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The Impact of Heuristic Biases on Investors’ Investment Decision

Making; Evidence from Colombo Stock Exchange

Article in Journal of Business and Technology · December 2021

DOI: 10.4038/jbt.v5i0.55

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DOI: http://doi.org/10.4038/jbt.v5i0.55

ISSN 2738-2028 (Online) | Special Edition | 2021 December

Journal of Business and Technology

International peer-reviewed journal | Publish semi-annually

The Impact of Heuristic Biases on Investors’ Investment Decision Making;

Evidence from Colombo Stock Exchange
Rohana Kumara, R.M.K.S.1* and Kawshala, B.A. H.2
12
Department of Commerce and Financial Management, University of Kelaniya, Sri Lanka.
*
Corresponding Author: [email protected]

ABSTRACT
This paper aims to investigate the impact of heuristic biases on the decision making of individual
investors’ who are actively trading on Colombo Stock Exchange (CSE). Most studies focus on well-
developed financial markets and very little is known about investors’ behaviour in less developed
financial markets or emerging markets. The present study contributes to filling this gap in the
literature. Investors’ heuristic biases have been measured using a five-point Likert scale questionnaire
which contained numerous items including indicators of investment decisions. The sample consists
of 140 individual investors trading on the CSE. The systematic random sampling technique was used
for data collection. To examine the impact of heuristic biases on investment decision making,
hypotheses were tested by using multiple regression analysis. The results suggest that, there is a
significant impact from the heuristic bias create from the initial piece of information (Anchoring and
adjustment bias) over the investment decision making. But other biases such as the overconfidence
bias, representativeness bias and availability bias are not much significantly impact on investment
decision making by the individual investors in CSE. The paper inspires the investors to avoid relying
on heuristic biases when making investments. It provides awareness and understanding of heuristic
biases in investment management which could be really worth for decision makers and professionals
in financial institutions, such as portfolio managers and traders in commercial banks, investment
banks and mutual funds. This paper helps investors to select better investment tools and to avoid
repeating expensive errors, which occur because of heuristic biases. So, it is necessary to focus on a
specific investment strategy to control mental mistakes by investors due to heuristic biases.

Keywords: Availability, Anchoring & Adjustment, Investment Decision, Overconfidence,

Representativeness.

INTRODUCTION
in the financial markets are rational and
At present, most individuals have to make
always make rational decisions. According to
distinctive choices in their lives, some choices
Arora and Kumari (2015) most investors use
are substantial, and others are of little
different models and theories which are
consequence. That means, some decisions are
coming under standard finance to estimate the
very simple whereas others are very
risk and expected returns when making
complicated and therefore it generates the
investment decisions. Therefore, traditional
requirement of a multi-step decision-making
financial theories assume that individual
process. Recent studies in the field of standard
investors are rational beings.
finance demonstrate that individual investors
want to make their investment decisions But there are some cases that the investors
rationally (Kubilay & Bayrakdaroglu, 2016). display an irrational behaviour within the
Many theories of standard finance have been marketplace. Trading excessivel, purchasing
developed with the assumption that investors stocks without looking at the fundamental
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values, buying stocks which their friends are uncertain situations. Heuristics are rules of
buying, taking decisions based on their past thumb, which decision-makers use in complex
performance and retaining loss-making stocks and uncertain situations to make decisions
while selling winning stocks are some of them. easily (Brabazon, 2000; Ritter, 2003) by
As a result of theorisation of these irrational reducing the complexity of measuring
behaviours, a new discipline called probabilities and forecasting values to simpler
behavioural finance has begun to develop after judgments (Tversky & Kahneman, 1974). By
gathering enough information that confirms using these heuristics, human beings can speed
human behaviour, which contradicts with the up their decision-making process relative to
traditional finance theory. So, when focusing rationally processing the available
about behavioural finance, it says there are information. Generally, when the time is
some situations that human beings do not limited, these heuristics are beneficial as well
behave rationally, and their decisions are as useful (Waweru et al., 2008). Whatever it
influenced by the psychological feelings. That may be, according to the Kahneman and
means, behavioural finance scholars, advocate Tversky (1974) ; Ritter (2003) these heuristics
that each individual has unavoidable may lead to biases. And also, all heuristics are
psychological biases that prevent them from a form of effort reduction, using one or more
making rational decisions and those of the following: analysing only a few clues,
psychological biases may lead to having bad integrating less information or analysing only
consequences on the investment decisions. a few alternatives (Shah & Oppenheimer,
And also, Bakar and Yi (2016) found that 2008). So, to reduce the risk of loss in
psychological factors have a significant uncertain situations most investors have used
impact on the decision-making of individual these heuristic biases like overconfidence bias,
investors who are in the stock markets. Some representativeness bias, availability bias,
other researchers have found that cognitive anchoring & adjustment bias. Here, even
errors, fundamental heuristics and though the individual investors can reduce the
psychological biases are the various factors mental effort in the decision-making process
that affect the investment decision-making by using these heuristics, they may be led to
process (Baker & Nofsinger, 2010). some errors in judgement. As a result,
According to that, there are some behavioural investors make inaccurate decisions and it will
factors affecting the investment decisions of further affect to the performance of the
individual investors which are Herding investment.
factors, Heuristics factors, Prospect factors
When determining the market trend, the
and Market factors.
decisions taken by the individual investors in
According to Shefrin, H (2007) behavioural the stock market play a significant role.
biases are the main reason for irrationality in Therefore, to understand and provide an
decision-making and poor investment appropriate explanation for the investors’
performance. The focus of this study is on decisions, it’s needed to investigate which
those behavioural biases and out of those heuristic biases are influencing on the
behavioural biases, the researchers focuses on decisions of the individual investors in CSE
Heuristic biases. That means, here the and how these heuristic biases are further
researchers focused on four main heuristic affecting to the performance of the investment
biases called overconfidence bias, decisions.
representativeness bias, anchoring &
And, since the field of behavioural finance is
adjustment bias, and availability bias.
an emerging area for research relative to other
Therefore, in this study, the heuristics theory
financial theories, this study is going to be
can be identified as one of the most important
unique. When considering the financial
theories in behavioural finance. According to
markets in developing countries, behavioural
the heuristic theory, decision-makers use these
finance has a limited number of applications
heuristics to avoid the risk of losses in

