Learning Behaviour of Individual Investors and its Effect on their Behavioural Bias: The Mediating Role of Self-reflection

Abstract

Abstract Adding a new perspective to the bias-learning behaviour of investors, this paper aims to explore how the trading experience produces learning effects to reduce their behavioural biases. A web-based self-administrated questionnaire survey was conducted to a random sample of 1000 individual investors of the Colombo Stock Exchange, of which 189 valid responses were received during the study period from March to August 2018. The data analysis was performed by applying the Structural Equation Modelling technique to test the hypotheses of the conceptual model. The findings reveal that the learning occurs when past trading experiences are self-reflected to assess the validity of the mental frames underlying those past decisions, which consequently minimizes herd bias. The results also show that this self-reflection process has a full mediating effect on the relationship between the experience and herd bias. Accordingly, contrary to the reinforcement learning assumption used in the previous studies, this paper concludes that the past experiences do not itself produce learning effects, rather, should be cognitively reflected upon to reduce behavioural biases in decision making. Nevertheless, it is also found that the self-reflection is not strengthened by the relationships with investment advisors and other investors, which could be attributed to the market uncertainties occurred during the period of the study and the dominance of unsophisticated investors in the market. Keywords: