How Herding Bias Could be Derived from Individual Investor Types and Risk Tolerance?
This paper is to clarify the relationship of individual investor types, risk tolerance and herding bias. The questionnaire survey investigation is conducted to collect 389 valid and voluntary individual investors and to examine how the risk tolerance plays as a mediator between four types of personality and herding bias. Based on featuring BB&K model and reviewing the prior literature of psychology, a linear structural model are constructed and further used to evaluate the path of herding formation through the analysis of Structural Equation Modeling (SEM). The results showed that more impetuous investors would be prone to herding bias directly, but rather exhibit higher risk tolerance. However, risk tolerance would fully mediate between the level of confidence (i.e., confident or anxious) and herding bias, but not mediate between the method of action (careful or impetuous) for individual investors.
[1] D. G. Allen, R. W. Renn, K. R. Moffitt, and J. M. Vardaman, "Risky
business: The role of risk in voluntary turnover decisions," Hum.
Resource Manag. Rev., vol. 17, no. 3, pp. 305-318, 2007.
[2] R. P. Bagozzi, and Y. Yi, "On the evaluation of structural equation
models," J. Acad. Market. Sci, vol. 16, pp. 74-94, 1988.
[3] T. E. Bailard, D. L. Biehl, and R. W. Kaiser, Personal Money
Management (5th ed.). Chicago, Ill.: Science Research Associates, 1986.
[4] M. Baddeley, "Herding, social influence and economic decision-making:
Socio-psychological and neuroscientific analyses," Phil. Trans. Biol. Sci.,
vol. 365, pp.281-90, 2010.
[5] M. M. Barnewall, "Psychological characteristics of the individual
investor." In W. Droms, ed., Asset Allocation for the Individual Investor.
Charlottesville, VA.: The Institute of Chartered Financial Analysts, 1987.
[6] S. Benartzi, and H. R. Thaler, "Myopic loss aversion and the equity
premium puzzle," Q. J. Econ., vol. 110, no. 1, pp. 73-92, 1995.
[7] R. Bye, and G. M. Lamvik, "Professional culture and risk perception:
Coping with danger on board small fishing boats and offshore service
vessels," Reliab. Eng. Syst. Saf., vol. 92, pp. 1756-1763, 2007.
[8] B. M. Byrne, Structural Equation Modeling with AMOS - Basic Concepts,
Applications, and Programming, Mahwah, New Jersey: Lawrence
Erlbaum Associates, 2001.
[9] A. Caplin, and J. Leahy, "Psychological expected utility theory and
anticipatory feelings," Q. J. Econ., vol. 116, pp. 55-79, 2001.
[10] J. Chevalier, and G. Ellison, "Career concerns of mutual fund managers,"
Q. J. Econ., vol. 114, no. 2, pp. 389-432, 1999.
[11] P. T. Jr. Costa, and R. R. McCrae, Revised NEO Personality Inventory
and NEO Five-Factor Inventory: Professional Manual. FL: Psychological
Assessment Resources, 1992.
[12] S. DellaVigna, "Psychology and economics: Evidence from the field," J.
Econ. Lit., vol. 47, no. 2, pp. 315-372, 2009.
[13] A. Devenow, and I. Welch. "Rational herding in financial economics,"
Eur. Econ. Rev., vol. 40, no. 3-5, pp. 603-615, 1996.
[14] W. G. Doubleday, "Expected utility and the cumulative consequences of
repeated decisions: a tutorial," Risk, Decision and Policy, vol. 7, pp.
109-119, 2002.
[15] J. Elster, "Emotions and economic theory," J. Econ. Lit., vol. 36, pp.
47-74, 1998.
[16] N. S. Endler, and D. Magnusson, "Toward an interactional psychology
and personality," Psychol. Bull., vol. 83, no. 5, pp. 956-974, 1976.
[17] E. Engelberg, and L. Sjöberg, "Money obsession, social adjustment, and
economic risk perception," J. Soc. Econ., vol. 36, pp. 686-697, 2007.
