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MRR
40,5
578
Received 19 April 2016
Revised 24 October 2016
Accepted 12 January 2017
Management Research Review
Vol. 40 No. 5, 2017
pp. 578-603
© Emerald Publishing Limited
2040-8269
DOI 10.1108/MRR-04-2016-0091
Institutional investor behavioral
biases: syntheses of theory
and evidence
Zamri Ahmad and Haslindar Ibrahim
School of Management, Universiti Sains Malaysia, Penang, Malaysia, and
Jasman Tuyon
Faculty of Business Management, Universiti Teknologi MARA,
Kota Kinabalu, Malaysia
Abstract
Purpose – This paper aims to review the theory and empirical evidence of institutional investor behavioral
biases in the lenses of behavioral finance paradigm. It surveys the research specifically focusing on
behavioral biases among institutional investors in investment management activities worldwide.
Design/methodology/approach – A literature survey is done to gather and synthesize evidence on
behavioral biases of institutional investors.
Findings – The survey and analysis reveal the following findings. First, the theoretical underpinning of
investors’ irrational behavior has been neglected in behavioral finance research. Second, the behavioral
heuristics and biases are dynamic and complex. Third, understanding behavioral biases’ origin, causes and
effects requires interdisciplinary perspectives from the fields of psychology, sociology and biology.
Originality/value – The analysis and alternative perspectives drawn in this paper provide new insights
into the field of behavioral finance and aims to suggest researchers, practitioners and regulators on the next
course of actions.
Keywords Behavioral finance, Institutional investors, Irrationality, Affective biases,
Cognitive heuristics, Market behaviour
Paper type Conceptual paper
1. Introduction
Practical investment and academic studies have acknowledged the existence of investment
behavioral biases that lead to irrational decision-making. These biases in investing
encompass many types, and are still not well understood. Investor irrational behavior is real
and its effects to financial and economic systems are pervasive if no efforts are taken to
acknowledge and mitigate them. Despite its significance, the theoretical underpinning of
irrational behavior remains vague, and this has been neglected in academic, practice and
policy discourse. In academic finance inquiry, empirical evidence of behavior irregularity
reflected in financial markets has increasingly challenged the validity of many modern
finance theories and models. Attention to this issue is important but remains challenging
because modern and behavioral finance paradigms are divided in perspectives with regard
to theoretical foundation of investor and market behaviors. Modern finance paradigm has
defended the assumption of rationality and market efficiency as the correct theoretical basis
describing the approximate behavior for investor and the market. On the other hand,
The authors greatly acknowledge the financial assistance provided for this research by Universiti
Sains Malaysia (USM) through USM-RUI Grant No. 1001/PMGT/816276.
behavioral finance paradigm believes that investor behavior is bounded rational and Investor
collectively forms inefficient markets. behavioral
Behavioral finance postulates that as human beings, retail and institutional investors
commit some elements of irrationality in their decision-making. This human irrationality is
biases
biologically, psychologically and sociologically embedded in a normal human being. Given
the above problems in focus, the objective of this paper is to examine the evidence of various
classes of behavioral biases among fund managers, which is the largest and most important
segment of institutional investors in financial markets. We focus solely on survey-based
579
evidence to understand and describe the behavior from the individual-level data. This
review will provide information to scholars, practitioners and regulators on the origin,
causes and effects of institutional investors’ irrational behaviors and suggests possible
future actions.
This paper provides two insights. First, it proposes an alternative theoretical
underpinning through theoretical triangulation of psychological, sociological and biological
perspectives in understanding the origin, causes and effects of institutional investor
irrational behaviors. Second, it draws a conceptual framework based on syntheses of
theories and empirical evidence in understanding the origin of institutional investors’
irrational behaviors, their influence on irrational investment management strategies and
their impact on fund investment performance. This inquiry is organized as follow. Section 2
establishes the theoretical perspectives and evidences on investors and market behaviors.
Section 3, provides syntheses of the fund managers biases compiled from survey-based
research worldwide. Section 4, proposed the theoretical conceptualization and modeling of
fund managers’ irrational behaviors’ origin, causes and effects. Finally, Section 5 concludes
and provides suggestions to scholars, practitioners and regulators on the next course of
actions.

2. Literature review
2.1 Behavioral finance theoretical perspectives
Approximation of human behavior is the cornerstone in understanding the reality of
financial markets’ functioning (Shiller, 1999). In particular, investor behavior determines
asset prices through demand and supply forces, and consequently determine the financial
market behaviors. Currently, two schools of thought, namely, modern finance and
behavioral finance, provide a different theoretical conceptualization of the finance
worldviews. Figure 1 illustrates the interconnections between investor, asset prices and
market behaviors in financial systems together with the two schools of thought theoretical
perspectives. To keep our discussion focus, we briefly introduce the financial worldview
from the lenses of behavioral finance. The modern finance theoretical perspectives are
described by Miller (1999), while the behavioral finance historical development is well
explained by Ritter (2003), Baker and Nofsinger (2010), Statman (2014) and Thaler (2016).
Behavioral finance offers an alternative theoretical perspective of financial market
functioning (i.e. investor, asset prices and market behaviors) based on positive philosophical
views, which does not assume full rationality of market players. The current theoretical
foundations for investor behaviors in the behavioral finance paradigm are the bounded
rationality theory of Simon (1955) and prospect theory of Kahneman and Tversky (1979)
drawn from the field of psychology. In psychology perspective, irrationality on the part of
human decision is a basic human nature (Ellis, 1976). This is substantiated with extensive
experimental evidences from cognitive psychology on the systematic heuristics and biases
that arise from people’s beliefs and preferences (Tversky and Kahneman, 1986).
MRR
40,5

580

Figure 1.
Theoretical
perspectives of
financial market
functioning
Guided by the above theoretical assumption on human behavior, asset prices and market Investor
behavior, which are the product of collective actions of market players, are dynamic and behavioral
adaptive in nature. Human behavior biases are affecting asset prices through supply and
demand interactions which sometimes lead the market to be inefficient (Schneider and
biases
Lappen, 2000; Ritter, 2003). These provide support to the adaptive market efficiency
hypothesis of Lo (2004, 2005) as a representative theory for financial market behavior. Based
on the behavioral finance paradigm, the complexity and dynamism of investors and market
581
behaviors are best reflected and acknowledged in a complex system (Jacobs and Levy, 1989;
Mitroi and Oproiu, 2014) supported by interdisciplinary theories. As such, it is important to
synchronize investors, asset prices and market in the dynamic systems ruled by real human
behavior. In the following sections, the discussion will focus on forces determining investor
behavioral biases.

