The Impact of Heuristic Biases on Investors’ Investment Decision Making; Evidence from Colombo Stock Exchange

This paper aims to investigate the impact of heuristic biases on the decision making of individual investors’ who are actively trading on Colombo Stock Exchange (CSE). Most studies focus on well-developed financial markets and very little is known about investors’ behaviour in less developed financial markets or emerging markets. The present study contributes to filling this gap in the literature. Investors’ heuristic biases have been measured using a five-point Likert scale questionnaire which contained numerous items including indicators of investment decisions. The sample consists of 140 individual investors trading on the CSE. The systematic random sampling technique was used for data collection. To examine the impact of heuristic biases on investment decision making, hypotheses were tested by using multiple regression analysis. The results suggest that, there is a significant impact from the heuristic bias create from the initial piece of information (Anchoring and adjustment bias) over the investment decision making. But other biases such as the overconfidence bias, representativeness bias and availability bias are not much significantly impact on investment decision making by the individual investors in CSE. The paper inspires the investors to avoid relying on heuristic biases when making investments. It provides awareness and understanding of heuristic biases in investment management which could be really worth for decision makers and professionals in financial institutions, such as portfolio managers and traders in commercial banks, investment banks and mutual funds. This paper helps investors to select better investment tools and to avoid repeating expensive errors, which occur because of heuristic biases. So, it is necessary to focus on a specific investment strategy to control mental mistakes by investors due to heuristic biases.