[18] R. Garvey, A. Murphy, and F. Wu, "Do losses linger," The Journal of
Portfolio Management, vol. 33, no. 4, pp. 75-83, 2007.
[19] J. E. Grable, "Financial risk tolerance and additional factors that affect
risk taking in everyday money matters," J. Bus.Psychol., vol. 14, pp.
625-630, 2000.
[20] J. R. Graham, "Herding among investment newsletters: Theory and
evidence," J. Finance., vol. 54, pp. 237-268, 1999.
[21] J. E. Garble, and S. H. Joo, "A Cross-disciplinary examination of
financial risk tolerance," Consumer Interests Annual, vol. 46, pp. 151-157,
2000.
[22] J. E. Garble, and R. H. Lytton, "Financial risk tolerance revisited: The
development of a risk assessment instrument," Financ. Serv. Rev., vol. 8,
no. 3, pp. 163-181, 1999.
[23] J. E. Garble, R. H. Lytton, and B. O-Neill, "Projection bias and financial
risk tolerance," J. Behav. Finance., vol. 5, no. 3, pp. 142-147, 2004.
[24] J. F. Hair, R. E. Anderson, R. L. Tatham, and W. C. Black, Multivariate
Data Analysis (5th ed.). Prentice Hall International: UK, 1998.
[25] J. W. Hoelter, "The analysis of covariance structures: Goodness-of-fit
indices," Socio. Meth. Res., vol. 11, no. 3, pp. 325-344, 1983.
[26] L. A. Hayduk, Structural Equation Modeling with LISREL: Essentials
and Advances, Baltimore, MD: John Hopkins University Press, 1987.K.
C. Jöreskog, and D. Sörbom, LISREL VIII: Reference Guide, Scientific
Software International Inc., Chicago, 1993.
[27] D. Kahneman, and A. Tversky, "Prospect theory: an analysis of decision
under risk," Econometrica, vol. 47, no. 2, 1979, pp. 263-291.
[28] R. B. Kline, Principles and Practice of Structural Equation Modeling,
New York: Guilford Press, 1998.
[29] C. M. Kuhnen, and B. Knutson, "The Influence of Affect on Beliefs,
Preferences, and Financial Decisions," J. Financ. Quant. Anal., vol. 46,
no. 03, pp. 605-626, 2011.
[30] M. G. Lipe, "Individual investors' risk judgments and investment
decisions: the impact of accounting and market data," Account. Org. Soc.,
vol. 23, pp. 625-640, 1998.
[31] A. Lo, and D. Repin, "The psychophysiology of real-time financial risk
processing," J. Cognit. Neurosci., vol. 14, no. 3, pp. 323-339, 2002.
[32] S. Maital, R. Filer, and J. Simon, "What do people bring to the stock
market (beside money)?" The Economic Psychology of Stock Market
Behavior, In B. Gilad and S. Kaish (Eds.), Handbook of Behavioral
Economics Behavioral Macroeconomics, vol. B, Greenwich,
Connecticut, JAI Press Inc., 1986, pp. 273-307.
[33] L. Menkhoff, U. Schmidt, and T. Brozynski, " The impact of experience
on risk taking, overconfidence, and herding of fund managers:
Complementary survey evidence," Eur. Econ. Rev., vol. 50, pp.
1753-1766, 2006.
[34] I. B. Myers, and M. H. McCaulley, Manual: A guide to the Development
and Use of the Myer Briggs Type Indicator. Palo Alto, CA: Consulting
Psychologist Press, Inc., 1985.
[35] M. M. Pompian, Behavioral Finance and Wealth Management: Building
Optimal Portfolios that account for investor biases. Hoboken, NJ: John
Willey & Sons, Inc., 2006.
[36] N. Nicholson, E. Soane, M. Fenton-O'Creevy, and P. Willman,
"Personality and domain-specific risk taking," J. Risk. Res., vol. 8, no. 2,
pp. 157-176, 2005.
[37] R. Raine-Eudy, "Using structural equation modeling to test for
differential reliability and validity: An empirical demonstration,"
Structural Equation Modeling, 2000, vol. 7, no. 1, pp. 124-141.
