The current issue and full text archive of this journal is available on Emerald Insight at:

www.emeraldinsight.com/1940-5979.htm

Past portfolio
Perception of past portfolio returns
returns, optimism and
financial decisions
Mohammad Tariqul Islam Khan 79
Faculty of Business, Multimedia University Melaka, Malaysia, and
Received 12 February 2016
Siow-Hooi Tan and Lee-Lee Chong Revised 23 April 2016
Accepted 24 April 2016
Faculty of Management, Multimedia University, Cyberjaya, Malaysia

Abstract
Purpose – The purpose of this paper is to examine the relationships among perception of past portfolio
returns, optimism and financial decisions.
Design/methodology/approach – The relationships are examined using a data set of both retail and
institutional investors in Malaysia and estimated using ordinary least square regression.
Findings – The results demonstrate that perception of past portfolio returns influences both retail and
institutional investors’ trading and risk taking. Optimism measured as relative investment optimism and
personal investment optimism similarly influences both groups of investors’ financial decisions. However,
perception of past portfolio returns causes only retail investors to exhibit optimism. The results furthermore
show that only for retail investors perception of past portfolio returns indirectly influences financial decisions,
through the mediating channel of optimism.
Practical implications – The findings on the influences of perception of past portfolio returns and the
mediating channel in decision process help to understand the differences between retail and institutional
investors. Retail investors are found to be more susceptible to optimism. Therefore, regulators in Malaysia
may enhance their initiatives by incorporating the peril of forming optimistic expectations in financial
decisions, by giving special focus on retail investors.
Originality/value – This paper focuses on investors’ perception of past portfolio returns and its influence on
various financial decisions, unlike past portfolio returns or market returns. Also, this paper is among the first
to demonstrate the mediating channel of optimism in investors’ decision process.
Keywords Malaysia, Perception, Optimism, Financial decisions, Past portfolio returns
Paper type Research paper

1. Introduction
Investors’ perception and its influences on financial decisions are gaining more attention in
behavioral finance literature. In particular, investors’ perceptions regarding products and
brands of the company, opinion of market efficiency, risk and return expectations are found
to influence various financial decisions such as trading, stock investing, risk taking and the
use of technical analysis (Hoffmann et al., 2015; Aspara, 2013; Doran et al., 2010; Menkhoff,
2010). Besides, it has been demonstrate that perception of past investment outcome
influences investors’ behavioral characteristics (e.g. Merkle, 2013; Weber et al., 2013).
While the extant literature suggests that perception may influence investors’ financial
decisions as well as their propensity to exhibit certain behavior, however, this literature does not
provide evidence on how perception of past portfolio returns influences financial decisions and
behavioral characteristics in an integrated model. To address this literature gap, this paper
proposed a new conceptual model, which argues that perception of past portfolio returns
influences investors’ financial decisions such as trading, risk taking and risky asset allocation
decisions. Moreover, such perception of past returns influences investors to exhibit optimism.
Optimism in turn influences these financial decisions. In this proposed model, optimism appears
as a potential mechanism between perception of past portfolio returns and financial decisions. Review of Behavioral Finance
Vol. 9 No. 1, 2017
pp. 79-98
Financial support provided by the Ministry of Higher Education (MOHE), Malaysia under © Emerald Publishing Limited
1940-5979
Fundamental Research Grant Scheme (Grant No: EP20101103001) is gratefully acknowledged. DOI 10.1108/RBF-02-2016-0005
RBF The influence of perceptions in financial decisions is typically considered as contrasting the
9,1 notion of efficient market theory (Kaplanski et al., 2015). Efficient market theory implies that
investors’ perception of past portfolio returns should not have any influence on subsequent
financial decisions. That is investors should not belief in autocorrelation of portfolio returns. This
view contrasts perception’s influence and thus increases the necessity to study the relationships
among perception of past portfolio returns, optimism and numerous financial decisions.
80 Optimism is proposed as an intermediary channel between perception of past portfolio
returns and financial decisions. Optimism manifests in different forms in financial domain
depending on the purpose of the study (Puri and Robinson, 2007; Jacobsen et al., 2014;
Weinstock and Sonsino, 2014). However, less research has been focused on investors’
optimism toward portfolio investment. This paper envisages that investors’ optimism
relating to portfolio investment would be most relevant in their financial decisions and
perception of past portfolio returns. Psychological literature defines optimism in both
absolute and relative terms. Optimism in relative context seems to be consistent with the
psychological definition of comparative optimism, while optimism in absolute context seems
to be relevant with dispositional optimism (Harris and Middleton, 1994; Scheier et al., 1994).
Following this two aspects of optimism, this paper investigates investors’ optimism toward
portfolio investment in relative and absolute terms. While optimistic phenomenon has been
widely demonstrated as mediating channel in psychology (Eren, 2012; Karademas, 2006),
it has gained little attention in investors’ decision-making process.
To pursue the aim of this paper, the Malaysian stock market offers several interesting
features. First of all, there is a growing level of optimism among Malaysian consumers
revealed by consumer confidence index (Nielsen, 2014). The ING investment dashboard
survey reports that 61 percent of individuals show optimism about the improvement of their
personal finances. One important finding of their survey is that individuals exhibiting
optimism about personal finances are more likely to invest in risky securities (The Edge
Financial Daly, 2010). This motivates to investigate detailed about investors’ optimism toward
portfolio investment. Second, this paper intends to investigate both retail and institutional
investors’ optimism in the Malaysian stock market where institutional investors dominate the
market. Besides, retail investors also play an important role as regulators continuously
attempt to increase the number of retail participation in the market (Securities Commission
Malaysia, 2011). Taking this into account, the study considers the whole market, in addition to
investigate the robustness of proposed model across different sample.
A field survey was conducted on retail and institutional investors to test the relationships
among perception of past portfolio returns, optimism and financial decisions. To describe the
results shortly, first of all, perception of past portfolio returns influences both retail and
institutional investors’ trading and risk-taking decisions. Symmetrically, optimism influences
trading and risk taking of these two groups of investors. But, the differences have been observed
regarding the influences of perception of past portfolio returns on risky asset allocation and
optimism characteristics, and furthermore considering the intermediary channel. Second, the
mediating channel in decision process has been found only for retail investors, where perception
of past portfolio returns influences financial decisions, through the indirect effect of optimism.
This paper contributes to the behavioral finance literature by showing the stronger
influences of perception of past portfolio returns on retail and institutional investors’ financial
decisions, which contrasts the fundamental notion of efficient market theory. More
importantly, the introduction of intermediary stage of optimism in financial decisions of retail
investors furthermore contributes to the emerging literature on optimism in financial domain.

