The Impact of Social Influence on the relationship between Behavioral Biases and Portfolio Diversification

Article Sidebar

PDF
Published: Dec 30, 2022
Keywords:
Overconfidence, Hot Hand Fallacy, Social Influence, Portfolio Diversification

Main Article Content

Ahmed Hassan Jamal
International Islamic University, Islamabad
Muhammad Faisal Rizwan
International Islamic University Islamabad Pakistan

Abstract

The study examines the impact of behavioral biases on portfolio diversification of the investors trading at Pakistan Stock Exchange (PSX). The study also explores the moderating role of social influence in the association between behavioral biases and portfolio diversification. Biases studied in this research are overconfidence and hot hand fallacy. Primary data is collected from investors of Pakistan Stock Exchange using a structured questionnaire. A representative sample of 430 investors trading at Pakistan Stock Exchange is used in this study. The findings of this research have shown that behavioral biases impact negatively the portfolio diversification. The finding of this research also highlights that social influence moderates the association between hot hand fallacy and portfolio diversification. However, findings showed that social influence do not moderate the association between overconfidence and portfolio diversification. This research will be helpful for investors as well as for the regulators. This research will enable the investors to recognize the effect of biases in their ability to diversify the investment portfolio. They will also consider the role that social influence play in the impact of these biases on portfolio diversification. On the other hand, this research also highlighted areas where regulators can educate investors. The study finds a strong support from Theory of Planned Behavior. Previously researches have studied the effect of biases on investment horizon, investment decisions or investment risk. This research is unique in a way that it examines the effect of biases on portfolio diversification.

Article Details

How to Cite
Hassan Jamal, A. ., & Faisal Rizwan , M. (2022). The Impact of Social Influence on the relationship between Behavioral Biases and Portfolio Diversification. Journal of Workplace Behavior, 3(2), 84–99. Retrieved from https://charisma-jwb.com/index.php/jwb/article/view/150
Issue
Vol. 3 No. 2 (2022): Journal of Workplace Behavior
Section
Articles
Author Biographies

Ahmed Hassan Jamal, International Islamic University, Islamabad

Ahmed Hassan Jamal is a PhD Scholar at International Islamic University, Islamabad. He is also an Associate Member of Association of Chartered Certified Accountants – UK. He has more than 7 years of teaching experience at Allama Iqbal Open University as a permanent faculty member. He has published articles in various reputed journals. His research interests are in behavioral finance, corporate governance, corporate finance and portfolio management. Ahmed Hassan Jamal is the corresponding author and can be contacted at: hassan.jamal@aiou.edu.pk.

Muhammad Faisal Rizwan , International Islamic University Islamabad Pakistan

Muhammad Faisal Rizwan, PhD, is an Associate Professor at International Islamic University, Islamabad. He has almost 20 years of teaching experience at university level. He has guided numerous Doctoral research scholars. He has published his articles in national and international journals. His areas of interest are financial management, financial Analysis, corporate finance, financial statements analysis and investment management.

References

Abreu, M. and Mendes, V. (2012). Information, overconfidence and trading: do the sources of information matter? Journal of Economic Psychology, 33(4), pp. 868-881.

Adil, M., Singh, Y. and Ansari, M.S. (2021). How financial literacy moderate the association between behaviour biases and investment decision? Asian Journal of Accounting Research, pp. 2443-4175

Akhtar, F. (2020). Investor personality and investment performance: from the perspective of psychological traits. Qualitative Research in Financial Markets.

Akhtar, F., Thyagaraj. K.S. and Das, N. (2018). The impact of social influence on the relationship between personality traits and perceived investment performance of individual investors. International Journal of Managerial Finance, 14(1), pp. 130-148.

Arnold, H.J. (1982). Moderator variables: a clarification of conceptual, analytic, and psychometric issues. Organizational Behavior and Human Performance, 29(2), pp. 143-174.

Baker, H.K. and Nofsinger, J.R. (2002). Psychological biases of investors. Financial Services Review, 11(2), pp. 97-116.