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(Ahmad et al., 2018). So as a developing a significant role than ever before, this study is
country when focusing on the Sri Lankan more important as well as very useful not only
context, there is a lack of empirical research to for individual investors but also for other
explain the impact of these heuristic biases on decision-makers and professionals in financial
the individual investors’ decision-making in institutions such as portfolio managers &
CSE. According to Kengatharan & traders in commercial banks, investment banks
Kengatharan (2014) as there are limited studies and mutual funds. Out of
about behavioural finance in Sri Lanka, this
those beneficiary parties, here it is mainly
study provides a greater contribution to the
focused on individual investors. Therefore, this
development of this field within Sri Lanka.
analysis can avoid the individual investors
Hence, this research is conducted with the
from relying on the heuristic biases or feelings,
hope of ensuring the suitability of using
when making their investment decisions and it
behavioural finance for such kind of financial
would be led to the overall performance of
markets.
such investment decisions. Another thing is
On the other hand, when considering the global through this study, individual investors will be
context, as per the previous studies much able to acquire an appropriate awareness and
research on heuristic biases have so far focused understanding relating to these heuristic biases
on Western countries. The studies which are in investment management. And, when
conducted in Western contexts cannot be making the investment decisions by individual
generalized to the Asian countries (Ahmad et investors, repeating expensive errors can be
al., 2018). It may not necessarily have any occurred due to these heuristic biases. So, to
relevancy to Sri Lankan context, because of the avoid such repeating expensive errors,
differences in contextual paradigm (i.e., investors have to choose the better investment
individualist vs collectivist). That means, most tools and this study would be more helpful in
studies have concentrated on individualistic such situations as well. According to that, this
cultures and well-developed financial markets research encourages individual investors to
whereas very little is known about the profiles, improve the performance of their investments
inspirations and conduct of individual by recognizing these biases and errors in
investors in collectivist cultures and less judgement. Therefore, to control “mental
developed markets. So, there is a significant mistakes” done by the individual investors due
gap and this study helps to fill that gap in the to these heuristic biases, it is necessary to focus
literature by considering how the investors’ on a specific investment strategy.
behavioural biases affects the performance of
LITERATURE REVIEW
the investment decisions in collectivist
societies, particularly in Sri Lanka. Moreover, Number of researchers have investigated the
since the Sri Lanka is a different country with impact of psychological biases on individual
regard to culture, political and legal settings investors’ decision making from various
compared to developed nations as well as some aspects in various cultures or environments,
developing countries, the findings from other some of which obtained most relevant and
countries cannot be applied directly to the Sri valuable results for this study. However, a
Lankan setting (Rajeshwaran, 2020). Another limited review of prior studies relating to the
thing is, thinking level of Sri Lankan investors heuristic biases, such as overconfidence bias,
also vary from investors in developed representative bias, availability bias, anchoring
countries and hence this study is going to and adjustment bias and its impact on
contribute contextually. Therefore, the overall individual investors’ decision-making are cited
objective of the study is to identify the impact hereafter.
of heuristic biases on the investment decisions
Traditional finance theory indicates
of individual investors trading in CSE.
investment decisions are based on the
Nowadays, since the investment decisions play assumption that investors behave in a rational