2.2 Interdisciplinary insights on investor and market behaviors

Empirical evidences from the field of psychology, sociology and biology conclude that
investors’ behaviors are shaped collectively by internal and external forces, namely,
psychological, sociological and biological factors.
Psychological factors are decision-making biases that are produced internally by
individuals through the two systems of human thinking, namely, the dual cognitive–
affective process (Kahneman, 2003; Carmerer et al., 2005). These thinking systems are
claimed to induce errors in individual decision-making. Specifically, the cognitive system
produces errors that are collectively known as cognitive heuristics or the tendency to use
rules of thumb in the decision-making process to simplify complex decision situations (De
Bondt, 1998; Fuller, 1998; Das and Teng, 1999). Whereas, biases in decision-making
produced by affective system are sentiment or feelings, emotion and mood (Lowenstein
et al., 2001; Ackert et al., 2003; Lucey and Dowling, 2005; Grable and Roszkowski, 2008; Shu,
2010; Dow, 2011).
The sociological factors are external forces that induce decision-making biases on part of
individual because of social influence in the social networks (Zafirovski, 2000; Shiller, 2002;
Fligstein and Dauter, 2007; Frith and Singer, 2008; Baddeley, 2010; Carruthers and Kim,
2011; Fenzl and Pelzmann, 2012; Seyfert, 2012). These evidences are consistent with earlier
prediction by Keynes (1937) that social interaction influences individual decisions by way of
believing what others think and following what others do. From the field of ecology,
ecologists coined that the financial institutions, ranging from large institutional investors to
investment banks, have important social and ecological impacts at a global level through
their investment decisions (Galaz et al., 2015). The relevance of social factors in influencing
individual decision is postulated in many sociology-based theory. The theory of social
preferences suggests that individual sole motivation is not entirely for self-interest as
assumed in modern economics paradigm. Instead, this theory argues that the society is
made of both fair (concern for others) and selfish individuals. Thus, individual motivation
and interaction between fair and selfish groups influences decision-making with important
economic consequences (Sobel, 2005; Fehr and Schmidt, 2006). The theory of social mood
(Nofsinger, 2005) hypothesizes that social mood determines the types of decisions made by
consumers, investors and corporate managers alike. Culture-based theory postulates that
culture can affect finance through three channels. First, the values that are predominant in a
country depend on its culture. Second, culture affects institutions practice. Third, culture
affects how resources are allocated in an economy (Stulz and Williamson, 2003). In
behavioral finance application, Statman (2008) argues cultural differences may influence
MRR investor behavior that matters in understanding individual in different culture investment
40,5 decision-making process.
The biological origin of human irrationality has been explained by Ellis (1976), while
individual financial risk tolerance based on biological perspective has been provided by
Harlow and Brown (1990). The main idea is that biological and psychological traits influence
the formation of preferences and decision-making process. Harlow and Brown (1990) also
582 highlighted that personality characteristics such as sensation-seeking and extroversion, as
well as various components of the complex set of human neurochemical systems, influence
the individual financial risk tolerance. Based on this theoretical premise, Murphy (2012)
provides the underlying biological explanations for time-varying risk aversion and temporal
changes in expectations. The basic premise is that the brain states which are induced by
internally produced biological chemicals could explain investor irrational behaviors that
cause mispricing and inefficiency of the markets. In his paper, Murphy discusses how
variations in testosterone and cortisol influence irrational risk-taking behaviors, especially
for males. In a wider perspective, Professor Paul J. Zak and his collaborators discuss many
aspects of the neurobiology origin of individual decision and collective actions (see www.
neuroeconomicstudies.org/published-works).
Motivated by biology-based theory (the theory of evolution) and evidence, Farmer and Lo
(1999) put forward a new view of financial market functioning from a biological perspective.
In particular, within an evolutionary biology conceptual framework, they postulated that the
markets, instruments and investors are interacting and dynamically evolving. This is due to
the assumption made on part of the financial agents that are believe to be competing and
adapting, but not necessarily in optimal ways. Later, Lo (2004, 2005) formalizes the adaptive
market hypothesis (AMH) as an alternative theory for financial market functioning.
Recently, extending the biological perspective, the neuroscience theories have been
capitalized upon to inform the neural and cognitive origin of investor behavior under the
neurofinance research pillar (Sahi, 2012; Frydman and Camerer, 2016).
Based on these interdisciplinary literature reviews, the possible list of behavioral
heuristics and biases are many and unclear. This claim is in line with Fuller (1998) who
states no taxonomy existed for classifying behavioral biases currently exist in behavioral
finance. Nonetheless, we argue that based on these evidences, the behavioral biases can be
systematically categorized by those which are induced by psychological, sociological and
biological forces.

2.3 Institutional investors and their investment behavior

Financial market behavior is aggregates of investors’ behaviors of institutional and retail
individual investors (Tuckett and Taffler, 2012). Institutional investors are the main actors
in financial markets (Gonnard et al., 2008). Institutional investors are defined as asset
management companies like investment funds, insurance companies, pension funds and
other forms of institutional savings that principally work for their customers as agents (Suto
and Toshino, 2005). Although the characteristics of institutional investors are not uniform
throughout the world, generally they have four common features according to Midgley and
Burns (1977). First, they are intermediaries that invest on behalf of others. Second, they have
large amount of funds for investment. Third, they are only few and could act in concert to
influence the market. Fourth, they tend to have a net inflow of funds readily available for
investment.
Because the institutional investors are the most dominant players in financial markets,
understanding their behavior is important for understanding the asset prices’ innovation
and market behavior in general. They are expected to be rational and to act professionally.
Nonetheless, there are many issues of irrationality of institutional investors (Menkhoff, 2002; Investor
Montier, 2002; Suto and Toshino, 2005) and some have blamed them for creating excessive behavioral
volatility that distort financial markets stability and directly destabilizing the economy
(Menkhoff, 2002). However, to date, the real behavior of fund managers has been largely
biases
ignored in finance academic literature (Tuckett and Taffler, 2012). Addressing these issues
is important for academicians, practitioners and regulators.
Academically, modern finance assumes institutional investors are always rational actors,
who off-set irrational wave by retail investors through rational arbitrage activities. This will 583
ensure the financial market to be always operationally and informationally efficient.
However, there are a few problems related to this assumption. First, there is growing
evidence challenging the validity of this assumption. Second, there is evidence of
irrationality of institutional investors behavior as well, that leads some to believe that lay
people and experts are alike (Akerlof and Shiller, 2009; Garling et al., 2009). Third, any
evidences of irrationality and inefficiency in financial markets bring challenges to the
completeness of agency theory and corporate governance theory, which have been based on
full rationality assumption.
In practical investment perspective, the practices of fund management based on modern
finance paradigm have been challenged. First, in the presence of behavioral biases on part of
institutional investors’ thinking, behavior and action, this provides evidences that they
contradict their role as shareholders (Suto and Toshino, 2005) as predicted by agency theory.
Second, there is a need of corporate governance to address the negative effect of behavioral
biases as highlighted by some scholars. In this regard, Suto and Toshino (2005) argued that
institutional investors who underperform in corporate governance, distort corporate
evaluation and neglect their long-term fiduciary roles entrusted to them as an agent. They
also noted that “there is still a large gap between awareness and action” (Suto and Toshino,
2005, p. 476) with regards to enhancing corporate governance to address behavioral biases
in investment institutions.
In regulatory perspective, these behavioral finance perspectives should have been taken
into account and incorporated in policy-making to ensure fair and transparent practices in
investment activities in financial markets by all parties. However, because the policy-
makers are also guided by modern finance and economics thought, this has not yet been the
case. We should have learned from many historical evidences of financial crises caused by
irrational behavior of institutional investors. To address market inefficiency, Li (2008)
highlighted the needs for organizational and institutional framework to be fair, transparent
and efficient in disclosing and distributing information. This requires the need to strengthen
the laws in financial markets.