Baker, H.K. and Ricciardi, V. (2014). How biases affect investor behavior. The European Financial Review, February-March, pp. 7-10.

Blume, M. E., Crockett, J. and Friend, I. (1974). Stockownership in the United States: Characteristics and Trends. Survey of Current Business 16–33.

Bonabeau, E. (2004). The perils of the imitation age. Harvard Business Review, 82(6), pp. 45-54.

Bonney, L., Plouffe, C.R., Hochstein, B. and Beeler, L.L. (2020). Examining salesperson versus sales manager evaluation of customer opportunities: a psychological momentum perspective on optimism, confidence, and overconfidence. Industrial Marketing Management, 88, pp. 339-351.

Borghans, L., Duckworth, A.L., Heckman, J.J. and Ter Weel, B. (2008). The economics and psychology of personality traits. Journal of Human Resources, 43(4), pp. 972-1059.

Budiarto, A. (2017). Pengaruh financial literacy, overconfidence, regret aversion bias, danrisk tolerance terhadap keputusan investasi (studi pada investor PT. Sucorinvest central gani galeri investasi BEI universitas negeri surabaya). Jurnal Ilmu Manajemen, 5(2), pp. 1-9.

Chaudary, S. (2019). Does salience matter in investment decision? Differences between individual and professional investors. Keybernets, 48(8), 1894-1912.

Chih, Wen-Hai & Hsu, Li-Chun & Liou, Dah-Kwei. (2017). Understanding virtual community members’ relationships from individual, group, and social influence perspectives. Industrial Management & Data Systems. 117(6), pp. 990-1010.

Cohen, G. (2013). Rational" or "Intuitive": Are Behavioral Biases Correlated across Stock Market Investors? Contemporary Economics, 7(2), 31-53

Davis, A. (2006). The role of the mass media in investor relations. Journal of Communication Management, 10(1), pp. 7-17.

Duxbury, D. (2015). Behavioral finance: Insights from experiments II: Biases, moods and emotions. Review of Behavioural Finance. 7(2). pp. 151-175.

Fornell, C. and Larcker, D.F. (1981). Structural equation models with unobservable variables and measurement error: Algebra and statistics. Journal of Marketing Research, 18(3), pp. 382-388.

Gilovich, T., Vallone, R. & Tversky, A. (1985). The Hot Hand in Basketball: On the Misperception of Random Sequences. Cognitive Psychology, 17(3), 295–314

Grace, J. B. (2008). Structural equation modeling for observational studies. The Journal of Wildlife Management, 72(1), 14-22.

Guiso, L. and Jappelli, T. (2006). Information Acquisition and Portfolio Performance, CEPR WP 5901, October.

Henseler, J., Ringle, C.M. and Sarstedt, M. (2015). A new criterion for assessing discriminant validity in variance-based structural equation modeling. Journal of the Academy of Marketing Science, 43(1), pp. 115-135.

Hsu, C.-L. and Lu, H.-P. (2004). Why do people play online games? An extended TAM with social influences and flow experience. Information & Management, 41(7), pp. 853-68

Jayeola, D., Ismail, Z., and Sufahani, S.F (2017). Effects of diversification of assets in optimizing risk of portfolio. Malaysian Journal of Fundamental and Applied Sciences, 13(4), pp. 584-587

Khan, I., Afeef, M., Jan, S. and Ihsan, A. (2021). The impact of heuristic biases on investors’ investment decision in Pakistan stock market: moderating role of long term orientation. Qualitative Research in Financial Markets, 13(2), pp. 252-274

Kirchner, U. and Zunckel, C. (2011). Measuring Portfolio Diversification. Working Paper.

Krejcie, R.V., & Morgan, D.W., (1970). Determining Sample Size for Research Activities. Educational and Psychological Measurement. Educational and Psychological Measurement, 30, 607-610.

