, Usman
International Islamic University Islamabad, Pakistan (bbashir.usman@gmail.com)

Yasir, Muhammad
International Islamic University Islamabad, Pakistan (yasirfw@hotmail.com)

Abstract:

We studied the hindsight bias and investor decision making by employing the novel approach asset selection effect and sign of return effect. The study investigated the hindsight bias and investor decision making through questionnaires. The respondents are divided into three groups namely bank financial managers, stock market investors and students. The statistical significance of the asset selection effect and sign of return effect is tested by proportional z-test. Furthermore, the correlation of the memory error and recall error is also determined. The overall perceived error (hindsight bias) relationship is checked with the confidence in recall and confidence in estimate. We found strong evidence of hindsight bias in all respondents groups and its worst consequence on investment decision making. The bank financial managers were found less exposed to hindsight bias in comparison to stock market investors in asset selection effect. However, in sign of return effect the financial managers were more hindsight biased than the stock market investors. The relationship of hindsight bias and confidence in recall and confidence in estimate also confirms that all the respondents were hindsight biased and more confident in their estimate and less confident in their recall. All the respondents claim that they knew the phenomenon all along are wrong in their estimate. The respondents were unable to learn from previous errors and unable to detect their errors in estimate and recall. This error in prediction leads the investor to bear the risk above their accepted level which is harmful to their wealth.

Keywords: hindsight bias; asset selection effect; sign of return effect; estimate error; recall error; overall perceived error

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DOI: https://doi.org/10.5861/ijrsm.2013.323

*Corresponding Author