2.4 Evidence on institutional investors’ behavioral biases

In the search of existing empirical evidence, a purposive literature review has been used. In
particular, we review the possible lists of behavioral biases reflected by institutional
investors by relying on past studies that have been conducted using the survey method.
This is intended to control for possible biasness in opinion due to different research
methodologies used. Most importantly, a direct survey of institutional investors provides
the best and real measures of their behaviors (Frank, 2007). With these objectives in mind,
we did not cover the bulk of complementary perspectives provided under the experimental
methodology approach which are generally conducted on non-real institutional investors in
laboratory experimental setting.
In doing so, we retrieved all possible existing papers from various journal databases (i.e.
EBSCO host, Emerald, Google Scholar, Science Direct, SAGE Knowledge, Scopus, Springer
MRR Link, World Scientific, Wiley Online) and reference to behavioral finance books. The search
40,5 on these literatures is performed in early 2015. We used the following key words in our
search “behavioral finance”, “irrational behavior”, “behavioral biases”, “institutional
investors”, “fund managers” and “survey-based”. All identified articles are further manually
screened for content suitability. Finally, we managed to identify more than 30 relevant
papers related specifically to a survey of fund managers’ behavioral biases covering 19
584 countries. The retrieved relevant literature is summarized in Table I.
The general findings of these studies indicate that behavioral forces are found to be
significant among institutional investors. We provide synthesis of these behavioral
heuristics and biases in the following sections.

3.1 Common behavioral biases among institutional investors

The list of investment biases that investors committed is too long (Cronqvist and Siegel,
2014) and impossible to be summarized here. We discuss here only those reflected in the
empirical papers reviewed. They can be grouped into two broad categories as induced by
psychology forces (i.e. cognitive heuristics and affective biases) and sociology forces
(cultural and mass influences).
3.1.1 Psychology forces. Psychological forces impact individual investor decision and
behavior through the influence of both cognitive heuristics and affective biases. Cognitive
heuristics generally refer to the influences of various cognitive shortcut strategies in
decision-making because of limited cognitive capacity (Warneryd, 2001). From the survey-
based research reviewed, the following are the common cognitive heuristics affecting
institutional investors’ decision-making (Table II).
Affective biases refer to biases induced by affective states, namely, emotion, sentiment
and mood of an individual in the course of decision-making. Their descriptions and some
examples of possible investment implications are as summarized in Table III. Note that, in
current practice, behavioral finance scholars have used the emotions sentiment and mood
interchangeably or collectively as affective biases because of difficulties in distinguishing
them. The current referred theory of bounded rationality does not discuss these emotions.
Nonetheless, we argue here that they can be distinguished as explained in Table III.
3.1.2 Sociology forces. Sociologists believe that investment in financial markets is a
social phenomenon where individuals’ thinking and actions are not isolated from others. In
this perspective, social influence is expected to occur in decision-making given the complex
and uncertain situations (Warneryd, 2001). The justifications for this social influence as
highlighted by Festinger (1954) are that individuals have an innate tendency to compare
themselves with others and that they generally evaluate their attitude and capacity against
others as a comparison. Table IV shows some important social forces that may affect
investment decision-making.

