Overcoming Cognitive Biases: A Heuristic for Making Value Investing Decisions
Year: 2015
Type: article
Abstract: Investment decisions are subject to error due to cognitive biases of the decision makers. One method for preventing cognitive biases from influencing decisions is to specify the algorithm for the decision in advance and to apply it dispassionately. Heuristics are useful practical tools for simplifying decision making in a complex environment due to uncertainty, limited information and bounded rationality. We develop a simple heuristic for making value investing decisions based on profitability, financial stability, susceptibility to bankruptcy, and margin of safety. This achieves two goals. First, it simplifies the decision making process without compromising quality, and second, it enables the decision maker to avoid potential cognitive bias problems.
Source: Journal of Behavioral Finance
Authors: Eben Otuteye, Mohammad Siddiquee
Institutions: University of New Brunswick, Mount Saint Vincent University
Language: English
Subfield: Finance
Domain: Social Sciences
Open Access status: green
OpenAlex ID: W2125659641