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way (Sherif, 2016). That means they always try experiments and theoretical evidences propose
to earn returns for the money they invest in the that there are different types of heuristics,
stock markets. Therefore, to become which affect to the decision-making process of
successful within the stock market it is the investors. Heuristics are referred to as
required for the investors to have rational simple efficient rules of thumb. Such heuristics
behaviour patterns (Sherif, 2016). have been proposed to provide an explanation
about how people make decisions, how they
At present, behavioural finance has become an
come to judgments and how they solve
integral part of the decision making, since it
problems when they are facing complex
significantly influences the performance of
situations or when they have incomplete
investors (Kengatharan & Kengatharan, 2014).
information (Gitau et al., 2019). Moreover,
Behavioural finance theory suggests that when
some researchers advocate that many people
making the investment decisions investors do
try to make decisions by using mental shortcuts
not behave in a rational way at every time
and when making decisions, they do not
(Sherif, 2016). That means there are some
consider all available information and
situations that the investors deal with some
therefore, they do not engage in a complex
cognitive and psychological errors. These
analytical process. According to Ritter (2003)
errors are known as behavioural biases and
these heuristics make the decision-making
they may exist in many ways. Therefore, the
process easier, specially within a complex and
behavioural finance theory mainly focuses on
uncertain environment. Generally, these
psychology and it leads to understand how
heuristics are more useful when the available
emotions and cognitive errors influence on
time is limited (Waweru et al., 2008).
behaviours of individual investors
According to Daniel Kahneman (2011) and
(Kengatharan & Kengatharan, 2014).
Parikh (2009) even though these rules perform
Moreover, Gunathilaka (2014) has found that
well under many circumstances, there may be
individual investors can be influenced by
certain situations, which lead to systematic
investors’ psychological factors. According to
cognitive biases. In year 1974, Kahneman &
Ritter (2003) behavioural finance is purely
Tversky were the first writers of biases relating
based on psychology and it argues that
to heuristic theory by introducing three main
individual investors’ decision-making process
heuristic biases named representativeness bias,
is subject to different cognitive illusions.
availability bias, and anchoring bias (Tversky
Moreover, behavioural finance concept
& Kahneman, 1974). Then Waweru et al.
describes individual behaviour and collective
(2008) introduced the Overconfidence bias
behaviour through the integration of sociology,
into heuristic theory. According to
psychology, and other behavioural sciences
Weerawansa and Morage (2018) heuristics
(Kawshala et al., 2020).
have a strong negative relationship with
According to Gitman and Joehnk (2008) investment decision making.
scholars in behavioural finance advocate that
Overconfidence Bias and Investment
investment decisions of individual investors
Decision Making
are influenced by a number of beliefs and
biases. Due to such beliefs and biases, According to Pompain (2006) overconfidence
investors overreact to various types of is one of the main heuristic biases, which can
financial information and underreact to others. be explained as unwarranted faith in one’s
So that, they make not only irrational decisions intuitive reasoning, judgments and cognitive
but also, they affect to their risk-taking abilities. When individuals overestimate their
behaviours as well (Bakar & Yi, 2016). This knowledge and skills, it is a demonstration of
behavioural finance theory leads to form the overconfidence (De Bondt & Thaler, 1995;
heuristics theory, which is known as “rules of Hvide, 2002). According to Pompain (2006)
thumb” (Bakar & Yi, 2016). “too many people overvalue what they are not
and undervalue what they are and such people
When focusing on the heuristic theory, many

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suffer from overconfidence bias”. Therefore, investors’ financial decisions on the Nairobi
as per the previous scholars there are three Stock Exchange. Kengatharan and
attributes, which reflect the individuals who Kengatharan (2014) proposed that this
are suffering from overconfidence bias. They overconfidence bias has negative significant
are overestimation, over-placement and over- influence on investment related choices and
precision. If the individuals focus only on their their performance as well. Gamage et al.
own skills and the beliefs of decision makers (2021) has found that overconfidence has no
about their quality of performance rather than significant impact on individual investment
their actual performance it can be defined as decisions of equity investors at CSE.
the overestimation (Statman et al., 2006).
Representativeness Bias and Investment
Duttle Kai (2015) found that “Overestimation
Decision Making
can be measured through over-performance,
the level of control, chance of success and Representativeness can be described “as the
overestimation of one’s actual abilities”. If the degree of similarity that an event has with its
people consider that, they are better than others parent population” (De Bondt & Thaler, 1995)
that is the over-placement (Larrick et al., or “the degree to which an event represents its
2007). If the investors are ignoring the risk population” (Tversky & Kahneman, 1974).
factors, which are associated with investment Investors provide more value to recent
decisions and if they are too or excessively experience and try to ignore the average long-
certain of their judgments that is the over- term rate due to this representativeness (Ritter,
precision (Odean, 1999). Sometimes after 2003). According to Shefrin (2008) sometimes
receiving new information, individual individuals make forecasts which are not
investors do not revise their initial assessment appropriate for the relevant situations because
appropriately and so that they do not consider representativeness puts much trust in
to what extent their assessment may be stereotypes. As per the many studies, there are
inaccurate. That is also a main reason for two kinds of representativeness bias. They are
overconfidence bias. base-rate neglect (When assessing the
likelihood of a particular investment outcome,
When focusing about the investment decision-
the decision maker considers the irrelevant
making, the overconfidence bias has very bad
information) (Pompian, 2006) and sample-size
consequences for decision-making process and
neglect (Decision makers inaccurately assume
the performance of the investors. According to
that small sample sizes are representative of
Bakar and Yi (2016) “overconfidence bias has
populations or they try to depend on too few
a significant impact on investors’ decision-
samples rather than complex data) (Barberis &
making”. If some investor is suffering from
Thaler, 2003). Under this representativeness
overconfidence bias there is a tendency of
heuristic, some researchers argue that most
underestimating the risk factors and
individuals are insensitive to the sample size as
overestimating the expected profit by such
they incorrectly believe that small samples of
investor (Baker & Nofsinger, 2010). When
events, people etc. are some kinds of
investors forecast the trend, they overestimate
representatives of the entire populations from
their own ability and therefore it generates the
which the sample is drawn.
adverse forecasting results (Shefrin, 2000).
Sometimes overconfidence of the traders may When considering the representativeness bias
lead to take place an excessive trading on stock with investment decision making, some
exchanges, which results in low returns for scholars have found a positive relationship
traders (Odean, 1998). According to Chen et among them. That means, because of the
al. (2007) since the Chinese investors are representativeness bias investment decisions
suffering from overconfidence bias, they make are improved. According to Toma (2015)
poor trading decisions or do some trading identified that returns of the individual
mistakes. Waweru et al. (2008) suggests that investors increased because of the
overconfidence bias affected the institutional representativeness bias. Ikram (2016) found