3.2 Heterogeneity of behaviors

Behavioral finance paradigm acknowledges that individual thinking, behavior and actions
in risky and uncertain investment decision-making are dynamic and complex. Empirical
evidences from interdisciplinary inquiries provide insights that different individuals or
groups of individuals have different degrees of behavioral biases. These differences are due
to differences in individual, cultural and institutional forces as discussed below.
3.2.1 Individual traits. Individual traits refer to demographic and personality type.
Behavioral aspects of demographic and personality type are possible influence on decision-
making and financial risk-taking behavior that have been well documented in finance and
economics literature since Siegal and Hoban (1982).
Behavioral biases Countries Studies
Investor
behavioral
Anchoring Kenya Waweru et al. (2008) biases
Availability bias Kenya, Israel Waweru et al. (2008), Kudryavtsev et al. (2013)
Confirmation bias Germany Menkhoff and Nikiforow (2009)
Disposition effect Japan, Israel, Sweden Susai and Moriyasu (2007), Kudryavtsev et al.
(2013), Bodnaruk and Simonov (2014)
Emotion USA, USA, Asian countries Tuckett and Taffler (2012) 585
Gambler’s fallacy Kenya, Israel Waweru et al. (2008), Kudryavtsev et al. (2013)
Gut feelings Malaysia Lai et al. (2001)
Herding Japan, Germany, USA, Suto and Toshino (2005), Menkhoff et al. (2006),
Thailand, Switzerland, Italy, Susai and Moriyasu (2007), Beckmann et al.
Israel (2008), Lutje (2009), Menkhoff and Nikiforow
(2009), Kourtidis et al. (2011), Kudryavstev et al.
(2013)
Hot hand fallacy Israel Kudryavtsev et al. (2013)
House money effect Germany Menkhoff and Nikiforow (2009)
Inconsistence in risk Greece, Malaysia Kourtidis et al. (2011), Mahat and Ali (2012)
tolerance
Loss aversion USA, Kenya Olsen (1997)
Mental accounting Kenya Waweru et al. (2008)
Optimism France Braihanne et al. (2014)
Overconfidence Germany, Australia, Kenya, Menkhoff et al. (2006), De Venter and Michayluk
USA, Switzerland, Italy, (2008), Waweru et al. (2008), Menkhoff (2010),
Thailand, Greece, France Kourtidis et al. (2011), Braihanne et al. (2014)
Reflection effect Germany Menkhoff and Nikiforow (2009)
Representativeness Kenya Waweru et al. (2008)
Sentiment India Sehgal et al. (2009)
Social influence Greece Kourtidis et al. (2011)
Use of other information
Company visits UK Clatworthy and Jones (2008)
Newspaper reports Saudi Arabia Al-Abdulqader et al. (2007)
Political news Malaysia Lai et al. (2001)
Relying on analysts reports UK Clatworthy and Jones (2008)
Relying on other opinions Hong Kong, Sweden Wong and Cheung (1999), Hellman (2005)
Rumors Malaysia Lai et al. (2001)
Use of non-accounting UK, Germany Clatworthy and Jones (2008), Lutje (2009)
information
Word of mouth USA Shiller and Pound (1989)
Irrational investment behavior
Excessive portfolio Sweden Bodnaruk and Simonov (2014)
turnover
Home bias Germany Menkhoff and Nikiforow (2009)
Momentum trading USA, UK Richardson et al. (2010)
Winner and spotlight Germany Arnswald (2001)
stocks
Self-marketing Japan Suto and Toshino (2005)
Self-monitoring Greece Kourtidis et al. (2011)
Short-termism Japan, Germany, USA, Suto and Toshino (2005), Lutje (2009), Menkhoff
Table I.
Switzerland, Italy, Thailand (2010)
Use of technical analysis Hong Kong, Malaysia, Saudi Wong and Cheung (1999), Lai et al. (2001), Al- Summary of studies
Arabia, Germany, Abdulqader et al. (2007), Kourtidis et al. (2011), on institutional
Switzerland, USA, Italy, Menkhoff (2010), Richardson et al. (2010) investor behavioral
Thailand, UK biases
MRR
Heuristics Descriptions Investment implications
40,5
Anchoring Anchoring occurs when individuals Various reference points are used as a
make estimates by referring to an initial benchmark. This practice could induce
value. In investment application, deviations in security and market prices
investors’ forecasts of future value may in the short run (Fromlet, 2001). Investors
be affected by reference to some often anchor on initial purchase price as a
586 benchmark (Warneryd, 2001) reference point for loss or gain and
financial crisis as bad experience (Baker
and Ricciardi, 2014)
Availability Availability heuristics is a tendency of an The information related to well-known
individual to form estimates or companies is more available and could
judgments based on the ease of instances dominate impression (Warneryd, 2001).
or occasions that can be brought to mind Recent information by analysts or
(Warneryd, 2001) brokers influences decision (Montier,
2002)
Confirmation Confirmation bias refers to a situation Investor search for confirming evidence
where investors desire to find and ignore disconfirming evidence
information that is in confirmation with (Shefrin, 2000). More often, investor
their existing beliefs (Montier, 2002) overweigh on information in their favor
(Montier, 2002)
Disposition effect Disposition effect is defined as tendency Riding looser too long to avoid
of selling winners too early and riding recognizing bad deals and cutting losses
losers too long (Shefrin and Statman, can do harms to investment values
1985) (Fromlet, 2001)
Gambler’s fallacy Gambler’s fallacy is a phenomenon, Investors are overly pessimistic after bull
whereby investors inappropriately markets and overly optimistic after bear
predict a sure reversal (negative recency) markets (De Bondt, 1991)
(Shefrin, 2000)
Hot hand fallacy Investors believe that certain events will If an investor has won in the past, he/she
be repeated (positive recency) likely chooses to bet and win in the
(Kudryavtsevet al.,2013) future (Kudryavtsevet al.,2013). This also
induces trend-chasing attitude (Baker
and Ricciardi, 2014)
Loss aversion Loss aversion is defined as a situation This could explain the situation where
where people generally opt to take a investors hold losing stocks and do not
chance rather than the guaranteed losses sell anything at a loss (Shefrin, 2000).
in an investment options (Shefrin, 2000) Risk-averse investor will not take more
risk (Baker and Ricciardi, 2014)
Mental accounting Mental accounting refers to individual Investor risk-taking would vary
tendency to treat their different depending on which mental account they
investment instruments or portfolio are dealing (Shefrin and Statman, 1985).
differently (Shefrin and Statman, 1985) Portfolio formation as pyramid of assets
with different goals and risks (Statman,
1999)
Over optimism People tend to exaggerate their own Over-optimism can induce excessive
Table II. abilities that can be induced by illusion of trading behavior (Shefrin, 2000;
Cognitive heuristics control and self-attribution bias (Montier, Bodnaruk and Simonov, 2014)
and investment 2002)
implications (continued)

Heuristics Descriptions
Overconfidence Overconfidence is described as people
thinking that they know more than they
really do (Shiller, 2000) because they
consider themselves to be experts in
decision-making (Fromlet, 2001)
Representativeness Representativeness is defined as the
tendency to give certain developments,
reports or statements more importance
without serious thought (Fromlet, 2001).
People in situation of uncertainty
generally tend to look for familiar
patterns and believe that the pattern
would be similar (Warneryd, 2001)
Investor
Investment implications behavioral
Overconfidence can promote optimism biases
and induce excessive trading behaviors
(Shefrin, 2000; Montier, 2002; Bodnaruk
and Simonov, 2014). Overconfidence
induces control of illusion bias where
individuals believe they can control a 587
particular situation (Fromlet, 2001)
Causes overreaction (underreaction) and
optimism (pessimism) to bad (good) news
(De Bondt and Thaler, 1985; Shefrin,
2000). Overemphasis on negative facts
(Fromlet, 2001). Past losers are
undervalued and past winners are
overvalued (Shefrin, 2000). Influence of
company (Cooper et al., 2001). Buying
stock after prices rise (Baker and
Ricciardi, 2014) Table II.

