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Perception of past portfolio returns, optimism and financial decisions

Author

Listed:
  • Mohammad Tariqul Islam Khan
  • Siow-Hooi Tan
  • Lee-Lee Chong

Abstract

Purpose - The purpose of this paper is to examine the relationships among perception of past portfolio returns, optimism and financial decisions. Design/methodology/approach - The relationships are examined using a data set of both retail and institutional investors in Malaysia and estimated using ordinary least square regression. Findings - The results demonstrate that perception of past portfolio returns influences both retail and institutional investors’ trading and risk taking. Optimism measured as relative investment optimism and personal investment optimism similarly influences both groups of investors’ financial decisions. However, perception of past portfolio returns causes only retail investors to exhibit optimism. The results furthermore show that only for retail investors perception of past portfolio returns indirectly influences financial decisions, through the mediating channel of optimism. Practical implications - The findings on the influences of perception of past portfolio returns and the mediating channel in decision process help to understand the differences between retail and institutional investors. Retail investors are found to be more susceptible to optimism. Therefore, regulators in Malaysia may enhance their initiatives by incorporating the peril of forming optimistic expectations in financial decisions, by giving special focus on retail investors. Originality/value - This paper focuses on investors’ perception of past portfolio returns and its influence on various financial decisions, unlike past portfolio returns or market returns. Also, this paper is among the first to demonstrate the mediating channel of optimism in investors’ decision process.

Suggested Citation

  • Mohammad Tariqul Islam Khan & Siow-Hooi Tan & Lee-Lee Chong, 2017. "Perception of past portfolio returns, optimism and financial decisions," Review of Behavioral Finance, Emerald Group Publishing Limited, vol. 9(1), pages 79-98, April.
    • Handle: RePEc:eme:rbfpps:rbf-02-2016-0005
    DOI: 10.1108/RBF-02-2016-0005
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    Citations

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    Cited by:

    1. Ritika & Nawal Kishor, 2020. "Development and validation of behavioral biases scale: a SEM approach," Review of Behavioral Finance, Emerald Group Publishing Limited, vol. 14(2), pages 237-259, November.
    2. Shelly Srivastava & Supriyo Roy, 2023. "Impact of Equity Investment Intention Towards Behaviour: An Empirical Analysis," Vision, , vol. 27(3), pages 329-346, June.
    3. Mohammad Tariqul Islam Khan & Siow-Hooi Tan & Gerald Goh Guan Gan, 2019. "Advanced Financial Literacy of Malaysian Gen Y Investors and Its Consequences," Margin: The Journal of Applied Economic Research, National Council of Applied Economic Research, vol. 13(1), pages 83-108, February.

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