Influence of heuristics and framing factors on speculating and investment behavior: Evidence from individual traders in the Saudi stock market / Ibrahim Tawfeeq Alsedrah

Abstract

Traditional finance (TF) assumes that people are rational. However, TF ignores the fact that people are human; their decisions, and subsequently, their behaviors, are influenced by emotions and psychology, especially when trading in the stock market. Therefore, Behavioral Finance (BF) has arisen to compliment TF. BF is a relatively new field that applies psychology to financial decisions and subsequently examines its effects on stock prices and the market. Most BF studies are conducted in developed markets, which are dominated by institutional investors. Most of these studies have used the experimental approach, and a few have used observation of trading accounts. However, there remains a lack of quantitative studies using surveys, especially in frontier markets like the Saudi Stock Market (SSM). The SSM is dominated by individuals who control around 90% of the market value. The market has witnessed stock mispricing, market inefficiency and sharp corrections, which have negatively affected individuals’ investments. Irrational behavior on the part of individuals is suspected to be the root of this problem. While many studies that have been published examine rationality in decision making in emerging and developed markets, little is known about the behavior of individuals in the Saudi stock market. In response to these issues, this research aims to determine the degree of heuristics and framing factors exhibited by individuals and to propose a theoretical model that explains the influence of heuristics and framing factors on individual speculating and investment buying behavior simultaneously. It then aims to quantify how much speculation and investment behavior is due to the influence of heuristics and framing factors