Overcoming Cognitive Biases: A Heuristic for Making Value Investing Decisions

Otuteye, E., & Siddiquee, M. (2015). Overcoming Cognitive Biases: A Heuristic for Making Value Investing Decisions. Journal of Behavioral Finance, 16(2), 140-149

17 Pages Posted: 23 Jul 2013 Last revised: 17 Oct 2017

Eben Otuteye

Faculty of Business Administration, University of New Brunswick

Mohammad Siddiquee

Department of Business Administration and Tourism and Hospitality Management, Mount Saint Vincent University

Date Written: April 26, 2013

Abstract

Investment decisions are subject to error due to cognitive biases of the decision makers. One method for preventing cognitive biases from influencing decisions is to specify the algorithm for the decision in advance and to apply it dispassionately. Heuristics are useful practical tools for simplifying decision making in a complex environment due to uncertainty, limited information and bounded rationality. We develop a simple heuristic for making value investing decisions based on profitability, financial stability, susceptibility to bankruptcy, and margin of safety. This achieves two goals. First, it simplifies the decision making process without compromising quality and secondly it enables the decision maker to avoid potential cognitive bias problems.

Keywords: value investing, cognitive biases, heuristics, margin of safety

Suggested Citation

Otuteye, Eben and Siddiquee, Mohammad, Overcoming Cognitive Biases: A Heuristic for Making Value Investing Decisions (April 26, 2013). Otuteye, E., & Siddiquee, M. (2015). Overcoming Cognitive Biases: A Heuristic for Making Value Investing Decisions. Journal of Behavioral Finance, 16(2), 140-149. Available at SSRN: https://ssrn.com/abstract=2297170

Eben Otuteye

Faculty of Business Administration, University of New Brunswick ( email )

Fredericton, New Brunswick E3B5A3
Canada

Mohammad Siddiquee (Contact Author)

Department of Business Administration and Tourism and Hospitality Management, Mount Saint Vincent University ( email )

166 Bedford Highway
Halifax, Nova Scotia B3M 2J6
Canada
902-457-6931 (Phone)
902-445-2582 (Fax)

HOME PAGE: http://www.msvu.ca

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