[38] J. R. Ritter, "Behavioral finance," Pac. Basin. Finance J., vol. 11, pp.
429-437, 2003.
[39] J. B. Rotter ,"Generalized expectancies for internal versus external
control of reinforcements," Psychol. Monogr., vol. 80, pp.1-27, 1966.
[40] P. S. Schaefer, C. C. Williams, A. S. Goodie, and, W. K. Campbell,
"Overconfidence and the Big Five," J. Res. Pers., vol. 38, pp. 473-480,
2004.
[41] D. S. Scharfstein, J. C. Stein, "Herd behavior and investment,- Am. Econ.
Rev., vol. 80, no.3, pp. 465-479, 1990.
[42] S. Sehgal, and N. Tripathi, "Investment strategies of FIIs in the Indian
equity market," J. Bus. Perspect., vol. 13, no. 1, pp. 11-18, 2009.
[43] B. Shiv, G. Loewenstein, A. Bechara, H. Damasio, and A. R. Damasio,
"Investment behavior and the negative side of emotion," Psychol. Sci.,
vol. 16, no. 6, 435-439, 2005.
[44] W. R. Sias, "Institutional herding," The Review of Financial Studies, vol.
17, no. 1, pp. 165-206, 2004.
[45] S. B. Sitkin, and A. L. Pablo, "Reconceptualizing the determinants of risk
behavior," Acad. Manag. Rev., vol. 17, pp. 9-38, 1992.
[46] E. R. Stone, C. L. Dodrill, and N. Johnson, "Depressive cognition: A test
of depressive realism versus negativity using general knowledge
questions," J. Pers., vol. 135, no.6, pp. 583-602, 2001.
[47] J. Yang, and W. Qiu, "A measure of risk and a decision-making model
based on expected utility and entropy," Eur. J. Oper. Res., vol. 164, pp.
792-799, 2005.
[1] D. G. Allen, R. W. Renn, K. R. Moffitt, and J. M. Vardaman, "Risky
business: The role of risk in voluntary turnover decisions," Hum.
Resource Manag. Rev., vol. 17, no. 3, pp. 305-318, 2007.
[2] R. P. Bagozzi, and Y. Yi, "On the evaluation of structural equation
models," J. Acad. Market. Sci, vol. 16, pp. 74-94, 1988.
[3] T. E. Bailard, D. L. Biehl, and R. W. Kaiser, Personal Money
Management (5th ed.). Chicago, Ill.: Science Research Associates, 1986.
[4] M. Baddeley, "Herding, social influence and economic decision-making:
Socio-psychological and neuroscientific analyses," Phil. Trans. Biol. Sci.,
vol. 365, pp.281-90, 2010.
[5] M. M. Barnewall, "Psychological characteristics of the individual
investor." In W. Droms, ed., Asset Allocation for the Individual Investor.
Charlottesville, VA.: The Institute of Chartered Financial Analysts, 1987.
[6] S. Benartzi, and H. R. Thaler, "Myopic loss aversion and the equity
premium puzzle," Q. J. Econ., vol. 110, no. 1, pp. 73-92, 1995.
[7] R. Bye, and G. M. Lamvik, "Professional culture and risk perception:
Coping with danger on board small fishing boats and offshore service
vessels," Reliab. Eng. Syst. Saf., vol. 92, pp. 1756-1763, 2007.
[8] B. M. Byrne, Structural Equation Modeling with AMOS - Basic Concepts,
Applications, and Programming, Mahwah, New Jersey: Lawrence
Erlbaum Associates, 2001.
[9] A. Caplin, and J. Leahy, "Psychological expected utility theory and
anticipatory feelings," Q. J. Econ., vol. 116, pp. 55-79, 2001.
[10] J. Chevalier, and G. Ellison, "Career concerns of mutual fund managers,"
Q. J. Econ., vol. 114, no. 2, pp. 389-432, 1999.
[11] P. T. Jr. Costa, and R. R. McCrae, Revised NEO Personality Inventory
and NEO Five-Factor Inventory: Professional Manual. FL: Psychological
Assessment Resources, 1992.