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that there is a positive relationship between the above view and they have identified some
representativeness bias and decisions of situations where the availability bias
individual investors who are trading on the negatively affects individuals’ investment
Islamabad stock exchange. On the other hand, decisions. A study conducted by Waweru et al.
some researchers disagree with the above view (2008) indicated that financial decisions of
that there is a positive relationship between institutional investors who trading on the
representativeness bias and investment Nairobi Stock Exchange are affected by the
decision-making. That means investors who availability bias. Moreover, some scholars
are suffering from representativeness bias found that individuals’ stock picking decisions
make some trading mistakes and make poor are also affected by the availability bias (Massa
trading decisions, which lead them to an & Simonov, 2005).
irrational behaviour. Gamage et al. (2021) has
Anchoring & Adjustment Bias and
found that representativeness has no
Investment Decision Making
significant impact on individual investment
decisions of equity investors at CSE. Anchoring and adjustment bias occur during
According to Lakonishok et al. (1994) due to the decision-making process and it explains
the representativeness problem many when making the investment decisions or
companies engage in poor investments. judgements, there is a high tendency of
investors to rely excessively on the initial piece
Availability Bias and Investment Decision
of information provided. When there is the
Making
initial piece of information, then all other
When making judgements or forecasting, if the assessments or judgements revolve around
people rely too much on easily available that. As a result, there may be a chance of
information that can be defined as the occurring an error or bias towards interpreting
availability bias (Ngoc, 2013). If some investor the other information as well. According to the
assesses the possibility of an outcome by Kahneman and Tversky (1974) “different
depending on how easily the outcome comes to starting points yield different estimates, which
mind, availability bias occurs (Tversky & are biased towards the initial value” and that
Kahneman, 1974). According to many studies, phenomenon is called anchoring. Pompain
the decision makers who are suffering from (2006) suggest that when making the
availability bias are unable to diversify their investment decisions there may be a tendency
investment portfolio and they try to choose of individual investors to “anchor” their ideas
investments without going for a thorough or thoughts to a logically irrelevant reference
analysis of the options and so that they fail to point and that can be explained as the
choose alternative investments when suitable anchoring and adjustment bias.
since they limit their investment opportunities.
When focusing about the decision-making,
When considering the availability bias with Waweru et al. (2008) found that anchoring and
decision making of the investors, many studies adjustment bias affected for the financial
have identified that there is a positive decisions of institutional investors who are
relationship among them. That means, because trading on the Nairobi Stock Exchange. Some
of the availability bias investment decisions researchers have identified that there is a
are improved and returns of the individual positive impact of anchoring and adjustment
investors are also increased. According to bias to the risky investment decisions (Ishfaq,
Khan (2015) also identified that there is a M. & Anjum, N., 2015). According to
significant impact of availability bias on the Kengatharan and Kengatharan (2014)
individual investors’ decision-making. anchoring heuristic has a positive significant
Gamage et al. (2021) proposed that availability influence on investment decision making and
heuristic has a significant impact on individual performance of the individual investors. As per
investment decisions of equity investors at the study conducted by Abraham et al. (2014)
CSE. But some researchers disagree with the indicates that anchoring and adjustment bias

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impact to the investment decisions of listed Hypothesis

property fund managers in South Africa. Some
As per the discussion in the above section and
scholars have shown that this bias influences
with the support of the existing literature, this
the various type of decisions like “real estate
study establishes the following hypotheses.
acquisitions, job performance
▪ H1: Overconfidence bias has a significant
evaluations, judges’ rankings in competitions
impact on the investment decisions of
and personal injury verdicts etc.”. Moreover,
individual investors in CSE.
this bias may lead to some errors in judgements
and the potential missed gains. ▪ H2: Representativeness bias has a
significant impact on the investment
Conceptualization and Hypothesis
decisions of individual investors in CSE.
Development
▪ H3: Availability bias has a significant
When focusing about the conceptualization of
impact on the investment decisions of
the current study, it basically assesses the
individual investors in CSE.
relationship among the core constructs of
heuristic biases and investment decision ▪ H4: Anchoring and adjustment bias
making of the individual investors. Elaborating has a significant impact on the
in detail, individual investors’ decision making investment decisions of individual
is the dependent variable and the heuristic investors in CSE
biases are the independent variables which
comprise of four main heuristic biases called RESEARCH METHODOLOGY
overconfidence bias, representative bias,
Research design is the central part of a good
availability bias, anchoring and adjustment
research. Kothari (2004) indicates that the
bias.
research design as “the conceptual structure
Based on the literature review, researcher within which research is conducted; it
developed the conceptual framework for the constitutes the blueprint for the collection,
study as follows. It graphically explains how measurements and analysis of data” Moreover,
the research study achieves the questions anԁ the research design should be based on the
objectives of the study. research objectives and the scope of the study
followed by the research questions. Recalling
Independent Variables Dependent Variable the main objective of this study is to determine
the impact of heuristic biases on the investment
Overconfidence decisions of individual investors in CSE. That
Bias means, here it is focused to identify the IV
(Heuristic biases) DV (Investment decisions of
individual investors) relationship based on the
Representativeness Investment
hypothesis testing supported by the available
Bias decisions
literature. Thus, this is mainly a correlational
of
study. Accordingly, the positivist philosophy
individual
Availability Bias and the deductive reasoning are more
Investors
appropriate to achieve the research objectives
of the study and hence, mainly utilizes the
Anchoring & quantitative research methods in data analysis
Adjustment Bias purposes.
Under operationalization, the current study
Figure 01 – Conceptual Framework consists of five main constructs (1) Investment
decisions of individual investors is the
endogenous or dependent variable and (2)
Overconfidence bias (3) Representativeness

