Please use this identifier to cite or link to this item: http://hdl.handle.net/11328/1985
Title: The use of the recognition heuristic as an investment strategy in European stock markets
Authors: Lobão, Júlio
Pacheco, Luís Miguel
Pereira, Carlos
Keywords: Investiments
Behavioural finance
Stock returns
Finantial market
Recognition heuristic
Issue Date: 5-Dec-2017
Publisher: Emerald
Citation: Lobão, J., Pacheco, L. M., & Pereira, C. (2017). The use of the recognition heuristic as an investment strategy in European stock markets. Journal of Economics, Finance and Administrative Science, 22(43), 207-223. doi: 10.1108/JEFAS-01-2017-0013. Disponível no Repositório UPT, http://hdl.handle.net/11328/1985
Abstract: Purpose People often face constraints such as a lack of time or information in taking decisions, which leads them to use heuristics. In these situations, fast and frugal rules may be useful for making adaptive decisions with fewer resources, even if it leads to suboptimal choices. When applied to financial markets, the recognition heuristic predicts that investors acquire the stocks that they are aware of, thereby inflating the price of the most recognized stocks. This paper aims to study the profitability against the market of the most recognized stocks in Europe. Design/methodology/approach In this paper, the authors perform a survey and use Google Trends to study the profitability against the market of the most recognized stocks in Europe. Findings The authors conclude that a recognition heuristic portfolio yields poorer returns than a market portfolio. In contrast, from the data collected on Google Trends, weak evidence was found that strong increases in companies monthly search volumes may lead to abnormal returns in the following month. Research limitations/implications The applied investment strategy does not account for transaction costs, which may jeopardize its profitability given the fact that it is necessary to revise the portfolio on a monthly basis. Despite the results obtained, they are useful to understanding the performance of recognition heuristic strategies over a comprehensive time horizon, and it would be interesting to depict its viability during different market conditions. This analysis could provide additional information about a preferable scenario for employing our strategies and, ultimately, enhance the profitability of recognition heuristic strategies. Practical implications Through the exhaustive analysis performed here on the recognition heuristic in the European stock market, it is possible to conclude that no evidence was found for the viability of exploring this type of strategy. In fact, the investors would always gain better returns when adopting a passive investment strategy. Therefore, it would be wise to assume that the European market presents at least a degree of efficiency where no investment would yield abnormal returns following the recognition heuristic. Originality/value The main objective of this paper is to study the performance of the recognition heuristic in the financial markets and to contribute to the knowledge in this field. Although many authors have already studied this heuristic when applied to financial markets, there is a lack of consensus in the literature.
URI: http://hdl.handle.net/11328/1985
Appears in Collections:REMIT – Artigos em Revistas Internacionais / Papers in International Journals

Files in This Item:
File Description SizeFormat 
The use of the recognition heuristic as an investment strategy in European stock markets.pdf318.2 kBAdobe PDFView/Open


Items in DSpace are protected by copyright, with all rights reserved, unless otherwise indicated.