2. Conceptual model and hypotheses development

In developing the conceptual model, the study relies on the extant literature that provides the
groundwork for the proposed model as shown in Figure 1. In the beginning, the study establishes
 H1a Past portfolio
Relative investment H3a Annual portfolio
returns
optimism turnover
H3b
H2a H5a
H3c

H3d Trading intention

Perception of past
portfolio returns
H1b
H5b 81
H1c
H5c
Hypothetical risk
H4a taking
H4b
H5d
H2b
H4c
Personal investment
optimism H4d Risky asset Figure 1.
allocation
Conceptual model
H1d

the link between perception of past portfolio returns and financial decisions. Empirical research
has shown that perceptions with respect to return expectations, risk perception and risk tolerance
and changes therein lead to trading and risk-taking decisions of Dutch individual investors
(Hoffmann et al., 2015). In other way around, Kaplanski et al. (2015) report that short-term past
realized returns are positively correlated with the following month’s perceived Sharpe ratio
defined in terms of perceived risk and return in a survey of Dutch individual investors. Their
study provides the association between past market returns and investors’ perception.
In this study, the attention has been paid to investors’ perception of past portfolio returns as
investors’ perception of their own portfolio returns may be most relevant for their financial
decisions. A well-documented representativeness heuristic indicates that past returns provide
useful information about future (DeBondt, 1993). Empirical findings confirm that individual
investors view past returns as a representative of future and based on this perception they make
their future buying and selling decisions (Chen et al., 2007). This is explained by investors’
propensity to rely on heuristic simplification rather than engaging in longer analytical process.
It is also anticipated that past return experiences influence individual’s additional risk
taking. In Taiwan future market, morning gains cause different types of traders to take above-
average risks in the afternoon (Liu et al., 2010). Weber et al. (2013) show that risk and return
expectations toward market and own portfolio, and risk attitude induce changes in risk taking
in hypothetical task in a panel survey in the UK. They advocate that subjective expectations
have better predictive ability, which results from the risk-as-feeling hypothesis compared to
numeric measurements of market returns and volatility (Barberis et al., 1998; Weber and Hsee,
1998; Loewenstein et al., 2001; Baker and Wurgler, 2006). Investors incorporate feeling of gains
and losses into their perceptions when making risk-taking decision. Loewenstein et al. (2001)
report that affective reaction to previous gains or losses influences an individual’s risk and
return perceptions, which subsequently influence risky decisions.
While perception of prior returns may influence investors’ trading and risk-taking
decisions, it can also influence portfolio composition of financial assets. Huberman and
Sengmueller (2004) use data from 401(k) retirement plans and conclude that in response to
recent return experiences employees change their contribution plans and they do this
frequently when the return exceeds the S&P 500 index. Incorporating all three important
financial decisions, the study hypothesizes that:
H1a. Investors’ perception of past portfolio returns will increase their annual portfolio
turnover.
RBF H1b. Investors’ perception of past portfolio returns will increase their trading intention.
9,1 H1c. Investors’ perception of past portfolio returns will increase their hypothetical risk
taking.
H1d. Investors’ perception of past portfolio returns will increase their risky asset allocation.
The literature on the role of past returns suggests that investors’ propensity to exhibit certain
82 behavior depends on their perception of past portfolio returns. Malmendier and Nagel (2011)
report that positive past market returns cause investors to display optimism about the stock
market using US household data from the Survey of Consumer Finance. Empirical research
also shows that in response to prior return experiences investors tend to update their
optimistic beliefs by using transaction records and survey from the Netherlands (Hoffmann
and Post, 2015). This can be explained by investors’ excessive extrapolation of previous return
experiences. Hot-hand fallacy is another alternative explanation, which suggests that
investors infer positive beliefs from their personally experienced gains and expect the gains to
be persistent in the future (DeBondt, 1993; Benartzi, 2001; Johnson et al., 2005). Additionally,
the trend-following expectations suggest that investors become optimistic following the
expectations of trend continuation, which ultimately create asset price bubbles in
experimental settings (Hommes et al., 2005, 2008). The belief of return continuation rather
than reversal in future is mainly responsible for investors to display optimism about return
expectations (DeBondt, 1993; Gilovich et al., 1985).
Based on the above models, this study expects that investors tend to exhibit optimism in
different forms following their perception of past portfolio returns. In particular, investors
may exhibit optimism relative to other investors. Harris and Middleton (1994) report that
individuals tend to be comparatively optimistic, where they are likely to experience more
positive events and unlikely to experience more negative events compared to other
individuals. Smits and Hoorens (2005) argue that individuals compare themselves with their
peers in experiencing an event. Comparative judgment can be measured in direct and
indirect approaches, where direct approach has been recommended as the easiest way to
capture optimism in relative context (Kruger, 1999; Helweg-Larsen and Shepperd, 2001;
Chambers and Windschitl, 2004). The direct approach estimates an individual’s likelihood of
experiencing an event compared to someone else’s likelihood on a single scale (Kruger,
1999). With respect to portfolio investment, it is expected that investors may believe in
likelihood of experiencing more positive and less negative outcomes in their portfolio
investment compared to other investors in response to perception of past positive returns:
H2a. Perception of past portfolio returns causes investors to exhibit optimism toward
portfolio investment relative to other investors.
As a result of investors’ tendency to rely on perception of past portfolio returns, they may
display optimism about their portfolio investment in absolute term. That is investors may
hold generalized positive expectations about their own portfolio investment in future due to
their greater emphasis on perception of past portfolio returns. Individual’s propensity to
hold positive expectations about future is similar to the notion of dispositional optimism
(Scheier and Carver, 1985; Scheier et al., 1994). However, unlike psychometric measure of
dispositional optimism, this study concerns about investors’ positive expectations that they
expect in future from their portfolio investment:
H2b. Perception of past portfolio returns causes investors to exhibit optimism toward
their portfolio investment.
Investors’ optimism biases may be useful in understanding their financial decisions in stock
markets. However, most of the studies in finance define optimism in different forms and
therefore their effect on financial decisions is ambiguous. Hoffmann et al. (2015) find that
upward changes in return expectations of portfolio, which is an indicative optimism, are Past portfolio
positively related to investor’s trading, portfolio turnover, larger trade values and usage of returns
derivatives. Beuselinck et al. (2011) show the influence of psychometric measure of
dispositional optimism on individual’s option trading in a survey data combined with
trading records in the Netherlands. Dispositional optimism measured as life orientation test
indicates that even with the negative return experiences option traders exercise more
options due to optimistic expectations. These existing studies suggest optimism is likely to 83
influence trading activities.
Relatively few studies have extended optimism’s influence in risk-taking decisions.
Experimentally in a stock trading experiment, Felton et al. (2003) find that optimistic males
more often overestimate the returns of risky portfolios as well as underestimate the risk and
volatilities. As a consequence, they add above-average risk in portfolios. In a Survey of
Consumer Finance data, Puri and Robinson (2007) measure individual’s optimism by
comparing self-reported life expectancy with the actuarial table and find that their measure
of optimism is positively related to financial risk taking. In a survey data of British
household, Balasuriya et al. (2010) measure optimism as individual’s personal financial
situation in future and document its positive impact on risky portfolio choices and a
negative impact on risk-free portfolio choices.
Optimism manifested toward stock markets and the economy affects households’ asset
allocation decision. Analyzing various household data around the world, Jacobsen et al. (2014)
quantify stock market optimism and economic optimism and conclude that these measures of
optimism drive risky asset allocation.
This study expects that optimism manifested in investors’ portfolio investment is able to
explain their portfolio turnover, trading intention, hypothetical risk taking and risky asset
allocation. Investors subject to optimism in comparative term expect to experience more
positive and less negative returns relative to other investors. This comparative judgment in
experiencing more gains and fewer losses in portfolio investment would results in more
trading, higher risk taking and more risky asset allocation:
H3a. Optimism toward portfolio investment relative to other investors is positively
associated with annual portfolio turnover.
H3b. Optimism toward portfolio investment relative to other investors is positively
associated with trading intention.
H3c. Optimism toward portfolio investment relative to other investors is positively
associated with hypothetical risk taking.
H3d. Optimism toward portfolio investment relative to other investors is positively
associated with risky asset allocation.
In absolute term, investors’ susceptibility to exhibit optimism toward portfolio investment
may lead them to undertake aggressive financial decisions due to their rosy view about
portfolio investment:
H4a. Optimism toward portfolio investment is positively associated with annual
portfolio turnover.
H4b. Optimism toward portfolio investment is positively associated with trading
intention.
H4c. Optimism toward portfolio investment is positively associated with hypothetical
risk taking.
H4d. Optimism toward portfolio investment is positively associated with risky assets
allocation.
RBF The proposed hypotheses as discussed above specify the potential mediating channels of
9,1 different aspects of optimism between perception of past portfolio returns and financial
decisions. The indirect effect of perception of past portfolio returns on various financial
decisions are hypothesized from the insights of existing studies. A set of study documents
the direct influence of past returns on investors’ optimistic beliefs (Malmendier and Nagel,
2011; Hoffmann and Post, 2015), whereas other studies find optimism measured in different
84 forms affects trading, risky portfolio choices and excessive allocation to equity (Hoffmann
et al., 2015; Puri and Robinson, 2007; Felton et al., 2003; Jacobsen et al., 2014). This study
therefore assumes the potential mediating effect of different aspects of optimism:
H5a. Perception of past portfolio returns influences annual portfolio turnover, through
the multiple mediators of optimism in relative term and optimism in general toward
portfolio investment.
H5b. Perception of past portfolio returns influences trading intention, through the
multiple mediators of optimism in relative term and optimism in general toward
portfolio investment.
H5c. Perception of past portfolio returns influences hypothetical risk taking, through the
multiple mediators of optimism in relative term and optimism in general toward
portfolio investment.
H5d. Perception of past portfolio returns influences risky asset allocation, through the
multiple mediators of optimism in relative term and optimism in general toward
portfolio investment.
The above hypotheses will be tested with the sample of both retail and institutional investors.