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bias (4) Availability bias (5) Anchoring and section will elaborate how each construct was
Adjustment bias are the four exogeneous or operationalized and the measurement scales
independent variables of the study. In order to used for measuring each construct in detail and
measure each construct, the study employed a following table produces the summary of the
standard questionnaire and the following measurement scales.

Table 01 - The Summary of the Operationalization of Personal Information

(Part A of the Questionnaire)
Part A No. of items Sources
Personal 7 items (PI1, PI2, Nada and Moa’mer (2013), Prasad et al. (2015)
Information PI3, PI4, PI5, PI6,
(PI) PI7)
Source - Developed by the researcher
Table 02 - The Summary of the Operationalization of Main Constructs (Part B of the
Questionnaire)
No. of items and Measurement
Part B - Construct Sources
scale
Investment Decision 7 items (ID1, ID2, ID3, ID4, ID5, Nyamute (2016)
Making (ID) ID6, ID7)
Five-point Likert Scale
Overconfidence Bias 4 items (OB1, OB2, OB3, OB4) Awan et al. (2010),
(OB) Five-point Likert Scale Odean (1999), Barber
and Odean (2000)
Representativeness 4 items (RB1, RB2, RB3, RB4) Nada and Moa’mer
Bias (RB) Five-point Likert Scale (2013)
Availability Bias 4 items (AB1, AB2, AB3, AB4) Nada and Moa’mer
(AB) Five-point Likert Scale (2013)

Anchoring and 4 items (AAB1, AAB2, AAB3, Nada and Moa’mer

Adjustment Bias AAB4) (2013)
(AAB) Five-point Likert Scale
Source - Developed by the researcher
When considering the unit of analysis, since relevant to investment decisions of individual
the focus of this study is to determine the investors. Out of this population, 140
impact of heuristic biases on individual individual investors were selected for the final
investors’ decision making, the unit of analysis analysis. That means, the sample of this study
can be identified as the “individual level”. That includes 140 individual investors who have
means, all the data required for this study was registered under three main stockbroker firms
collected from individual investors in CSE. (Asha Securities Limited, Asia Securities (Pvt)
Ltd, Capital Trust Securities (Pvt) Ltd) in CSE.
When determining the sample design, the
Here, since this study basically employed in
population for this study was identified as all
the quantitative research approach the
individual investors in Colombo Stock
probabilistic sampling methods were deemed
Exchange because, this study was conducted in
to be more appropriate. So, as the sampling
the Sri Lankan context and the topic was
technique the researcher used systematic

