The role of house money effect and availability heuristic in investor behavior

Chieh Shuo Chen, Jia Chi Cheng, Fang Chi Lin, Chihwei Peng

Research output: Contribution to journalArticle

2 Citations (Scopus)

Abstract

Purpose: The house money effect is proposed to describe that people appear to consider large or unexpected wealth gains to be distinct from the rest of their wealth, and are thus more willing to gamble with such gains than they ordinarily would be. On the other hand, the availability heuristic describes that people tend to have a cognitive and systematic bias due to their reliance on easily available or associational information. The purpose of this paper is to employ these behavioral perspectives in an empirical model regarding the January anomaly to explore investor behavior in Taiwanese stock market with bonus culture and well-known electronics industry. Design/methodology/approach: This study uses the conventional and standard dummy variable regression model, as employed in prior studies, and further includes some control variables for firm, industry and macro-economic level factors. Moreover, 19 industrial indices for Taiwanese stock market over the period January 1990 to December 2014 are included in this study to examine the hypotheses, except for the 1997 Asian financial crisis and the global financial crisis period of 2007-2009 to avoid the potential effect. On the other hand, the authors also use the entire sample period of 1990-2014 for understanding whether the magnitude of January effect is different. Findings: The empirical results indicate that Chinese bonus payments in January induce a strong January effect in the Taiwanese stock market, especially when most listed firms have positive earnings growth in the preceding year, suggesting a house money effect. Moreover, this study further provides some preliminary evidence that the higher January returns due to bonus culture are apparent only in the electronics industry when both Chinese New Year and bonus payments are in January, implying the role of availability heuristic based on the electronics stocks in investor behavior before the impending stock exchange holidays. Some robust tests show qualitative support. Research limitations/implications: The major contribution of this study is to extend the existing research by incorporating cultural and industrial factors with behavioral finance, thus enriching the literature on the causes of seasonality for Asian stock markets. Practical implications: This study also has behavioral implications of investments for investors in the Taiwanese stock market, especially for foreign institutional investors which pay close attention to this market. Originality/value: This study first applies and examines the culture bonus hypothesis with regard to how employees who receive culture bonuses in January can change their attitudes toward risk and induce the January effect from the concept of mental accounting. Moreover, this study further proposes and examines the extended culture bonus hypothesis related to how the January effect due to culture bonus is different for the electronics and non-electronics industries when taking into account the stock market holidays from the concept of availability heuristic.

Original languageEnglish
Pages (from-to)1598-1612
Number of pages15
JournalManagement Decision
Volume55
Issue number8
DOIs
Publication statusPublished - 2017 Jan 1

Fingerprint

Investor behavior
Availability heuristic
Bonus
Stock market
January effect
Electronics industry
Wealth
Factors
Holidays
Payment
Industry
Dummy variables
Asian stock markets
Employees
Gambles
Behavioral finance
Earnings growth
Stock exchange
Anomaly
Bonuses

All Science Journal Classification (ASJC) codes

  • Business, Management and Accounting(all)
  • Management Science and Operations Research

Cite this

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title = "The role of house money effect and availability heuristic in investor behavior",
abstract = "Purpose: The house money effect is proposed to describe that people appear to consider large or unexpected wealth gains to be distinct from the rest of their wealth, and are thus more willing to gamble with such gains than they ordinarily would be. On the other hand, the availability heuristic describes that people tend to have a cognitive and systematic bias due to their reliance on easily available or associational information. The purpose of this paper is to employ these behavioral perspectives in an empirical model regarding the January anomaly to explore investor behavior in Taiwanese stock market with bonus culture and well-known electronics industry. Design/methodology/approach: This study uses the conventional and standard dummy variable regression model, as employed in prior studies, and further includes some control variables for firm, industry and macro-economic level factors. Moreover, 19 industrial indices for Taiwanese stock market over the period January 1990 to December 2014 are included in this study to examine the hypotheses, except for the 1997 Asian financial crisis and the global financial crisis period of 2007-2009 to avoid the potential effect. On the other hand, the authors also use the entire sample period of 1990-2014 for understanding whether the magnitude of January effect is different. Findings: The empirical results indicate that Chinese bonus payments in January induce a strong January effect in the Taiwanese stock market, especially when most listed firms have positive earnings growth in the preceding year, suggesting a house money effect. Moreover, this study further provides some preliminary evidence that the higher January returns due to bonus culture are apparent only in the electronics industry when both Chinese New Year and bonus payments are in January, implying the role of availability heuristic based on the electronics stocks in investor behavior before the impending stock exchange holidays. Some robust tests show qualitative support. Research limitations/implications: The major contribution of this study is to extend the existing research by incorporating cultural and industrial factors with behavioral finance, thus enriching the literature on the causes of seasonality for Asian stock markets. Practical implications: This study also has behavioral implications of investments for investors in the Taiwanese stock market, especially for foreign institutional investors which pay close attention to this market. Originality/value: This study first applies and examines the culture bonus hypothesis with regard to how employees who receive culture bonuses in January can change their attitudes toward risk and induce the January effect from the concept of mental accounting. Moreover, this study further proposes and examines the extended culture bonus hypothesis related to how the January effect due to culture bonus is different for the electronics and non-electronics industries when taking into account the stock market holidays from the concept of availability heuristic.",
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The role of house money effect and availability heuristic in investor behavior. / Chen, Chieh Shuo; Cheng, Jia Chi; Lin, Fang Chi; Peng, Chihwei.

In: Management Decision, Vol. 55, No. 8, 01.01.2017, p. 1598-1612.

Research output: Contribution to journalArticle

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