3. Methodology
3.1 Data
The survey respondents include two groups of investors: retail and institutional investors in
Malaysia. For retail investors, the survey was conducted in registered stockbroking
companies in Bursa Malaysia (The Malaysian Stock Exchange). According to Bursa
Malaysia’s website, there were thirty registered stockbroking companies in 2013. Retail
investors must open a Central Depository System account with the registered companies to
trade in the Malaysian stock market. All the registered brokerage firms were employed as
sampling frame of this study. Different communication channels such as telephone, mail and
e-mail, have been employed to collect data on retail investors using simple random
sampling. Two approaches were mainly followed to distribute the questionnaires: one is in
investment seminars and another is in stockbroking companies.
Investment seminars that were held during the survey period were considered for
questionnaire distribution. Jointly with Bursa Malaysia, registered stockbroking companies
organized the seminars with the aim to inform their clients about the investment
opportunity, market updates and new investment products in Bursa. Usually, the clients of
the stockbroking companies were the participants of the investment seminars.
Questionnaires were randomly distributed to the participants by all means. Survey
participation was voluntary and those who were interested filled up the survey forms.
To distribute the questionnaires in stockbroking companies, the persons working in client
services (i.e. those who deal with the clients) were initially contacted and then explained
them about the purpose of the study. In distributing the questionnaire to their clients, they
were given special instruction to follow random distribution. Similar approaches were
carried out to collect the survey data on retail investors by Khan et al. (2016). In total, 1,054
questionnaires were distributed, following the suggestion of Krejcie and Morgan (1970).
As the population of retail investors was roughly 4.4 million or more (Bursa Malaysia, 2013), Past portfolio
with the margin error of 3 percent and the confidence interval of 95 percent, the sample size returns
of 1,054 seemed to be the required sample size. Of 1,054 questionnaires distributed,
the usable responses for analysis were received from 454. Roscoe (1975) reports that a
sample size of larger than 30 and smaller than 500 is appropriate for most research.
For institutional investors, the survey was conducted via face-to-face communication using
non-probability sampling in mutual fund and asset management companies and investment 85
banks. Fund managers who manage either conventional or Islamic funds, are CEOs, investment
analysts and investment managers were categorized as the group of institutional investors.
Before distributing the questionnaire, it was ensured whether the respondents hold any of these
job positions. To add here, the survey questionnaires were slightly different for institutional
investors with respect to financial decisions because they make decisions on behalf of their
company, whereas retail investors take decision for themselves. Following convenience
sampling, 296 questionnaires were distributed in total and valid responses received for
statistical analysis from 66 institutional investors. The overall response rate including retail and
institutional investors was 38.51 percent. Non-response bias was handled by comparing the late
responses with the early one and the results suggest the absence of non-response bias
(Armstrong and Overton, 1977). The cross-sectional survey for both groups of investors was
conducted between September and November 2013. Since monetary incentives may mislead the
survey findings (Anderson, 2004), it was absent in collecting the survey data.
In survey, there is a possibility of self-reporting bias as the respondents may answer
strategically, or conceal their financial decisions, or answer randomly without
understanding the questions (Menkhoff et al., 2010; Egan et al., 2014). To address these
issues, this study has taken certain measures. Since the aim of the survey was merely for
academic purpose, there seem to be less motivation for strategic answer by respondents
(Menkhoff et al., 2010). Thus, strategies aimed to distort the questionnaire seem to be less
likely. Moreover, voluntary participation in the survey indicates that respondents had great
interest in financial market research and were intrinsically motivated to answer correctly
(Menkhoff et al., 2010; Egan et al., 2014). Based on the nature of survey questions and
anonymity of responses, there were no obvious reasons that investors disguise their
perception, optimistic beliefs and financial decisions.