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random sampling for the study. That means, quantitative research data collected from at
first the researcher considered all the least 100 respondents is needed to get reliable
stockbroker firms which are registered in CSE results from the data analysis statistical tools”
and it was 29 stockbroker firms. As per the (Hair, J.F. et al., 1998). According to that,
stockbroker rules, three stockbroker firms since this study is mainly a quantitative study
were considered as inactive firms. That means, based on primary data, it was used a structured
they have inactivated their operations and so questionnaire for data collection. That means
that, such inactivated firms cannot open client all items in the questionnaire were responded
accounts as well as they shall not be permitted to using a five-point Likert Scale from 1
to transact on the CSE on behalf of their (strongly disagree) to 5 (strongly agree).
clients. Therefore, except those three Moreover, the questionnaire was prepared both
inactivated firms, researcher communicated all in English language and in Sinhala language to
other 26 stockbroker firms. Out of them, only facilitate attaining real data from the
three stockbroker firms called Asha Securities participants. This questionnaire comprises of
Limited, Asia Securities (Pvt) Ltd and Capital two sections namely Section “A” and Section
Trust Securities (Pvt) Ltd permitted for the “B”. In section “A”, the respondents were
researcher to access their investors. Then the asked 7 questions (PI1, PI2, PI3, PI4, PI5, PI6,
researcher distributed the questionnaire for PI7) about their personal information. In this
individual investors of these three firms by section researcher aimed to identify the
following a systematic way. Here the investors’ gender, age category which they are
procedure is, researcher distributed the belong to, educational level of the investors,
questionnaire to investors at regular intervals which Province they are from, current
in which the researcher handed over it to one employment sector of the investors, frequency
investor and then left the next immediate of buying and selling stocks of the investors
investor and gave it again to next after (1st and time period of attending the stock market
investor, then 3rd investor, then 5th investor…. etc. Section “B” includes questions regarding
likewise) out of who visited the above three core constructs of the study and are measured
stockbroker firms within three weeks at regular in five-point Likert Scales. This section
days in regular period of time. Thus, the endowed with 23 questions. That means, first
sampling technique of this study can be 4 questions (OB1, OB2, OB3, OB4) represent
identified as systematic random sampling. overconfidence bias, second 4 questions (RB1,
RB2, RB3, RB4) represent representativeness
When considering the data collection method,
bias, third 4 questions (AB1, AB2, AB3, AB4)
primary data (a structured questionnaire) was
represent availability bias, fourth 4 questions
used as the data collection method because of
(AAB1, AAB2, AAB3, AAB4) represent
some reasons. According to Bryman, A. and
anchoring and adjustment bias and final 7
Bell, E. (2007) as a data collection method,
questions (ID1, ID2, ID3, ID4, ID5, ID6, ID7)
questionnaires are more appropriate for this
represent investment decision making.
study because of time and cost savings as
compared to other methods, such as Here, since the researcher is going to test the
interviews, video conferencing and hypothesis, this study mainly used Multiple
brainstorming. Another reason was that, since Regression for data analysis purpose and
the respondents of this study were individual achieving the research objectives as well. And
investors, they might have not much time for these data were analysed using SPSS 23.0
interviews and so that by using a method like version.
questionnaires, investors are able to complete
DATA ANALYSIS AND RESULTS
it within a small time like ten minutes. A total
of 162 questionnaires were directly distributed Reliability Analysis
to individual investors. Out of them only 138
questionnaires were fully completed by the Reliability is a more important concept which
investors and used for the analysis. “In can be used to evaluate the quality of a

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research. According to Sekaran (2003) Statistics for Demographic Variables

utilizing better research instruments will
The sample for the research was composed of
eventually increase the accuracy of the results,
76.4 per cent male and 23.6 per cent female,
which in turn, will enhance the quality of the
individual investors in CSE. The major
entire research. Hence, it’s needed to assess the
proportion of the sample lied within the age
goodness of measurements used for the study.
level of 25-34 years, while 21.4 per cent
Thus, reliability plays a significant role in this
representing 35-44 years, 15.7 per cent
regard. Reliability of a measure is recognized
representing 45-54 years, 12.9 per cent
by testing for both consistency and stability.
representing below 25 years and above 55
That means, the reliability specifies the
years in terms of age groups. When it comes to
internal consistency of the questionnaire,
the educational background 37.9per cent held
which used to obtain the survey results. Here,
bachelor’s degree, 12.9 per cent held a
the researcher has used Cronbach’s coefficient
master’s degree, 15.7 per cent of the
Alpha to assess the reliability of the items. As
respondents had done diplomas, while 30 per
a standard measurement, it is advocated to
cent of respondents had done up to advanced
have general cut off or minimum 0.7
level examinations. Half of the investors are
Cronbach’s alpha value of a given set of
from the Western Province which is 51 per
questions. The closer Cronbach’s alpha is to 1,
cent while other half of the investors are from
the greater the internal consistency reliability.
all the other provinces. 27.1 per cent investors
So, the following table represents the
from North Western Province, 10 per cent
Cronbach Alpha Coefficients for the main
investors from Central Province, 7.1 per cent
constructs of the study.
investors are from Southern Province and all
Table 03 – Results of Reliability Test the other investors dispersed among other
provinces. The investors’ occupation is
Numbe Cronbach different and most of them are work for the
r of Alpha private sector which is 71 per cent. Other
Construct /
items Coefficien investors consist of, 10 per cent of self-
Factor
t employees, 7.1 per cent employed in the
Overconfidence 4 0.836 government sector which is a very low
Bias representation of investors from that sector and
12.1 per cent investors represent many various
Representativenes 4 0.721 occupations and professions. When it comes to
s Bias the capital market transactions a significant
number of transactions took place occasionally
Availability Bias 4 0.827
which represent 42.1 per cent. 14.3 per cent
transactions took place once a month, while 15
Anchoring and 4 0.711 per cent transactions were taking place 2-3
Adjustment Bias times a week. On the other hand, 18.6 per cent
Investment 7 0.720 transactions were done on daily basis. When it
Decision Making comes to attending to the stock market, it
demonstrates that how long (the time period)
Source – Primary Data an investor registered in the CSE. 31.4 per cent
As shown in the above table, all Cronbach’s sample investors joined over 11 years ago, 25.7
alpha values were above 0.7 for all constructs per cent investors joined 1-3 years ago, and
indicating sufficient internal consistency of the 19.3 per cent investors joined CSE more
items in the questionnaire. That means, all the recently, mostly less than a year.
independent variables supported the dependent Multiple Regression Analysis
variable of the study. So, the study was reliable
as per the statistics. Testing for Normality