[12] S. DellaVigna, "Psychology and economics: Evidence from the field," J.
Econ. Lit., vol. 47, no. 2, pp. 315-372, 2009.
[13] A. Devenow, and I. Welch. "Rational herding in financial economics,"
Eur. Econ. Rev., vol. 40, no. 3-5, pp. 603-615, 1996.
[14] W. G. Doubleday, "Expected utility and the cumulative consequences of
repeated decisions: a tutorial," Risk, Decision and Policy, vol. 7, pp.
109-119, 2002.
[15] J. Elster, "Emotions and economic theory," J. Econ. Lit., vol. 36, pp.
47-74, 1998.
[16] N. S. Endler, and D. Magnusson, "Toward an interactional psychology
and personality," Psychol. Bull., vol. 83, no. 5, pp. 956-974, 1976.
[17] E. Engelberg, and L. Sjöberg, "Money obsession, social adjustment, and
economic risk perception," J. Soc. Econ., vol. 36, pp. 686-697, 2007.
[18] R. Garvey, A. Murphy, and F. Wu, "Do losses linger," The Journal of
Portfolio Management, vol. 33, no. 4, pp. 75-83, 2007.
[19] J. E. Grable, "Financial risk tolerance and additional factors that affect
risk taking in everyday money matters," J. Bus.Psychol., vol. 14, pp.
625-630, 2000.
[20] J. R. Graham, "Herding among investment newsletters: Theory and
evidence," J. Finance., vol. 54, pp. 237-268, 1999.
[21] J. E. Garble, and S. H. Joo, "A Cross-disciplinary examination of
financial risk tolerance," Consumer Interests Annual, vol. 46, pp. 151-157,
2000.
[22] J. E. Garble, and R. H. Lytton, "Financial risk tolerance revisited: The
development of a risk assessment instrument," Financ. Serv. Rev., vol. 8,
no. 3, pp. 163-181, 1999.
[23] J. E. Garble, R. H. Lytton, and B. O-Neill, "Projection bias and financial
risk tolerance," J. Behav. Finance., vol. 5, no. 3, pp. 142-147, 2004.
[24] J. F. Hair, R. E. Anderson, R. L. Tatham, and W. C. Black, Multivariate
Data Analysis (5th ed.). Prentice Hall International: UK, 1998.
[25] J. W. Hoelter, "The analysis of covariance structures: Goodness-of-fit
indices," Socio. Meth. Res., vol. 11, no. 3, pp. 325-344, 1983.
[26] L. A. Hayduk, Structural Equation Modeling with LISREL: Essentials
and Advances, Baltimore, MD: John Hopkins University Press, 1987.K.
C. Jöreskog, and D. Sörbom, LISREL VIII: Reference Guide, Scientific
Software International Inc., Chicago, 1993.
[27] D. Kahneman, and A. Tversky, "Prospect theory: an analysis of decision
under risk," Econometrica, vol. 47, no. 2, 1979, pp. 263-291.
[28] R. B. Kline, Principles and Practice of Structural Equation Modeling,
New York: Guilford Press, 1998.
[29] C. M. Kuhnen, and B. Knutson, "The Influence of Affect on Beliefs,
Preferences, and Financial Decisions," J. Financ. Quant. Anal., vol. 46,
no. 03, pp. 605-626, 2011.
[30] M. G. Lipe, "Individual investors' risk judgments and investment
decisions: the impact of accounting and market data," Account. Org. Soc.,
vol. 23, pp. 625-640, 1998.
[31] A. Lo, and D. Repin, "The psychophysiology of real-time financial risk
processing," J. Cognit. Neurosci., vol. 14, no. 3, pp. 323-339, 2002.
[32] S. Maital, R. Filer, and J. Simon, "What do people bring to the stock
market (beside money)?" The Economic Psychology of Stock Market
Behavior, In B. Gilad and S. Kaish (Eds.), Handbook of Behavioral
Economics Behavioral Macroeconomics, vol. B, Greenwich,
Connecticut, JAI Press Inc., 1986, pp. 273-307.