3.2 Validity and reliability

Validity and reliability are always concerns in survey research. For content validity,
a pre-test of the questionnaire was conducted with the professionals and academicians in the
relevant areas. Besides pre-test, a pilot study was conducted with a sample of 31 investors in
August 2013. Based on the suggestions of expert panels and preliminary results of pilot
study, the questionnaire was finalized. The questionnaire has three sections. Section A was
designed to record investors’ demographic characteristics. In Section B, the investors were
asked to report their level of agreement on multiple items concerning optimism. The items
regarding optimism was designed following two approaches: one was compared to other
investors and another was in general term. Items were presented randomly and few reverse
order items were used. The last section of the questionnaire was designed to record
investors’ numerous financial decisions.
As the multiple items were used to capture investors’ degree of optimism, exploratory
factor analysis (EFA) was computed to estimate the items with higher loadings and to
extract the number of factors. EFA extracted two factors, which are subsequently named as
relative investment optimism and personal investment optimism. The results are reported in
Table AI. Convergent validity of these two aspects of optimism was assessed by the
single-factor solution. Low cross-loading of items of one construct into another one indicates
discriminant validity.
RBF To check for scale’s reliability, the Cronbach’s α was tested for relative investment
9,1 optimism and personal investment optimism. The α values for both of these constructs
exceed the threshold value of 0.7 suggesting the reliability of the constructs.

3.3 Empirical specification

To test the proposed hypotheses, ordinary least square (OLS) regressions were estimated.
86 OLS is likely to be more appropriate considering the nature of the dependent variables,
which are categorical. Although the dependent variables can be treated as ordinal as well
suggesting ordered logistic regression, it is argued that the results are not sensitive to using
OLS or ordered logistic regression (Ferrer-i-Carbonell and Frijters, 2004). The relationships
among perception of past portfolio returns, financial decisions and different aspects of
optimism can be expressed in the following equations:

Financial decisionsi ¼ a0 þa1 perception of past portfolio returnsi þa2 Zi þmi . . . (1)

Relative investment optimismi ¼ a0 þa1 perception of past portfolio returnsi þa2 Zi þ mi . . .

(2)

Personal investment optimismt ¼ a0 þa1 perception of past portfolio returnsi þa2 Zi þmi . . .
(3)

Financial decisionsi ¼ a0 þa1 relative investment optimsimi

þa2 personal investment optimsimi þa3 Zi þmi . . . (4)

where subscript “i” represents the data on an investor; financial decisions in the above
equations refer to an investor’s annual portfolio turnover, trading intention, hypothetical
risk taking and risky asset allocation; Zi a vector of control variables that are likely to
affect financial decisions and different aspects of optimism; and mi an error term which
captures other effects that are not estimated in the equations. In Equation (1), all measures
of financial decisions are regressed on perception of past portfolio returns. Then, relative
investment optimism and personal investment optimism are regressed on perception of
past portfolio returns in Equations (2) and (3), respectively. Finally, all measures of
financial decisions are regressed on relative investment optimism and personal
investment optimism in Equation (4). The dependent, predictors and control variables
are defined in Table I.
To test the mediation effects, the study employs Preacher and Hayes’s (2008) mediation
approach as it provides the opportunity to test multiple mediators concurrently between
independent and dependent variables. It directly tests the significance of indirect effects in a
model with the bias-corrected bootstrapping technique. More importantly, this approach
requires no normal sampling distribution.

4. Results
4.1 Perception of past portfolio returns and financial decisions
The hypotheses are tested for overall sample first and then for the sub groups of retail and
institutional investors. Table II reports the influences of perception of past portfolio returns
on numerous financial decisions. Starting with the full sample as shown from Columns (1) to
(4), the results are shown to be as expected. Perception of past portfolio returns is positive
Variable Definition and measurements Supporting literature
Past portfolio
returns
Gender 1 ¼ male, 0 otherwise
Age Younger ¼ 1 if investors’ age is below 25
Middle aged ¼ 1 if investors’ age ranged between 25 and 55 years
Older ¼ 1 if investors’ age is above 55 years
Education Primary ¼ 1 if maximum education level is primary or secondary
Degree ¼ 1 if maximum education level is degree 87
Postgraduate ¼ 1 if investors’ maximum education level is
postgraduate
Investment Less experience ¼ 1 if experience is less than 4 years
experience Experience ¼ 1 if experience is between 4 and 10 years
More experience ¼ 1 if experience is more than 10 years
Relative Aggregate scores of the four items are used to construct unrealistic Harris and Middleton
investment optimism (1994), Smits and
optimism The likelihood of getting positive return of my portfolio is high, Hoorens (2005)
compared to other investors
The likelihood of losing my invested capital is low, compared to
other investors
My portfolio is likely to doing well under uncertainty, compared to
other investors
The likelihood of my financial success is more compared to other
investors
Responses depicted on a five-point scale from 1 ¼ “strongly
disagree” to 5 ¼ “strongly agree”
Personal Aggregate scores of the three items are used to construct Weber et al. (2013),
investment dispositional optimism Fisher and Statman
optimism I expect superior returns of my investment in the future (2002), Simon et al.
I expect to achieve my investment goals in the future (1999)
I expect to improve my investment performance in the future
Responses depicted on a five-point scale from 1 ¼ “strongly
disagree” to 5 ¼ “strongly agree”
Annual What is your annual turnover (sum of buy and sell transaction volume) Menkhoff et al. (2013)
portfolio relative to the total volume of your portfolio?
turnover Answers were depicted in 5 categories and coded as 1 ¼ “less than
10%”, 2 ¼ “10-20%”, 3 ¼ “21-30%”, 4 ¼ “31-50”, 5 ¼ “more than 50%”
Trading Do you intend to buy or sell stocks in the future (next 3-6 months)? Glaser and Weber (2009)
intention Responses were depicted in four categories and coded as 1 ¼ “no
intention to make any stock transaction”, 2 ¼ “only buy or sell”,
3 ¼ “equally buy and sell”, 4 ¼ “mostly buy or sell”
Hypothetical Imagine that you plan to invest RM 100 thousands. How much Weber et al. (2013),
risk taking would you like to invest in Bursa Malaysia compared to invest in Malmendier and Nagel
risk-free assets with interest rate of 4%? (2011)
Responses were depicted in nine categories in percentage, from
1 ¼ “0%” to 9 ¼ “80% or more”
Risky asset Risky asset’s allocation is the fraction of amount, out of 100%, Ehm et al. (2014)
allocation invested into risky assets
Assume you have RM 100 thousands to invest into different types
of assets. How would you allocate this money between safe assets,
risky assets and other assets? Please allocate 100%
Perception of What do you think about the return of your portfolio (in %) over the Weber et al. (2013),
past portfolio past three months after transaction costs was? Merkle (2013)
returns Answers were depicted in seven categories in percentage (%):
0 ¼ ‘don’t know/no opinion’, 1 ¼ “−4% or worse”, 2 ¼ “−4-−2%”,
3 ¼ “−2-0%”, 4 ¼ “0-2%”, 5 ¼ “2-4%” and 6 ¼ “more than 4%.”
The options are given so that the investors can easily recall their Table I.
previous three months returns and give estimation with the range Definition of variables
 9,1

