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How past perceived portfolio returns affect financial behaviors—The underlying psychological mechanism

Mohammad Tariqul Islam Khan, Siow-Hooi Tan and Lee-Lee Chong

Research in International Business and Finance, 2017, vol. 42, issue C, 1478-1488

Abstract: The study proposes and tests the underlying psychological mechanisms on how investors’ past perceived portfolio returns affect their trading and risk taking, and if these psychological mechanisms are significant mediators. Using a covariance based structural equation modeling and multiple mediation tests with a dataset of Malaysian retail investors, the results show that: (a) In line with the naïve reinforcement learning, hot-hand fallacy and representativeness heuristics, investors’ excessive extrapolation of past perceived portfolio returns causes them to display optimism, overconfidence and risky attitude; (b) these psychological biases, in turn, lead to portfolio turnover, trading intention, risky share holding and willingness of risk taking; and (c) overconfidence, optimism and risk attitude emerged as multiple mediators. The results lead to the conclusion that the presence of underlying biases deteriorates financial behaviors.

Keywords: Past perceived portfolio returns; Psychological biases; Malaysia (search for similar items in EconPapers)
JEL-codes: D14 G11 G14 G02 (search for similar items in EconPapers)
Date: 2017
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