Does salience matter in investment decision? Differences between individual and professional investors

Abstract

Purpose

The paper takes a behavioral approach by making use of the prospect theory to unveil the impact of salience on short-term and long-term investment decisions. This paper aims to investigate the group differences for two types of investors’ groups, i.e. individual investors and professional investors.

Design/methodology/approach

The study uses partial least square-based structural equation modeling technique, measurement invariance test and multigroup analysis test on a unique data set of 277 active equity traders which included professional money managers and individual investors.

Findings

Results showed that salience has a significant positive impact on both short-term and long-term investment decisions. The impact was almost 1.5 times higher for long-term investment decision as compared to short-term decision. Furthermore, multigroup analysis revealed that the two groups (individual investors and professional investors) were statistically significantly different from each other.

Research limitations/implications

The study has implications for financial regulators, money managers and individual investors as it was found that individual investors suffer more with salience heuristic and may end up with sub-optimal portfolios due to inefficient diversification. Thus, investors should be cautious in fully relying on salience and avoid such bias to improve investment returns.

Practical implications

The study concludes with a discussion of policy and regulatory implications on how to minimize salience bias to achieve optimum and diversified portfolios.

Originality/value

The study has significantly contributed to the growing body of applied behavioral research in the discipline of finance.

Citation

Chaudary, S. (2019), "Does salience matter in investment decision? Differences between individual and professional investors", Kybernetes, Vol. 48 No. 8, pp. 1894-1912. https://doi.org/10.1108/K-09-2018-0490