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For the analysis of data, it should be tested for plots had a straight line. That means their
normality of the collected data. In the relationship was linear and the linearity
numerical method of normality test it is assumption was satisfied
expected to measure the skewness and the
kurtosis. Here it is considered Z score value of
the skewness and Z core value of the kurtosis.
The Z score value of the skewness and kurtosis
between -3.29 to +3.29 in each variable means
the data set is normally distributed.
Table 04 – Skewness and Kurtosis
Skewness / Std. Kurtosis /
Z
Error Std. Error
OB 2.995 -0.898
RB 2.905 -1.191
AB 0.468 -2.874 Figure 02 – MEAN_OB
AAB -0.700 -3.020
ID 0.165 -2.651
Source - Developed by the researcher

As shown in the above table Z score values of

skewness and kurtosis for each variable are
within the range. Therefore, it concludes that
the data set is normally distributed.
Testing for Linearity
Linearity test aims to determine the
relationship between independent variables
(Overconfidence bias, Representativeness
bias, Availability bias, Anchoring and Figure 03 – MEAN_RB
Adjustment bias) and the dependent variable
(Investment decision making) is linear or not.
The linearity test is a requirement in the linear
regression analysis. Good research in the
regression model there should be a linear
relationship between the independent and
dependent variables.
Linearity assumption can be tested by using
scatter plots. A relationship has no correlation
when the points on a scatterplot do not show
any pattern. A relationship is non-linear when
the points on a scatterplot follow a pattern but
not a straight line or curve shape line. A
relationship is linear when the points on a
scatterplot follow a somewhat straight-line Figure 04 – MEAN_AB
pattern. In this data set, all the variable’s scatter

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Model Summary
Table 05 – Model Summary
Std.
R Adjusted
Model R Error of Durbin-
R
Square the Watson
Square
Estimate
1 .331a .110 .083 .307 1.870

a. Predictors: (Constant), MEAN_AAB,

MEAN_RB, MEAN_OB, MEAN_AB

Figure 05 – MEAN_AAB b. Dependent Variable: MEAN_ID

The model summary table reports the strength
of the relationship between the model and the
Testing for Homoscedasticity dependent variable (Investment Decision
Homoscedasticity refers to a condition in Making). As per the findings, R-square value
which the variance of the residual, or error as shown above is .110. The R-square value
term, in a regression model is constant. That is, explains the proportion of variance in the
the error term does not vary much as the value dependent variable, which can be predicted
of the predictor variable changes. However, from the independent variables. The study
the lack of Homoscedasticity may suggest that indicated that 11% of the variance in
the regression model may need to include investment decision making will be explained
additional predictor variables to explain the by the heuristic biases collectively. This shows
performance of the dependent variable. the overall strength of association in the model.
As shown in the above scatterplot this study Adjusted R-square represented that 8.3% of the
satisfied the homoscedasticity assumption. dependent variable (Investment Decision
Making) has been described by the individual
variables. As the value was less than 60%, the
regression model wasn’t well fitted.
The Durbin-Watson static test is a test
performed in order to assess the presence of
autocorrelation in the regression model of the
study. Autocorrelation refers to a situation
where similarity of a time series exists over
subsequent time intervals. The presence of
autocorrelation can lead to underestimation of
the standard error reported in the study. The
Durbin-Watson statistic ranges in value from 0
to 4. A value near 2 indicates non-
autocorrelation; a value toward 0 indicates
positive autocorrelation; a value toward 4
indicates negative autocorrelation. According
to the above table a value of 1.870 means that
Figure 06 – Scatterplot there was no autocorrelation in the test model.

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Analysis of Variance (ANOVA)

Table 06 – ANOVA

Mean
Model Sum of Squares df F Sig.
Square
1 Regression 1.567 4 .392 4.153 .003b
Residual 12.737 135 .094
Total 14.305 139
a. Dependent Variable: MEAN_ID
b. Predictors: (Constant), MEAN_AAB, MEAN_RB, MEAN_OB, MEAN_AB
Source – Primary Data
“An analysis of variance (ANOVA) helps to effect while 0.05 or any value greater than this
examine the significant mean differences value is non-significant. According to the table
among more than two groups on an interval or 06 shown above the overall model is significant
ratio‐scaled dependent variable” (Sekaran & under 5% confident significant level. The “P”
Bougie, 2016). It is a statistical test often used value of the analysis showed a value of 0.003
in instances where there are more than two which is <0.05 indicating that this overall
groups, 0.000 – Statistically Significant or 0.05, model is statistically significant.
or any value less this will result in significant
Coefficients of Independent Variables

Table 07 – Coefficients of Independent Variables

Unstandardized Standardized
Collinearity Statistics
Model Coefficients Coefficients t Sig.
B Std. Error Beta Tolerance VIF

(Constant) 2.562 .776 3.299 .001

MEAN_OB .126 .147 .071 .852 .396 .952 1.050

1 MEAN_RB .013 .085 .012 .152 .879 .994 1.006

MEAN_AB .041 .074 .048 .559 .577 .899 1.112

MEAN_AAB .262 .075 .295 3.495 .001 .923 1.084

a. Dependent Variable: MEAN_ID
As shown in the above table, all four of these significant with a positive beta value. This says,
independent variables have a positive impact on all the heuristic biases (overconfidence bias,
the individual investors’ investment decision representativeness bias, availability bias,
making. When considering the regression anchoring and adjustment bias) have a positive
coefficient of each independent variable; impact on investment decision making of
overconfidence bias, representativeness bias individual investors in CSE. But, the impact of
and availability bias are insignificant with all the other three variables except the
positive beta values. But the probability of anchoring and adjustment bias is insignificant
anchoring and adjustment bias is statistically on investment decision making.