Affect state Descriptions Investment implications

Emotion Emotion state (greed, hope, worry fear,
panic) is induced by a particular (favorable
or unfavorable) event (Shefrin, 2000)
Sentiment Sentiment state (optimistic or pessimistic) is
induced by a particular (favorable or
unfavorable) event
Mood Mood state (good or bad mood, happy, sad,
stress) is induced by a particular (good or
bad) event
Emotion can induce optimism (pessimism),
overconfidence (low confidence), overreaction
(underreaction) and risk tolerance (Shefrin,
2000; Warneryd, 2001; Baker and Ricciardi,
2014)
Sentiment can induce optimism (pessimism),
overconfidence (low confidence), overreaction
(underreaction) and risk tolerance. Sentiment
proxies influence investors (Baker and
Wurgler, 2006)
Mood can induce optimism (pessimism),
overconfidence (low confidence), overreaction
(underreaction) and risk tolerance. Mood state Table III.
is induced by weather (Hirshleifer and Affects and
Shumway, 2003) due to seasonal affective investment
disorder implications

Demographic forces as important determinants for individual investment decisions and

risk-taking behaviors have been well established in behavioral finance literature. These
factors include the following. The first factor is gender differences. In psychology research,
men have been acknowledged as more risk-tolerant compared to women in many risk-
taking decisions (Byrnes et al., 1999), partly because they are more exposed to
overconfidence bias (Montier, 2002). This hypothesis has also been supported in behavioral
finance research (De Venter and Michayluk, 2008; Halko et al., 2012). The second factor is
age difference. Positive relationship between investor ages and level of risk tolerance has
been empirically supported in finance research. Riley and Chow (1992) documented that
investor level of risk aversion decreases with age. However, evidence from Halko et al. (2012)
showed that age effect on risk aversion is reduced when controlling for financial knowledge.
MRR Social forces Descriptions
40,5
Herding Investors are inclined to believe the majority
opinion and run on the same as directions
(Fromlet, 2001)
Social influence Influence emanating from other people’s
opinion or behavior. Social influence induced
588 investors to follow a market leader, to react
accordingly with other investors or to imitate
others’ behaviors (Warneryd, 2001)
Cultural norms Culture is defined as a system of shared
values, beliefs and attitudes that influence
perception, preferences and behaviors of a
group of society (Anderson et al., 2011).
Culture includes cultural traits, festival and
superstitious beliefs
Table IV.
Social forces and
investment
implications
Investment implications
Attention to winners’ stocks with the pre-
established beliefs that good performance
repeats itself (Fromlet, 2001)
Warneryd (2001) highlighted the following
social influence in investment decisions:
Small group influence through direct
contact with others
Direct observation and interpretation of
others’ behaviors
Believing on reports reflected in media
Bandwagon effects which mean people like
to confirm to opinion and behavior of the
majority
Cultural explains information content
(Nguyen and Truong, 2013) and investment
behavior (Beracha et al., 2014). Cultural
influence of home bias and international
diversification (Anderson et al., 2011).
Festival influence – investor exploiting the
Ramadhan anomaly in trading strategy
(Bialkowski et al., 2013). Investors
exploiting the Chinese New Year anomaly
(Ahmad and Hussain, 2001). Superstition-
like beliefs on horoscopes, numbers and
objects also influence investment strategies
of certain group of ethnics like the Chinese
which explains the price-clustering
phenomenon (Brown et al., 2002)

The third factor is experience. Empirical evidences showed that more experienced and
expert investors are more prone to overreaction and overconfidence biases (Chen et al., 2004;
Griffin and Tversky, 1992) and are more risk-takers (Corter and Chen, 2006). Education
difference is the fourth factor. Previous research suggests that education is important in
predicting preferences and behavior. In finance research, finance education that is expected
to increase financial literacy has been associated with choices for investment (Schooley and
Worden, 1999; Bernheim and Garrett, 2003) risk-taking behavior (Wang, 2009; Sjoberg and
Engelberg, 2009) and encourages wealth-creating investment (McCannon, 2014). Nikiforow
(2010) shows that training on behavioral finance increases awareness and reduces the fund
managers’ behavioral biases.
Personality types are psychological characteristics of individual. Many have examined
the connection between personality type and risk tolerance level. There are many
personality tests available, but the popularly used psychology-based personality-type tests
are the Myers–Briggs Type Indicator[1], Big Five Personality Taxanomy[2], Zuckerman’s
Sensation-Seeking Scale (Zuckerman, 1994), Domain-Specific Risk-Taking Scale[3] (Weber
et al., 2002; Blais and Weber, 2006) and Risk Tolerance Questionnaire (Corter and Chen,
2006). Using the Myers–Briggs Type Indicator test in behavioral finance research provides
insights that higher scores for extraversion, intuition, thinking and perceiving are positively
related to higher levels of risk tolerance (Filbeck et al., 2005). Use of Big Five personality
taxonomy in finance research also explains investment behavior and variation in risk-taking
among investors in accordance with their personality types. Mayfield et al. (2008) provide
evidence that extraverted individuals intend to engage in short-term investing behavior and Investor
individuals prone to neuroticism show that they are more risk-averse and do not engage in behavioral
short-term investing behavior. Meanwhile, individuals with openness to experience are
inclined to engage in long-term investing behavior. Zuckerman’s Sensation-Seeking Scale
biases
has been used by Belcher (2010) in examining student personality characteristics and
portfolio preferences, but no discernible pattern was found between psychological
characteristics and portfolio preferences.
3.2.2 Cultural traits. Culture impact on finance is a new emerging sub-field of behavioral 589
finance research. Based on sociology perspective, culture is partly important in
understanding individual behavior. Cultural factor has a great determinant role in
investment decision-making because investors personally and collectively adhere to
conserve personal relationship within the organization or society they belong to (Ellison and
Fudenberg, 1993). Growing evidences from behavioral finance research and other sociology
research indicated that investors’ behaviors are related to the cultural origin of the
individual. This perspective suggests that individual investment behavior could be
predicted based on their cultural characteristics. The importance of this perspective has long
been neglected in finance, but the number of recent works looking into this issue is
increasing.
Hofstede’s (1980) cultural dimension of individualism, uncertainty avoidance and long-
term orientation has been recently capitalized in behavioral finance research to explain the
behavior of stock markets. Nguyen and Truong (2013), for example, provide worldwide
evidences that information content of stock markets is higher in more individualistic
countries and in low uncertainty avoidance countries. Beracha et al. (2014) provide evidence
that institutional investors from different cultural background trade differently. In addition,
they provide evidence that institutional investors trade with higher frequency in their home
countries and in countries with similar cultural background. This finding can be
corroborated to earlier findings by Anderson et al. (2011), providing evidence that home bias
and international diversification by institutional investors are influenced by cultural bias.
Bialkowski et al. (2013) confirmed that fund managers exploit the Ramadhan anomaly in
their trading strategy.
3.2.3 Institutional traits. We discuss two important institutional traits, namely,
governance and ethical concerns. Current corporate governance policy and practice, which
are based on the rational model of decision-making, may be insufficient to mitigate future
corporate failure (Marnet, 2005). Lack of corporate governance in curving the behavioral
biases and information asymmetry has been pointed out as one of the reasons for failure in
addressing behavior-induced risks in financial markets. Marnet (2005) argued that to
gamble imprudently seems inherent in human nature. Stock returns in emerging markets
tend to be more positively skewed which can be attributed to managers having more
discretion to release good information immediately and bad information slowly (Claessens
and Yurtoglu, 2013). This is probably due to the fact that the current practice of corporate
governance does not take into account the need to curve behavioral biases. Some scholars
have voiced the needs for corporate governance to include a new mission for corporate
governance to control behavioral biases in firms (Baccar et al., 2013) and in financial
markets in general (Suto and Toshino, 2005).
Ethical concerns have also been reported to have important roles in mitigating
behavioral biases in fund management. In this perspective, Marco et al. (2011) provide
evidence of differences in risk-taking behavior between ethical and conventional mutual
fund managers. This stream of research is new which has yet to be explored in behavioral
finance research.
MRR 3.3 Irrationality investment decisions
40,5 Behavioral biases cause irrationality in various aspects of investment decisions. In Table V,
we synthesize the irrational investment decisions in four dimensions, namely, information
use, investment analysis use, investment and trading strategies and portfolio management
strategies.
Few insights can be drawn from the above evidences. First, the use of information other
590 than firm and economic fundamental factors challenges the modern asset pricing postulates
that only fundamental information matters in asset pricing modeling. Second, the popularity
of technical analysis use in equity investment analysis can be related to the influence of
behavioral biases in investor decision-making. Third, behavioral biases believe to be the
root cause of various non-rational trading strategies. Finally, in portfolio management
strategies, behavioral biases can be reconciled to explain various non-rational portfolio
management strategies. Collectively, all these will influence the level of portfolio
diversification, risk and returns differently than what was thought in modern
portfolio theory. These evidences seem to be consistent with behavioral finance views.

