Which heuristics can aid financial-decision-making?

© 2015 Elsevier Inc. We evaluate the contribution of Nobel Prize-winner Daniel Kahneman, often in association with his late co-author Amos Tversky, to the development of our understanding of financial decision-making and the evolution of behavioural finance as a school of thought within Finance. Whilst a general evaluation of the work of Kahneman would be a massive task, we constrain ourselves to a more narrow discussion of his vision of financial-decision making compared to a possible alternative advanced by Gerd Gigerenzer along with numerous co-authors. Both Kahneman and Gigerenzer agree on the centrality of heuristics in decision making. However, for Kahneman heuristics often appear as a fall back when the standard von-Neumann-Morgenstern axioms of rational decision-making do not describe investors' choices. In contrast, for Gigerenzer heuristics are simply a more effective way of evaluating choices in the rich and changing decision making environment investors must face. Gigerenzer challenges Kahneman to move beyond substantiating the presence of heuristics towards a more tangible, testable, description of their use and disposal within the ever changing decision-making environment financial agents inhabit. Here we see the emphasis placed by Gigerenzer on how context and cognition interact to form new schemata for fast and frugal reasoning as offering a productive vein of new research. We illustrate how the interaction between cognition and context already characterises much empirical research and it appears the fast and frugal reasoning perspective of Gigerenzer can provide a framework to enhance our understanding of how financial decisions are made

How markets react to earnings announcements in the absence of analysts and institutions: evidence from the Saudi market

How stock markets react to news is an established area of research. We examine the behaviour of the Saudi Stock Market (SSM) in response to quarterly earnings announcements where there are no analysts' forecasts, with the aim of examining the efficiency of the market. The SSM seems to underreact to positive news for the first five days and then reactions tend to strengthen in the following weeks, indicating the presence of a Post-Earnings Announcement Drift (PEAD). At the same time, the SSM overreacts to negative news in the first five days and then reverses its direction and reports an upward PEAD. The individually dominated market combined with the absence of analysts' forecasts is the main explanation for this underreaction to positive news and overreaction to negative news.PEAD; post-earnings announcement drift; market efficiency; analyst forecasts; SSM; Saudi stock market; over-reaction; under-reaction; Saudi Arabia; stock markets; quarterly earnings announcements; positive news; negative news.