88
RBF

Table II.

of past portfolio

financial decisions
Effect of perception

returns on numerous
Retail and institutional investors Retail investors Institutional investors
(1) (2) (3) (4) (5) (6) (7) (8) (9) (10) (11) (12)
Annual Risky Annual Risky Annual Risky
portfolio Trading Hypothetical asset portfolio Trading Hypothetical asset portfolio Trading Hypothetical asset
turnover intention risk taking allocation turnover intention risk taking allocation turnover intention risk taking allocation

Perception of
past portfolio
returns 0.23*** 0.11** 0.15*** 0.08* 0.23*** 0.09* 0.15*** 0.09** 0.23** 0.30*** 0.27*** -0.04
(5.29) (2.35) (3.49) (1.87) (5.03) (1.79) (3.18) (2.05) (2.28) (2.95) (4.53) (−0.32)
Gender 0.01 0.00 0.04 0.09** 0.03 0.03 0.03 0.09* −0.04 −0.25** 0.14** 0.14
(0.37) (0.18) (0.99) (2.18) (0.66) (0.71) (0.64) (1.92) (−0.42) (−2.54) (2.50) (1.11)
Middle aged
(25-55) 0.14*** 0.11** 0.06 −0.06 0.13** 0.10* 0.03 −0.08 0.19 0.08 0.42*** −0.13
(2.69) (2.22) (1.14) (−1.07) (2.38) (1.74) (0.52) (−1.25) (1.51) (0.65) (5.60) (−0.80)
Older (W55) 0.11** 0.10* 0.04 −0.02 0.08 0.08 0.02 −0.05 0.40*** −0.00 0.42*** 0.11
(2.08) (1.86) (0.85) (−0.45) (1.43) (1.31) (0.43) (−0.89) (3.13) (−0.05) (5.45) (0.66)
Degree 0.02 0.08 0.10 0.08 0.03 0.10 0.08 0.09
(0.30) (1.03) (1.25) (1.40) (0.41) (1.17) (1.00) (1.35)
Postgraduate −0.03 0.13* 0.08 0.12* −0.03 0.14* 0.08 0.13* −0.13 0.03 −0.01 −0.09
(−0.51) (1.70) (1.15) (1.88) (−0.39) (1.72) (1.15) (1.95) (−1.34) (0.35) (−0.16) (−0.72)
Experience
(between 4 and
10 years) 0.07 −0.01 0.08* 0.10** 0.05 −0.00 0.07 0.11* 0.13 −0.02 0.10 −0.01
(1.61) (−0.22) (1.65) (1.97) (1.17) (−0.16) (1.37) (1.94) (1.20) (−0.19) (1.50) (−0.08)
More
experience
(W10 years) 0.09* 0.11** 0.15*** 0.06 0.10* 0.16*** 0.14*** 0.10* 0.07 −0.24** 0.29*** −0.16
(1.82) (2.14) (3.08) (1.33) (1.91) (2.79) (2.69) (1.92) (0.71) (−2.22) (4.42) (−1.16)
Intercept 1.52*** 1.05** 3.26*** 9.51* 1.49*** 0.99** 3.51*** 8.88 1.21* 1.96*** 0.59 33.17**
(4.52) (2.56) (5.08) (1.70) (4.38) (2.33) (5.38) (1.54) (1.73) (2.78) (0.83) (2.02)
R2 0.09 0.05 0.06 0.03 0.09 0.06 0.05 0.04 0.20 0.19 0.24 0.10
No. of
observations 520 520 520 520 454 454 454 454 66 66 66 66
Notes: All coefficients of the parameter are standardized ( β) estimates. p-values are based on heteroscedasticity-consistent robust standard errors. *po 0.1, **p o0.05,
***p o0.01
and significantly related to portfolio returns, trading intention, hypothetical risk taking and Past portfolio
risky asset allocation. When the same models are estimated for retail investors only, the returns
influences of perception of past portfolio returns remain significant for all types financial
decisions as shown from Columns (5) to (8). However, the results vary to some extents for the
sample of institutional investors, where perception of past portfolio returns has positive and
significant impacts on annual portfolio turnover, trading intention and hypothetical risk
taking, but insignificantly related to risky asset allocation (Columns (9)-(12)). This result 89
confirms hypotheses H1a-H1c. But, the findings provide partial support for hypothesis H1d
as the data provide support only for the retail investors’ sample.

4.2 Perception of past portfolio returns and optimism

Perception of past portfolio returns is hypothesized to cause investors’ optimism.
Table III shows the influence of perception of past portfolio returns on two aspects of
optimism, i.e. relative investment optimism and personal investment optimism. Columns
(1)-(2) present the results for the full sample. Perception of past portfolio returns
significantly predicts investors’ relative investment optimism and personal investment
optimism. The effects are significant at 1 percent and 5 percent levels. The significant
effect remains with the sample of retail investors (Columns (3)-(4)). However, for the
sample of institutional investors, perception of past portfolio returns fails to significantly
predict these two aspects of optimism. Although the results vary with the sample of
sophisticated institutional investors, perception of past portfolio returns has positive
association with relative investment optimism and personal investment optimism for
retail investors. With these results, the hypotheses H2a and H2b are confirmed for the
group of retail investors.

4.3 Optimism and financial decisions

Optimism manifests as relative investment optimism and personal investment optimism
in turn is expected to influence investors’ financial decisions. Columns (1)-(4) of Table IV
display the results of full sample. Relative investment optimism has a positive and
significant influence on annual portfolio turnover, trading intention and risky asset
allocation. Another aspect of optimism, personal investment optimism influences
investors’ portfolio turnover, risk taking and risky asset allocation. When the full sample
is replaced by retail investors only, the results appear to be slightly different. As shown
from Columns (5) to (8), relative investment optimism is significantly related to only higher
portfolio turnover and trading intention. The predictive ability of personal investment
optimism seems to be stronger especially for risk taking and risky asset allocation.
Personal investment optimism is positively significant to affect annual portfolio turnover,
hypothetical risk taking and risky asset allocation. For the sample of institutional
investors, the influence of relative investment optimism continued to be significant, but
personal investment optimism’s affect turns insignificant for annual portfolio turnover
and risky asset allocation. In sum, across retail and institutional investors relative
investment optimism causes higher portfolio turnover and more trading intention, while
personal investment optimism causes higher risk taking. These results support
hypotheses H3a, H3b and H4c. But, hypotheses H4a and H4d are supported only for
retail investors.

