TESTING BEHAVIOURAL FINANCE THEORIES USING TRENDS AND SEQUENCE IN FINANCE PERFORMANCE

Abstract

This research investigates the relationship between behavioral bias and investment decisions in a developing nation scenario. This study investigates the impact of two behavioral biases (representativeness and conservatism) on investment decisions. Descriptive and inferential statistics, particularly multiple regression, are used to investigate the relationship between behavioral biases and investment decisions. Models based on psychological biases can explain momentum and reversals in stock returns, but they run the danger of over fitting theory to data. We investigate a fundamental psychological bias, representativeness, which underpins several behavioral-finance theories. People forecast future events based on how well past results match particular categories, according to this bias. We identify these groupings using financial performance, and we test the hypothesis that investors misclassify firms, resulting in biased expectations, to create out-of-sample tests. There is evidence of short-term accounting momentum, which lends credence to the idea that investors are slow to process new information. However, there is no evidence of a long-term reversal linked to financing performance. We find little evidence to support the theory that future returns are correlated with the consistency of past financing performance.