How Recognition-Based Heuristics Bias Affect Investment Decision and Performance. A Serial Mediation of Familiarity Bias, Barnum Effect, and Fundamental and Technical Anomalies Complemented by Financial Literacy

Samra Arshad and Danish Ahmed Siddiqui

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Abstract: This study aims to investigate how Recognition-Based Heuristics Bias affects investment decisions and performance. We proposed a theoretical framework built primarily on the fluency theory and cognitive ease theory, implying Heuristics Bias such as 1. alphabetical order (AO), 2. name fluency (NF), and 3. Name memorability (NM) increases the familiarity bias (FB) and the Barnum effect (BE). These, in turn, increase fundamental (FA) and technical anomalies (TA) that ultimately influence investment decisions (IDM) and performance (IP). We also contend that a high level of financial literacy (FL) strengthens the effect of fundamental and technical anomalies on investment decisions and performance. Empirical validity was established by conducting a survey using a closed-ended questionnaire. Data was collected from 318 targeted investors at the Pakistan Stock Exchange and analyzed using confirmatory factor analysis and structural equation modeling. Data analysis was done using PLS-SEM. The result showed that AO positively affects FB and BE, whereas NF and NM exhibit mixed effects. FB positively affects both FA and TA, while BE has a negatively significant effect on FA but has a positively significant effect on TA. FA has a negatively insignificant effect on IDM, and TA has a positively and significant effect. At the same time, both FA and TA have a significant positive effect on IP. Moreover, FB positively mediates between AO and investment anomaly, while BE constitutes a mix of significant and insignificant mediating effects across relationships. FL positively moderates the relationship between investment anomalies and IP. This article enhanced the understanding of the role that recognition-based heuristic-driven biases play in investment management. More importantly, it went some way towards enhancing understanding of behavioral aspects and their influence on investment decision-making and performance in an emerging market.

Keywords: Investment Decision; Financial Anomalies; Barnum Effect; Financial Literacy; Pakistan Stock Exchange; PLS-SEM (search for similar items in EconPapers)
Date: 2026
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