4.4 Mediating effects of optimism

So far, the results suggest the direct influence of perception of past portfolio returns on
numerous financial decisions, and relative investment optimism and personal investment
optimism, and in turn the influences of these aspects of optimism on financial decisions.
 9,1

90
RBF

Table III.

returns on two
of past portfolio
Effect of perception

aspects of optimism
Retail and institutional investors Retail investors Institutional investors
(1) (2) (3) (4) (5) (6)
Relative investment Personal investment Relative investment Personal investment Relative investment Personal investment
Independent variables optimism optimism optimism optimism optimism optimism

Perception of past
portfolio returns 0.18 (4.11)*** 0.11 (2.46)** 0.15 (3.23)*** 0.10 (2.06)** 0.33 (1.62) 0.13 (0.65)
Gender 0.06 (1.44) 0.03 (0.76) 0.07 (1.63) 0.02 (0.43) −0.05 (−0.29) 0.11 (0.56)
Middle aged (25-55) 0.02 (0.47) 0.01 (0.29) 0.03 (0.59) 0.05 (0.79) −0.19 (−0.75) −0.34 (−1.32)
Older (W55) −0.01 (−0.30) 0.08 (1.64)* −0.01 (−0.24) 0.11 (2.03)** −0.12 (−0.47) −0.13 (−0.49)
Degree 0.12 (1.76)* 0.00 (0.03) 0.11 (1.59) −0.00 (−0.04)
Postgraduate 0.12 (1.94)* 0.04 (0.65) 0.14 (2.00)** 0.04 (0.64) −0.06 (−0.29) 0.03 (0.17)
Experience (between 4 and
10 years) 0.05 (1.10) −0.06 (−1.17) 0.03 (0.69) −0.08 (−1.47) 0.14 (0.61) 0.05 (0.24)
More experience
(W10 years) 0.13 (2.61)*** 0.00 (0.17) 0.13 (2.43)** −0.01 (−0.30) 0.05 (0.25) 0.08 (0.40)
Intercept 2.90 (20.12)*** 3.70 (22.42)*** 2.91 (19.75)*** 3.69 (22.03)*** 3.65 (5.19)*** 4.39 (6.23)***
R2 0.06 0.02 0.05 0.02 0.18 0.13
No. of observation 520 520 454 454 66 66
Notes: All coefficients of the parameter are standardized (β) estimates. p-values are based on heteroscedasticity-consistent robust standard errors. *p o0.1, **p o0.05,
***p o0.01
 Retail and institutional investors Retail investors Institutional investors
(1) (2) (3) (4) (5) (6) (7) (8) (9) (10) (11) (12)
Annual Risky Annual Risky Annual Risky
portfolio Trading Hypothetical asset portfolio Trading Hypothetical asset portfolio Trading Hypothetical asset
turnover intention risk taking allocation turnover intention risk taking allocation turnover intention risk taking allocation

Relative investment
optimism 0.14*** 0.16*** 0.01 0.09* 0.13*** 0.12** 0.01 0.07 0.20* 0.33*** 0.00 0.17
(3.29) (3.38) (0.32) (1.75) (2.72) (2.43) (0.35) (1.27) (1.95) (3.19) (0.11) (1.31)
Personal investment
optimism 0.10** 0.00 0.21*** 0.15*** 0.11** 0.02 0.21*** 0.15*** 0.04 −0.09 0.26*** 0.21
(2.20) (0.05) (4.73) (3.14) (2.24) (0.52) (4.30) (2.83) (0.45) (−0.84) (4.11) (1.59)
Gender 0.02 0.00 0.05 0.09** 0.04 0.03 0.04 0.09* −0.01 −0.19* 0.15*** 0.10
(0.59) (0.17) (1.17) (2.04) (0.86) (0.66) (0.84) (1.86) (−0.10) (−1.92) (2.66) (0.88)
Middle aged (25-55) 0.15*** 0.11** 0.07 −0.06 0.14** 0.10* 0.03 −0.08 0.20 0.06 0.45*** 0.00
(2.74) (2.30) (1.18) (−1.14) (2.46) (1.78) (0.54) (−1.33) (1.59) (0.49) (5.79) (0.04)
Older (W55) 0.11** 0.10* 0.02 −0.04 0.07 0.08 0.00 −0.07 0.39*** −0.02 0.40*** 0.19
(2.00) (1.91) (0.45) (−0.70) (1.30) (1.32) (−0.00) (−1.19) (3.08) (−0.21) (5.16) (1.20)
Degree 0.00 0.07 0.10 0.07 0.02 0.09 0.08 0.08
(0.11) (0.86) (1.32) (1.27) (0.27) (1.07) (1.08) (1.29)
Postgraduate −0.06 0.11 0.06 0.10 −0.06 0.12 0.07 0.11* −0.16 0.01 −0.07 −0.06
(−0.88) (1.45) (0.95) (1.63) (−0.75) (1.51) (0.96) (1.73) (−1.62) (0.11) (−1.26) (−0.50)
Experience (between
4 and 10 years) 0.10** −0.00 0.11** 0.11** 0.09* −0.00 0.11** 0.12** 0.12 −0.03 0.11* −0.06
(2.13) (−0.17) (2.24) (2.23) (1.83) (−0.03) (2.03) (2.34) (1.10) (−0.33) (1.72) (−0.46)
More experience
(W10 years) 0.06 0.09* 0.14*** 0.05 0.08 0.14** 0.14*** 0.09* 0.05 −0.27** 0.25*** −0.18
(1.32) (1.70) (3.06) (1.07) (1.51) (2.48) (2.78) (1.79) (0.46) (−2.45) (3.79) (−1.36)
Intercept 0.05 −0.00 0.50 −21.01** −0.01 −0.06 0.65 −18.87* −0.28 0.87 −2.27* −30.44
(0.11) (−0.00) (0.54) (−2.18) (−0.03) (−0.11) (0.67) (−1.85) (−0.22) (0.67) (−1.77) (−1.06)
R2 0.08 0.06 0.08 0.07 0.08 0.07 0.08 0.06 0.20 0.20 0.23 0.18
No. of observations 520 520 520 520 454 454 454 454 66 66 66 66
Notes: All coefficients of the parameter are standardized (β) estimates. p-values are based on heteroscedasticity-consistent robust standard errors. *p o0.1, **p o0.05,
***p o0.01
Past portfolio

91
returns

of optimism on
Table IV.

numerous
Effect of two aspects

financial decisions
RBF Intuitively, these relationships suggest relative investment optimism and personal
9,1 investment optimism as potential mediators (Baron and Kenny, 1986). To test the
mediation effects, the study employs Preacher and Hayes’s (2008) multiple mediation test.
The results as reported in Table V show that relative investment optimism mediates the
relationship between perception of past portfolio returns and annual portfolio turnover.
With 95 percent confidence interval, the value of 0 does not contain within the upper and
92 lower intervals indicating the evidence of mediation. This mediation effect is found merely
for retail investors. Considering the relationship between perception of past portfolio returns
and trading intention, relative investment optimism again acts as a mediator with the
sample of retail investors. In case of risk taking, personal investment optimism mediates the
influence of perception of past portfolio returns on hypothetical risk taking for retail
investors. Also, personal investment optimism mediates between perception of past
portfolio returns and risky asset allocation. However, no mediation effects are observed for
institutional investors. To ensure the significance of mediating variables, Sobel (1982) test is
additionally computed. Sobel test confirms the significance of relative investment optimism
and personal investment optimism. The results are available upon request. Hypotheses
H5a-H5d are partially supported by the data on retail investors.

