Title:
HEURISTIC, HERDING AND DISPOSITION EFFECT IN INVESTOR’S RISK-TAKING BEHAVIOR

Authors:
Tyas Danarti, Ghozali Maski, Indonesia

Abstract:

There have been many empirical findings proving that individual investors do not behave completely rationally. This irrationality seems to appear in the process of non-sterile decision-making and in inconsistencies for maximizing utility. Financial behavioural theory through the concept of heuristic may explain such phenomena. The most iconic and heavily scrutinized phenomena found in investor’s behavior are herding behaviour and disposition effect. These behaviours are suspected to cause why mispricing frequently occurs in stock markets, as well as the lesson why investors’ stock portfolios are often in a deteriorating position. Their decisions in managing portfolios are often the reflection of risk-taking behaviour by themselves. Therefore, the aims of this study is to prove the correlations between heuristic, herding behaviour, disposition effect, and risk-taking behaviour in stock investors. The analysis of the data by using a statistical methods, that is Structural Equation Modelling (SEM). Empirical results suggest that the increase in heuristic intensity in stock investors encourages herding behaviour and disposition effect. Furthermore, the increase in herding behaviour and disposition effect intensity, in fact, leads to more aggressive risk-taking behaviour.