3.4 The missing links in behavioral finance research

In this section, we draw discussion on theory and practical flaws of behavioral finance
perspectives on behavioral biases. The theory is the fundamental problem that needs
attention. Current theoretical perspectives used in explaining the behavioral biases in
behavioral finance research include the theory of bounded rationality (Simon, 1955), theory
of planned behavior (Ajzen, 1991) and risk-as-feelings theory (Lowenstein et al., 2001). These
theories attempt to interpret the behavior from the theoretical lenses of psychology and
sociology. Still, there is no clear understanding (Baker and Ricciardi, 2014) and no clear
taxonomy (Fuller, 1998) on behavioral biases. In this regard, there is a need to understand
the neural basis of irrational behaviors’ origin, causes and effects because all decisions and
behaviors are initiated in the human mind.
In practice, the perspectives and beliefs about the nature of behavioral biases are also
unclear. Particular questions such as whether behavioral biases are good or bad for
investors, fund management company and the financial markets in general are inconclusive.
Some claim that heuristics and biases can guide successful decisions and actions and others
believe that these can cause disasters. In addition, whether behavioral biases are permanent
or temporary and whether this is expected to have short- or long-term influences on financial
prices and markets behavior are openly debated. In this regards, some scholars argued that
behavioral biases could cause prices to deviate from the fundamental value for long periods
(Shefrin, 2000). Others believe that the effects are only temporary and need not be
incorporated in theorizing and modeling works in finance.