5. Discussion
The first finding of the proposed model is that perception of past portfolio returns has a
positive influence on both retail and institutional investors’ portfolio turnover and trading
intention. This result suggests that the influence of perception in trading decisions is similar
between retail and institutional investors. From a rational perspective, this finding is in
opposition to efficient market theory. Trading decisions based on perception of past
portfolio returns indicate that investors rely on their own beliefs that past returns are
correlated with the future returns causing higher trading activity. This belief is known as
belief in stock return autocorrelation, which is recently highlighted by Kaplanski et al.
(2015). The finding is also consistent with the behavioral model of representativeness
heuristic (Kahneman and Tversky, 1972; DeBondt, 1993). Investors believe that past
portfolio returns are representative of future events which result in greater portfolio
turnover and trading intention for both groups of investors. Perception of higher portfolio
returns may create euphoria among investors that future return will be relatively high,
while the risk of that return will be relatively low. This causes higher trading activity.
The study documents that both retail and institutional investors’ risk-taking decisions are
similarly influenced by their perception of past portfolio returns. This finding reflects risk-
as-feeling hypothesis (Barberis et al., 1998; Loewenstein et al., 2001; Baker and Wurgler,
2006; Weber et al., 2013). Investors tend to incorporate their feeling with their perception of
past portfolio returns. Positive feeling associated with higher past returns increases risk
taking, while bad feeling associated with negative past returns reduces it. It is likely that
perception of past portfolio returns will influence both groups of investors’ risky asset
allocation. But, in fact, the result is observed only for retail investors and not for institutional
investors. The difference has also emerged regarding the effect of perception of past
portfolio returns on various dimensions of optimism.
The second finding is that institutional investors do not display optimism following
perception of past portfolio returns rather retail investors are subject to optimism.
Retail investors particularly exhibit relative investment optimism and personal
investment optimism as a result of relying on perceived past portfolio returns. Retail
investors’ tendency to display optimism can be interpreted by trend-following
expectations (Hommes et al., 2005, 2008). Investors expect that realized past positive
portfolio returns would be able to earn again in future. This positive belief leads investors
to form optimistic beliefs about their portfolio investment in future, not only relative to
 Annual portfolio turnover Trading intention Hypothetical risk taking Risky asset allocation
LL UL LL UL LL UL LL UL

Retail and institutional investors

Relative investment optimism 0.004 0.028 0.007 0.036 -0.012 0.023 0.011 0.455
Personal investment optimism 0.000 0.015 −0.005 0.007 0.003 0.045 0.019 0.367
Total indirect effects 0.007 0.035 0.008 0.036 0.002 0.054 0.100 0.672
Retail investors
Relative investment optimism 0.003 0.026 0.004 0.032 −0.010 0.023 −0.015 0.389
Personal investment optimism −0.001 0.016 −0.003 0.011 0.000 0.046 0.003 0.369
Total indirect effects 0.004 0.032 0.005 0.033 −0.000 0.053 0.047 0.603
Institutional investors
Relative investment optimism −0.014 0.102 0.010 0.137 −0.171 0.051 −0.284 2.469
Personal investment optimism −0.021 0.032 −0.082 0.005 −0.003 0.111 −0.023 1.873
Total indirect effects −0.017 0.109 −0.017 0.123 −0.135 0.120 −0.126 2.948
Notes: LL, lower limit; UL, upper limit. Confidence intervals generated with 95 percent bias-corrected confidence intervals and bootstrapping re-samples of 5,000
Past portfolio

93
returns

using Preacher and

Table V.

Hayes’s (2008)
Mediation analysis
RBF other investors but about their personal investment. The propensity to show optimism can
9,1 be also explained by hot-hand fallacy, which suggests that investors excessively
extrapolate their previous gains and accordingly, form their optimistic beliefs (DeBondt,
1993; Benartzi, 2001). The third finding of the proposed model is that relative investment
optimism symmetrically affects both retail and institutional investors’ trading (annual
portfolio turnover and trading intention), whereas personal investment optimism
94 influences risk taking in a hypothetical task. Investors whether its retail or institutional
subject to personal investment optimism are likely to invest higher percentage into the
Malaysian stock market. The differences have emerged again regarding the effect of
personal investment optimism on risky asset allocation, which has been observed only for
retail investors.
When looking into the mediating effects, i.e. how perception of past portfolio returns
influences different aspects of optimism, and how these aspects of optimism influence
financial decisions, the most important finding is that retail investors’ financial decisions are
influenced by mediating channels of optimism. However, institutional investors are
unaffected by the mediating channels. The study documents that various aspects of
optimism are important for retail investors’ decision-making process. Perception of past
portfolio returns influences trading, risk taking and risky asset allocation, through relative
investment optimism and personal investment optimism. This indirect effect concerns only
for retail investors. The major differences between retail and institutional investors
regarding the mediating effect and the effect of perception of past portfolio returns on
optimism can be attributed to institutional investors’ greater financial knowledge,
sophistication, rational decision-making process and better learning ability (Kaustia et al.,
2008; Liu et al., 2010; Menkhoff et al., 2010). The influences of perception of past portfolio
returns on retail and institutional investors’ financial decisions extend the earlier studies on
the effect of perception on an individual’s decision-making. More importantly, the
introduction of optimistic beliefs formation stage for retail investors contributes to the
behavioral finance literature, which has been previously illustrated in psychology literature
(Karademas, 2006; Eren, 2012).