[33] L. Menkhoff, U. Schmidt, and T. Brozynski, " The impact of experience
on risk taking, overconfidence, and herding of fund managers:
Complementary survey evidence," Eur. Econ. Rev., vol. 50, pp.
1753-1766, 2006.
[34] I. B. Myers, and M. H. McCaulley, Manual: A guide to the Development
and Use of the Myer Briggs Type Indicator. Palo Alto, CA: Consulting
Psychologist Press, Inc., 1985.
[35] M. M. Pompian, Behavioral Finance and Wealth Management: Building
Optimal Portfolios that account for investor biases. Hoboken, NJ: John
Willey & Sons, Inc., 2006.
[36] N. Nicholson, E. Soane, M. Fenton-O'Creevy, and P. Willman,
"Personality and domain-specific risk taking," J. Risk. Res., vol. 8, no. 2,
pp. 157-176, 2005.
[37] R. Raine-Eudy, "Using structural equation modeling to test for
differential reliability and validity: An empirical demonstration,"
Structural Equation Modeling, 2000, vol. 7, no. 1, pp. 124-141.
[38] J. R. Ritter, "Behavioral finance," Pac. Basin. Finance J., vol. 11, pp.
429-437, 2003.
[39] J. B. Rotter ,"Generalized expectancies for internal versus external
control of reinforcements," Psychol. Monogr., vol. 80, pp.1-27, 1966.
[40] P. S. Schaefer, C. C. Williams, A. S. Goodie, and, W. K. Campbell,
"Overconfidence and the Big Five," J. Res. Pers., vol. 38, pp. 473-480,
2004.
[41] D. S. Scharfstein, J. C. Stein, "Herd behavior and investment,- Am. Econ.
Rev., vol. 80, no.3, pp. 465-479, 1990.
[42] S. Sehgal, and N. Tripathi, "Investment strategies of FIIs in the Indian
equity market," J. Bus. Perspect., vol. 13, no. 1, pp. 11-18, 2009.
[43] B. Shiv, G. Loewenstein, A. Bechara, H. Damasio, and A. R. Damasio,
"Investment behavior and the negative side of emotion," Psychol. Sci.,
vol. 16, no. 6, 435-439, 2005.
[44] W. R. Sias, "Institutional herding," The Review of Financial Studies, vol.
17, no. 1, pp. 165-206, 2004.
[45] S. B. Sitkin, and A. L. Pablo, "Reconceptualizing the determinants of risk
behavior," Acad. Manag. Rev., vol. 17, pp. 9-38, 1992.
[46] E. R. Stone, C. L. Dodrill, and N. Johnson, "Depressive cognition: A test
of depressive realism versus negativity using general knowledge
questions," J. Pers., vol. 135, no.6, pp. 583-602, 2001.
[47] J. Yang, and W. Qiu, "A measure of risk and a decision-making model
based on expected utility and entropy," Eur. J. Oper. Res., vol. 164, pp.
792-799, 2005.
@article{"International Journal of Business, Human and Social Sciences:60388", author = "Huei-Wen Lin", title = "How Herding Bias Could be Derived from Individual Investor Types and Risk Tolerance?", abstract = "This paper is to clarify the relationship of individual investor types, risk tolerance and herding bias. The questionnaire survey investigation is conducted to collect 389 valid and voluntary individual investors and to examine how the risk tolerance plays as a mediator between four types of personality and herding bias. Based on featuring BB&K model and reviewing the prior literature of psychology, a linear structural model are constructed and further used to evaluate the path of herding formation through the analysis of Structural Equation Modeling (SEM). The results showed that more impetuous investors would be prone to herding bias directly, but rather exhibit higher risk tolerance. However, risk tolerance would fully mediate between the level of confidence (i.e., confident or anxious) and herding bias, but not mediate between the method of action (careful or impetuous) for individual investors.
", keywords = "Herding, investor types, risk tolerance.", volume = "6", number = "6", pages = "1463-6", }