Kudryavtsev, A., Cohen, G. and Hon-Snir, S. (2013). Rational or intuitive: are behavioral biases correlated across stock market investors? Contemporary Economics, 7(2), pp. 31-53.

Lin, H.W. (2011). Elucidating rational investment decisions and behavioral biases: evidence from the Taiwanese stock market. African Journal of Business Management 5(5), pp. 1630-1641.

Lu, J. (2014). Are Personal Innovativeness and Social Influence Critical to Continue with Mobile Commerce? Internet Research, 24(2), pp. 134-159.

Mouna, A. & Jarboui, A. (2015). Financial literacy and portfolio diversification: an observation from the Tunisian stock market. International Journal of Bank Marketing, 33(6), pp.808-822

Nunnally, J. C., & Bernstein, I. (1994). Validity. In: Psychometric theory (3 ed.). Toronto: McGraw-Hill, Inc.

Podsakoff, P. M., MacKenzie, S. B., Lee, J.-Y., & Podsakoff, N. P. (2003). Common method biases in behavioral research: a critical review of the literature and recommended remedies. Journal of Applied Psychology, 88(5), 879-903.

Raut, R.K., Das, N. and Mishra, R. (2020). Behaviour of individual investors in stock market trading: evidence from India. Global Business Review, 21(3), pp. 818-833.

Rasheed, M. H., Rafique, A., Zahid, T. and Akhtar, M. W. (2018). Factors influencing investor’s decision making in Pakistan Moderating the role of locus of control. Review of Behavioral Finance 10(1), pp. 70-87

Shanmugham, R. and Ramya, K. (2012). Impact of social factors on individual investors’ trading behavior. Procedia Economics and Finance, 2, pp. 237-246.

Shiller, R. (2000), Irrational Exuberance, Princeton University Press, Princeton, NJ

Shiller, R.J. and Pound, J. (1989). Survey evidence on diffusion of interest and information among investors. Journal of Economic Behavior & Organization, 12(1), pp. 47-66.

Shive, S. (2010). An epidemic model of investor behavior. Journal of Financial and Quantitative Analysis, 45(1), pp. 169-198.

Sotiropoulos, D.P. and Rutterford, J. (2017). Individual Investors and Portfolio Diversification in Late Victorian Britain: How Diversified Were Victorian Financial Portfolios? The Journal of Economic History. 78(2), pp.435-471.

Stacy, A.W., Newcomb, M.D. and Bentler, P.M. (1991). Personality, problem drinking, and drunk driving: mediating, moderating, and direct-effect models. Journal of Personality and Social Psychology, 60(5), pp. 795-811.

Statman, M. (1987). How Many Stocks Make a Diversified Portfolio? The Journal of Financial and Quantitative Analysis, 22(3), pp. 353-363

Sulaimon, A. & Oludayo, O. & Bilqis, A. (2022). Artificial intelligence model for building investment portfolio optimization mix using historical stock prices data. Rajagiri Management Journal, 16(1), pp. 36-62.

Tabachnick, B. G., & Fidell, L. S. (2007). Using multivariate statistics: Allyn & Bacon/Pearson Education.

Tauni, M.Z., Fang, H.X., Rao, Z. and Yousaf, S. (2015). The influence of Investor personality traits on information acquisition and trading behavior: evidence from Chinese futures exchange. Personality and Individual Differences, 87, pp. 248-255.

Wang, Shu-ming & Lin, Judy. (2011). The effect of social influence on the bloggers' usage intention. Online Information Review, 35(1), pp.50-65.

Williams, L. J., & McGonagle, A. K. (2016). Four research designs and a comprehensive analysis strategy for investigating common method variance with self-report measures using latent variables. Journal of Business and Psychology, 31(3), 339-359.

Woerheide, W. and Persson, D. (1993). An Index of Portfolio Diversification. Financial Services Review, 2(2), 73-85

Yu, H.K. and Kim, T. (2021). The effects of status on the performance of portfolio diversification strategies. Journal of Strategy and Management, 14(2), pp. 246-258