4. Theorizing and conceptualizing institutional investor behavioral biases

4.1 Theoretical framework
A major drawback in current behavioral finance works is the absence of unified theory in
explaining irrational behaviors’ origin, causes and effects. The existing bounded rationality
theory and prospect theory are insufficient to describe the complex and dynamic nature of
human behavior. As such, establishing a unified theoretical base is important. In this regard,
Tuyon and Ahmad (2014) proposed the theoretical triangulation of the following theories to
holistically understand and acknowledge interdisciplinary perspectives from cognitive
neuroscience, psychology and sociology in theorizing and modeling investor irrational
behaviors. Some scholars have highlighted triangulation of interdisciplinary perspectives as
Investment
management
dimension Irrational investment behavior (Effects)
Information use Rely on various information other than
firm and economic fundamentals,
including company visits (Clatworthy and
Jones, 2008), newspaper reports
(Al-Abdulqader et al., 2007), political news
(Lai et al., 2001); analysts’ reports
(Clatworthy and Jones, 2008), other
opinions (Wong and Cheung, 1999;
Hellman, 2005), rumors (Lai et al., 2001),
non-accounting information (Clatworthy
and Jones, 2008; Lutje, 2009), word of
mouth (Shiller and Pound, 1989)
Investment Popular use of technical analysis (Wong
analysis use and Cheung, 1999; Lai et al., 2001;
Al-Abdulqader et al., 2007; Menkhoff, 2010;
Kourtidis et al., 2011)
Investment and Excessive trading/excessive portfolio
trading strategies turnover (Bodnaruk and Simonov, 2014)
Disposition effect (tendency of selling
stocks that have appreciated in price too
early and holding on losing stocks too
long) (Baker and Ricciardi, 2014)
Overreaction to news
Performance chasing (Baker and Ricciardi,
2014)
Attention to winner and spotlight stocks
(Arnswald, 2001)
Momentum trading (Scott et al., 1999;
Menkhoff and Nikiforow, 2009; Richardson
et al., 2010)
Self-monitoring (Kourtidid et al., 2011)
Portfolio Insufficient diversification/naive risk
management diversification (Garling et al., 2009;
strategies Cronqvist and Siegel, 2014)
Short-termism (Suto and Toshino, 2005;
Lutje, 2009; Menkhoff, 2010)
Home bias (Menkhoff and Nikiforow, 2009)
Investor
behavioral
Irrational behavior (Causes) biases
Biased information search (Garling
et al., 2009; Cronqvist and Siegel, 2014)
to avoid information overload and
uncertainty of decisions. Herding bias 591
induces use of non-fundamental
information (Lutje, 2009). Also partly
induced by personality and social
traits
Induced by momentum trading
(Menkhoff and Nikiforow, 2009) to
exploit anomalies and trend or
performance chasing (Baker and
Ricciardi, 2014)
Overconfidence, Sensation-seeking
(Garling et al., 2009; Cronqvist and
Siegel, 2014), self-attribution bias
(Baker and Ricciardi, 2014)
Loss aversion, mental accounting,
framing, asymmetric risk attitude,
multiple reference points (Garling
et al., 2009; Cronqvist and Siegel, 2014)
Overconfidence, optimism, money
illusion (Cronqvist and Siegel, 2014;
Garling et al., 2009)
Excessive extrapolation, hot hand
fallacy, representativeness (Garling
et al., 2009; Cronqvist and Siegel, 2014;
Baker and Ricciardi, 2014)
Induced by herding, attention and
momentum trading biases
Overconfidence bias (Scott, Stumpp
and Xu, 1999) and herding bias
(Menkhoff and Nikiforow, 2009)
Self-attribution bias and
overconfidence (Baker and Ricciardi,
2014)
Ambiguity aversion; familiarity,
mental accounting; diversification
heuristics; co-variation neglect
(Garling et al., 2009; Cronqvist and
Siegel, 2014)
Herding (Lutje, 2009) and momentum
trading for short-term gains (Suto and
Toshino, 2005) Table V.
Investor preference for familiarity on Investment biases
local market (Menkhoff and Nikiforow, and psychological
2009) mechanisms
MRR a possible solution to understand human thinking, behavior and actions (Bednarik, 2013).
40,5 We argue the same is needed in behavioral finance.
The first is bounded rationality theory. Simon’s (1955) bounded rationality theory
suggests that investors’ decision-making is not fully rational but is bounded rational. It
asserts that because of human cognitive and emotional elements, decisions are normally
goal-oriented and adaptive (Jones, 1999). This is because, as a normal human being, both
592 logic and illogic thinking influence investors’ behaviors. Kahneman (2003) conceptualizes
the dual system of human mind into intuition (System 1) and reasoning (System 2). The
operational processes of System 1 are categorized as fast, automatic, effortless, associative
and emotional. While, the operational processes of System 2 are slower, serial, effortful,
deliberately controlled and rule-governed (Kahneman, 2003). However, we argued that this
theory only described the rational and irrational behavior from the cognitive psychology
perspectives. It does not explain the origin, causes and effects of behaviors.
The second theory is prospect theory. The use of expected utility theory as a descriptive
model of decision-making under risk in modern finance perspective has been criticised first
by Kahneman and Tversky (1979). The model assumption of an economic agent’s full
rationality behavior in real practice does not hold because most of the time, people’s
preferences systematically violate the assumption of expected utility theory (Kahneman and
Tversky, 1979). Accordingly, Kahneman and Tversky suggested prospect theory as an
alternative model of decision-making under risk and uncertainty (Kahneman and Tversky,
1979; Tversky and Kahneman, 1986). Prospect theory distinguishes two phases in
individual choice processes, namely, framing and valuation. In the framing stage, the
individual constructs a representation of the acts, contingencies and outcomes relevant to
the decision. While, in the evaluation stage, an individual assesses each of the prospects
available and chooses decision accordingly (Tversky and Kahneman, 1992). According to
this theory, the choice value function has the following characteristics:
 defined on deviation from the reference point, generally concave for gains and
convex for losses, steeper for losses than for gains; and
 having a nonlinear transformation of the probability scale (Kahneman and
Tversky, 1979; Tversky and Kahneman, 1992).
The limitation is that propsect theory also provides after-the-fact explanation to irrational
behaviors (Warneryd, 2001).
The third is theory of mind. Cognitive scientists draw two separate cognitive
systems of human mind (Evans, 2003). This dual system of human mind is known as
cognitive and affective systems (Abu-Akel and Shamay-Tsoory, 2011; Poletti et al.,
2012; Alos-Ferrer and Strack, 2014). According to this theory, human thinking is
processed by two systems, namely, a cognitive system that comprises knowledge,
beliefs and intentions and an affective system that accounts for emotions, feelings and
mood (Abu-Akel and Shamay-Tsoory, 2011; Poletti et al., 2012). This perspective has
become a popular base for behavioral research in understanding both the rational and
irrational elements in human decision-making and behaviors. This is in line with
Berlin’s (2011) opinion that understanding the individual irrationality requires an
understanding of this basic human mind that underlies both rational and irrational
behaviors. This is also in line with Mukherjee’s (2010) suggestion for a dual-system
model of preferences under risk. In addition, Alos-Ferrer and Strack (2014) argued that
these dual-process ideas and concepts justify the incorporation of bounded rationality
in individual thinking into economic theory.
 The fourth model is the ABC model. Activating–Beliefs–Consequences or in short the Investor
“ABC model” is the cognitive psychology theory of causation that provides an underlying behavioral
theory to understand the cause and effect of behavioral anomalies expressed by investors
and its impact on the stock market. This ABC model is founded by a clinical psychologist,
biases
Dr Albert Ellis, in 1950s (Ellis, 1976). According to this model, the root cause of human
irrational behavior (both by affective and cognitive) can be understood logically by this
theory of causation. According to this model, the C-behavioral consequences (in this case,
behavioral anomalies, can be positive or negative) arise from B-core beliefs or belief system 593
(affect and cognitive which contains both rational and irrational elements) that are triggered
by various A-activating events (Ellis, 1976, 1991; Li and Lee, 2011). A similar approach has
been used by Brahmana et al. (2012) in explaining the psychological factor (i.e. mood) on
irrational financial decision-making in stock market.
To summarize, bounded rationality as an alternative to full rationality first establishes
the theoretical framework for dual decision-making that comprises reasoning (rational-
based) and intuition (irrational-based). The prospect theory as an alternative to expected
utility theory provides theoretical explanations for heterogeneity of behavior. Theory of
human mind provides the neural origin of irrational behavior that is embedded in affective
side of the human mind. Finally, the ABC model facilitates the interpretation of cause and
effects of irrational behaviors. Collectively, these theories can be used as a unified theory in
understanding investor bounded rational behaviors. The next section discusses on how
these theories and the evidences reviewed previously can be connected to form the
conceptual framework in explaining the origins, causes and effects of behavioral biases in
institutional investor settings.

