Antecedents to heuristics: decoding the role of herding and prospect theory for Indian millennial investors

Abstract

PurposeThe purpose of this paper is to explore how heuristics are formed and whether herding and prospect theory act as antecedents to heuristics. The relationship is explored specifically for millennials.Design/methodology/approachThe proposed relationship is explored specifically for millennials. Herding and prospect theory are modelled as antecedents to heuristics. The study uses survey data from 923 millennials from India to test the model for two financial products: equity and mutual funds. Regression analysis is used to evaluate the model.FindingsFindings support the role of herding and prospect theory as antecedents to heuristics of millennials although to varying degrees for equity and mutual fund investments. The impact of herding on heuristics is likely to be smaller for equity investments as compared to mutual fund investments.Research limitations/implicationsThe findings provide insights into how heuristics are formed for millennials. The findings add to literature by beginning a new line of inquiry on how heuristics are formed. Since the model is tested on a single generation, future research can test the model on other generations. In addition, future research can also add more antecedents to our proposed model.Practical implicationsFindings from this study can provide financial planners and marketers with an understanding of how heuristics are formed for millennials. Financial planners can use these insights while providing financial advice to this generation and marketers can use them to create more relevant outreach.Social implicationsFinancial investments are an important conduit for financial security. By understanding the cognitive processes that influence financial investment decision-making, it is possible for educators to create content appropriately and for financial planners to advise clients accordingly to enable optimal financial decisions that will be wealth-creating.Originality/valueExisting literature primarily treats heuristics, herding and prospect theory as being independent of each other. The authors take a novel approach to model the antecedents to heuristics to be herding and prospect theory. The model is tested on millennials for two financial products: equity and mutual funds.

Impact of Individual Decision-Making Factors on Project Failure

“…Critical cognitive processes that influence individuals' decision-making include heuristics, herding, and prospect theory (Goyal, Gupta and Yadav, 2021). Heuristics refers to the reliance on mental shortcuts in decision-making.…”

“…Heuristics refers to the reliance on mental shortcuts in decision-making. These heuristics include overconfidence, representativeness, and anchoring (Goyal, Gupta and Yadav, 2021). Jordão et al (2020) highlight the influence of biased thinking on producing irrational decisions even when all the relevant facts are readily available to them.…”

“…The effects are dominant and destructive among all the biases and drivers for the remaining biases (Bazerman and Moore, 2013). Overconfidence refers to the tendency of the decision-makers to believe that they are better than what they are (Goyal, Gupta and Yadav, 2021). Some of the factors contributing to overconfidence include age and external factors (Goyal, Gupta and Yadav, 2021).…”

“…Overconfidence refers to the tendency of the decision-makers to believe that they are better than what they are (Goyal, Gupta and Yadav, 2021). Some of the factors contributing to overconfidence include age and external factors (Goyal, Gupta and Yadav, 2021). Overconfidence affects corporate investment decisions and the performance of traders investing in markets.…”

“…Despite the high failure rate, overconfidence is responsible for situations like stock market bubbles, continuous bets on acquisitions, and organizational mergers (Jordão et al, 2020). Studies have shown both positive and negative influences of overconfidence on investor returns (Goyal, Gupta and Yadav, 2021). Unrealistic optimism tends to overestimate the positivism of the future (Jordão et al, 2020).…”