What really rules investment decisions: Head or heart?

Abstract

The main purpose of this paper is to identify and discuss the relationship between behavioural and classical factors more clearly that have already been established and more specifically to determine the manner in which both behavioural and classical financial factors influence the investment decision making process by using information obtained from 100 investment managers in the City of London. This paper proposes that they are both valid and further that the classical economics with its numerical data informs the behaviourist approach. Of particular note is that around 4 out of every 5 managers acknowledged the influences of representativeness availability bias overconfidence and anchoring. Such a high proportion provides compelling supportive evidence of the primacy of behavioural economics in decision-making and that in consequence the gyrations of investment portfolios are more satisfactorily explained with reference to the personality profiles and psychological traits of the major active market participants than they are by reference to data and numerical analysis as classical economists would claim. © O. Masood S. Moore B. Aktan Ghulam Shabbir Khan Niazi 2010. © 2010 Elsevier B.V. All rights reserved.