4.2 Conceptual framework

Based on the syntheses of theories and evidences, Figure 2, conceptual framework, is
derived to examine the origin, causes and effects of fund managers’ behavioral biases.
The basic empirical model for the above conceptual framework can be represented as
follow.
4.2.1 Model: (irrational behavior) causes (irrational investment decision) effects (invest-
ment performance). The above conceptual framework is theoretically and empirically
supported. Garling et al. (2009) and Pitters and Oberlechner (2012) also conceptualize that
cognitive biases, affective influence and social influence collectively affect investor behavior
and induce stock market behavior. We provide the same conceptualization, but based on
different theoretical underpinnings. As discussed in the theoretical framework section,
bounded rational theory, prospect theory, theory of mind and the ABC model collectively
explain our conceptual framework.
The origin of behavioral biases can be deduced from the theory of mind, which describes
the human decision that originates from two systems of thinking, namely, cognitive and
affective systems. These systems induce both cognitive heuristics and affective biases
(sentiment, emotion and mood) in human decisions. This theory complements bounded
rational theory and prospect theory collectively in explaining the dynamics of human
behavior. The causes of irrational behavior in inducing irrational investment strategies can
be inferred from the ABC model, which postulates that behaviors are triggered by specific
triggering external events.
In addition, we extend the conceptual framework by taking into account the
heterogeneity of behavioral biases as induced by individual, institutional and cultural traits.
We also examine the theoretical link between behavioral biases (psychological mechanisms)
and investment irrational behavior, which has been relatively neglected.
MRR
40,5

594

Figure 2.
The conceptual
framework: irrational
behavior’s origin,
causes and effects
5. Discussion, conclusion and practical implications Investor
5.1 New insights behavioral
We provide two new insights. First, this paper proposes alternative theoretical perspectives,
i.e. theoretical triangulation (of bounded rationality theory, prospect theory, theory of mind
biases
and ABC model), drawn from knowledge in psychology, sociology and biology. We believe
that this perspective provides a rich understanding on the origin, causes and effect of
irrational behavior of a normal human being. Second, we draw a conceptual framework
based on syntheses of the theories and empirical evidences suggested above in 595
understanding the origin of institutional investors’ irrational behaviors, their influence on
irrational investment management strategies and their direct impact on fund performance.
These theoretical and conceptual perspectives can be corroborated with behavioral finance
postulation that stock prices and market behaviors are not solely based on fundamentals but
also other non-fundamental factors which directly influence investor decision-making. In
this paper, we argue that psychology, sociology and biological forces induce these non-
fundamental factors.

5.2 The next course of actions

Finally, the possible practical implications are highlighted for scholars, practitioners and
regulators.
To scholars, the theoretical and conceptual frameworks drawn in this paper could be
used and empirically examined for future research in understanding the institutional
investor behavioral biases’ origin, causes and effects on investment strategies and
performance. Human behaviors are indeed complex as claimed by many, but understanding
them in depth is possible with the availability and collaborative efforts of interdisciplinary
perspectives. Neglecting to understand these because of complexity is not a rational
decision. Current inquiries have been focusing on explaining behavioral heuristics and
biases on an ad hoc basis and after-the-fact explanations (Warneryd, 2001). To understand
investor behavior, the best approach is to focus on individual decision-making through
detailed interviews, observations and controlled experiments as suggested by Warneryd
(2001). We observe that research in these perspectives is still lacking in finance. We also
observe that in future research, there is a need to take into account the individual, cultural
and institutional differences to recognize the heterogeneity of human behaviors.
To institutional investors, in particular the fund managers, knowledge on behavioral
biases’ origin, causes and effects could be used to devise investment analysis and fund
management strategies to capitalize on the positive effects and to avoid negative effects of
behavioral biases. Shefrin (2000), Fromlet (2001) and Montier (2002) have warned of the
serious repercussion if behavioral biases are ignored in investment analysis. A list of
strategies and checklist to overcome behavioral errors has been discussed by Kahneman
and Riepe (1998), Fromlet (2001) and Baker and Ricciardi (2014).
Insights for behavioral asset pricing modeling – Priced risk of investing in any financial
instrument comprises both the fundamental and behavioral risks. As such, there is a need to
consider various behavioral biases in asset pricing modeling. Scholars in behavioral finance
have suggested some new asset pricing theories by combining both fundamental and
behavioral risks to determine asset returns. Main reference to this area is behavioral capital
asset pricing theory by Shefrin and Statman (1994), investor psychology in asset pricing by
Hirshleifer (2001), affect in a behavioral asset pricing model by Statman and Anginer (2008)
among others.
Insights for behavioral portfolio management – A recent comprehensive review of
behavioral biases in fund management industry is provided by Cuthbertson et al. (2016).
MRR This article highlighted the presence of behavioral biases among individual fund managers,
40,5 fund governance and organizational structure. Despite the threats, behavioral biases can be
capitalized as a strategy to device investment analysis and to develop a sustainable fund
portfolio. The behavioral portfolio theory by Shefrin and Statman (2000) highlighted the
needs to manage the behavioral risks’ influences to investment portfolio returns through
portfolio selection and diversification. In investment analysis application, Bollinger (2008)
596 suggested combining fundamental, technical, quantitative and behavioral analysis
perspectives. In investment portfolio management, lessons can be learned from some good
examples of fund managers in the USA that have incorporated the behavioral finance theory
into their investment analysis and management strategies. For instance, MarketPsych LLC
(https://marketpsych.com) is an investment analysis company that is focusing on behavioral
risks analysis based on psychoanalysis and neuroscience perspectives. In equity portfolio
management, Fuller & Thaler Asset Management, Inc. (http://fullerthaler.com) are using the
bottom-up approach to exploit insights from behavioral finance to manage their funds.
To the financial markets regulators, this paper has highlighted the needs to regulate these
behavioral risks as stressed in Daniel et al. (2002). This regulation helps to mitigate the
effects of irrational behavior and imperfect markets. In this regard, they suggested two
important issues for public policy, namely, to come up with policies which help investors
avoid errors and to promote the efficiency of the markets. Governing the financial markets
against behavioral risks is needed (Suto and Toshino, 2005) and particularly crucial in Asian
financial markets because of psychological and sociological inclination of market
participants in Asia which have been reported to be more prone and vulnerable to
behavioral biases (Kim and Nofsinger, 2008). This issue remains relevant and is still being
neglected in fund management industry management and governance framework globally
(Cuthbertson et al., 2016).
Collectively, the applications of behavioral finance theory and strategies to govern the
behavioral biases on the part of investors, institutions and in the marketplace are crucial.
Urgent attention and policy commitment is needed to be in place to protect the welfare of the
investors and the efficiency of the financial markets. These can be valuable complementary
strategies toward building a sustainable investment management practice that will benefit
the investing society, the industry and the nation.

Notes
1. See Filbeck et al., 2005 for detailed descriptions.
2. See Mayfield et al., 2008 for detailed descriptions.
3. See Blais and Weber (2006) for detail of questions.

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Further reading
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Corresponding author
Zamri Ahmad can be contacted at: zahmad@usm.my

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