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Multicollinearity CONCLUSION AND

RECOMMENDATIONS
Multicollinearity (or collinearity) is a
statistical phenomenon in multiple linear In the traditional financing, it has been
regression analysis where two (or more) concluded that the investors tend to make more
independent or predictor variables are highly rational decisions rather than being biased. In
correlated with each other, or intercorrelated. contrast, it has been identified in the
Presence of multicollinearity violates one of behavioural finance literature that the investors
the core assumptions of multiple linear are behaving irrationally because of various
regression analysis and as such it is biases due to various factors and forces.
problematic; the predicted regression Therefore, the aim of this study was to explore
coefficients are not reliable anymore. the impact of heuristic biases on the decisions
Multicollinearity can be checked from the of individual investors who are trading at CSE.
tolerance and VIF values in the above To achieve this research objective, there were
coefficients table 07. To assume that there is four heuristic biases which have been
no multicollinearity problem in variables, considered as the independent variables of the
tolerance should be higher than point one and study that are respectively the overconfidence
VIF value should be less than ten. As per the bias, representativeness bias, availability bias
above tolerance and VIF values, researcher can and anchoring & adjustment bias. The
assume that there is no multicollinearity investors’ decision making is considered as the
problem in variables. dependent
Hypotheses Testing variable. The data were collected over these
variables from 140 respondents who were the
Based on the outcome of regression analysis, investors of Colombo Stock Exchange with the
the researcher has tested the hypothesis and usage of a primary source of data collection
following conclusions can be arrived. which is the questionnaires. This sample of
Table 08 – Hypotheses testing 140 investors in CSE were selected from the
population of investors with the usage of
systematic random sampling. The
Hypotheses Status
questionnaire was responded using five-point
Overconfidence bias has a Likert scale that was ranging from strongly
H1 significant impact on the Not disagree to strongly agree. The section A of the
investment decisions of Supported
questionnaire has been reserved for the
individual investors in CSE.
collection of investors' demographics while the
Representativeness bias has
a significant impact on the Not
section B has been allocated for the collection
H2 of data over the four heuristic biases on the
investment decisions of Supported
individual investors in CSE. core constructs of this research. The data has
Availability bias has a been analysed with the usage of Pearson’s
H3 significant impact on the Not correlation and multiple regression analysis.
investment decisions of Supported At a given time the overconfidence of the
individual investors in CSE. investors can create biases due to the
Anchoring and adjustment overestimation of their own knowledge, skills,
bias has a significant impact personal financial records and intuition etc.
H4 on the investment decisions Supported Not only that but also the investors might
of individual investors in
CSE.
behave due to the biases that get formed
because of the preference over the most recent
Source - Developed by the researcher events consideration and ignoring the average
long-term return. In addition, the convenience
of easily available information for decision
making can force the investors to behave from

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their rational behaviour as well. Being humans, detailed consideration of information in

the investors sometimes may try to make their addition to the initially available data.
investment decisions by relying excessively on
LIMITATIONS & FUTURE RESEARCH
the initial piece of information provided when
DIRECTIONS
making decisions. The results of the study
show that overconfidence bias, This research has several limitations that need
representativeness bias and availability bias to be addressed by future research. The first
have no significant impact on the investment limitation is the size of the sample. If there is a
decisions of individual investors in CSE. These larger sample, it would have given more results
findings do not support the hypothesis H1, H2 that are trustworthy and will be able to address
& H3. Meanwhile Anchoring and adjustment a more extensive scope of the investigation.
bias (the heuristic bias which creates from the The second limitation is, even though there are
human beings’ tendency to rely excessively on multiple behavioural factors that affect the
the first piece of information provided when investment decisions of individual investors
making decisions) has a significant impact such as herding factors, heuristic factors,
over the investment decision making of prospect factors and market factors, this
individual investors who are operating at CSE research is based only on heuristic factors. , the
and this supports the hypothesis H4. When third limitation of this study is the difficulty to
considering the existing literature, Gamage et find out heuristic biases and individual
al. (2021) have found that overconfidence bias investors’ decision-making relationship
and representativeness bias have no significant literature within the Sri Lankan context since
impact on investment decisions of equity the behavioural finance is a very new area to
investors at CSE. Kengatharan and be explored. In addition to that another factor
Kengatharan (2014) has found that anchoring that might distort the outcomes is the existence
bias has positive significant influence on of inefficient markets for the security exchange
investment decision making and performance and sometimes the reluctance of the key
of individual investors. Rajeshwaran (2020) investors to share the secret information on the
has also found that there is high influence of stock market investments.
anchoring bias on the performance of investors
Further, the researcher suggests the future
who are trading at CSE. Therefore, researcher
empirical studies to consider a sample that is
can conclude that the findings (regarding
consisting a greater number of investors
overconfidence bias, representativeness bias
(Respondents) and to associate the other factors
and Anchoring & adjustment bias) of this study
those influence on the investment decision
are consistent with the existing literature as
making such as herding factors, prospect
well. But according to Gamage et al. (2021)
factors, and market factors.
availability heuristic has a significant impact
on individual investment decisions of equity References
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