6. Conclusion
This paper provides an insight into the relationships among perception of past portfolio
returns, different aspects of optimism and financial decisions using a sample of both retail
and institutional investors in Malaysia. While the findings provide evidence that perception
of past portfolio returns and optimism influence trading and risk-taking decisions of retail
and institutional investors, similarly. The differences do exist between these groups of
investors. The differences have emerged considering: the effect of perception of past
portfolio returns on risky asset allocation, the tendency to exhibit optimism following
perception of past portfolio returns and the mediating stage of optimism. The results
indicate that perception of past portfolio returns causes retail investors to exhibit relative
investment optimism and personal investment optimism. The mediating effect is observed
only for retail investors, where perception of past portfolio returns indirectly influences
numerous financial decisions, through relative investment optimism and personal
investment optimism.
The findings of direct and indirect effects of perception on financial decisions help to
understand better the differences between sophisticated institutional and novice retail
investors. The results imply that retail investors are more susceptible to optimism and their
decision process is strongly influenced by optimistic characteristics to reach financial
decisions, compared to institutional investors. Therefore, regulators in Malaysia need to
enhance their initiatives by incorporating the peril of forming optimistic expectations in
financial decisions, by giving special attention to retail investors.
References Past portfolio
Anderson, V. (2004), Research Methods in Human Resource Management, CIPD, London. returns
Armstrong, J.S. and Overton, T.S. (1977), “Estimating nonresponse bias in mail surveys”, Journal of
Marketing Research, Vol. 14 No. 3, pp. 396-402.
Aspara, J. (2013), “The role of product and brand perceptions in stock investing: effects on investment
considerations, optimism and confidence”, Journal of Behavioral Finance, Vol. 14 No. 3, pp. 195-212.
Baker, M. and Wurgler, J. (2006), “Investor sentiment and the cross-section of stock returns”, Journal of
95
Finance, Vol. 61 No. 4, pp. 1645-1680.
Balasuriya, J., Muradoglu, G. and Ayton, P. (2010), Optimism and Portfolio Choice, European Financial
Management Association, Aarhus, available at: http://dx.doi.org/10.2139/ssrn.1568908 (accessed
January 5, 2013).
Barberis, N., Shleifer, A. and Vishny, R. (1998), “A model of investor sentiment”, Journal of Financial
Economics, Vol. 49 No. 3, pp. 307-343.
Baron, R.M. and Kenny, D.A. (1986), “Moderator-mediator variables distinction in social psychological
research: conceptual, strategic, and statistical considerations”, Journal of Personality and Social
Psychology, Vol. 51 No. 6, pp. 1173-1182.
Benartzi, S. (2001), “Excessive extrapolation and the allocation of 401(k) accounts to company stock”,
Journal of Finance, Vol. 56 No. 5, pp. 1747-1764.
Beuselinck, C., Heyman, D. and Pronk, M. (2011), “Individual investors and option trading:
attention grabbing versus long-term strategies”, 1st European Retail Investment Conference,
Boerse stuttgart, February 23-25, available at: http://dx.doi.org/10.2139/ssrn.1745728 (accessed
October 23, 2012).
Bursa Malaysia (2013), “Annual report 2013- Bursa Malaysia Berhad”, Kuala Lumpur, available at:
http://bursa.listedcompany.com/misc/ar2013.pdf (accessed August 3, 2014).
Chambers, J.R. and Windschitl, P.D. (2004), “Biases in social comparative judgments: the role of
nonmotivated factors in above-average and comparative-optimism effects”, Psychological
Bulletin, Vol. 130 No. 5, pp. 813-838.
Chen, G., Kim, K.A., Nofsinger, J.R. and Rui, O.M. (2007), “Trading performance, dispositional effect,
overconfidence, representativeness bias, and experience of emerging market investors”, Journal
of Behavioral Decision Making, Vol. 20 No. 4, pp. 425-451.
DeBondt, W.P.M. (1993), “Betting on trends: intuitive forecasts of financial risk and return”,
International Journal of Forecasting, Vol. 9 No. 3, pp. 355-371.
Doran, J.S., Peterson, D.R. and Wright, C. (2010), “Confidence, opinions of market efficiency, and
investment behavior of finance professors”, Journal of Financial Markets, Vol. 13 No. 1, pp. 174-195.
Egan, D., Merkle, C. and Weber, M. (2014), “Second-order beliefs and the individual investor”, Journal of
Economic Behavior and Organization, Vol. 107 Part B, pp. 652-666.
Ehm, C., Kaufmann, C. and Weber, M. (2014), “Volatility inadaptability: investors care about risk, but
cannot cope with volatility”, Review of Finance, Vol. 18 No. 4, pp. 1387-1423.
Eren, A. (2012), “Prospective teachers’ future time perspective and professional plans about teaching: the
mediating role of academic optimism”, Teaching and Teacher Education, Vol. 28 No. 1, pp. 111-123.
Felton, J., Gibson, B. and Sanbonmatsu, D.M. (2003), “Preference for risk in investing as a function of
trait optimism and gender”, Journal of Behavioral Finance, Vol. 4 No. 1, pp. 33-40.
Ferrer-i-Carbonell, A. and Frijters, P. (2004), “How important is methodology for the estimates of the
determinants of happiness?”, The Economic Journal, Vol. 114 No. 497, pp. 641-659.
Fisher, K.L. and Statman, M. (2002), “Bubble expectations”, Journal of Wealth Management, Vol. 5
No. 2, pp. 17-22.
Gilovich, T., Vallone, R. and Tversky, A. (1985), “The hot hand in basketball: on the misperception of
random sequences”, Cognitive Psychology, Vol. 17 No. 3, pp. 295-314.
RBF Glaser, M. and Weber, M. (2009), “Which past returns affect trading volume?”, Journal of Financial
9,1 Markets, Vol. 12 No. 1, pp. 1-31.
Harris, P. and Middleton, W. (1994), “The illusion of control and optimism about health: on being less at
risk but no more in control than others”, British Journal of Social Psychology, Vol. 33 No. 4,
pp. 369-386.
Helweg-Larsen, M. and Shepperd, J.A. (2001), “Do moderators of the optimistic bias affect personal or
96 target risk estimates? A review of the literature”, Personality and Social Psychology Review, Vol. 5
No. 1, pp. 74-95.
Hoffmann, A.O.I. and Post, T. (2015), “How return and risk experiences shape investor beliefs and
preferences”, Accounting and Finance, doi: 10.1111/acfi.12169.
Hoffmann, A.O.I., Post, T. and Pennings, J.M.E. (2015), “How investor perceptions drive actual trading
and risk-taking behavior”, Journal of Behavioral Finance, Vol. 16 No. 1, pp. 94-103.
Hommes, C., Sonnemans, J., Tuinstra, J. and Van de Velden, H. (2005), “Coordination of expectations in
asset pricing experiments”, Review of Financial Studies, Vol. 18 No. 3, pp. 955-980.
Hommes, C., Sonnemans, J., Tuinstra, J. and Van de Velden, H. (2008), “Expectations and bubbles in asset
pricing experiments”, Journal of Economic Behavior and Organization, Vol. 67 No. 1, pp. 116-133.
Huberman, G. and Sengmueller, P. (2004), “Performance and employer stock in 401 (k) plans”, Review of
Finance, Vol. 8 No. 3, pp. 403-443.
Jacobsen, B., Lee, J.B., Marquering, W. and Zhang, C.Y. (2014), “Gender differences in optimism and
asset allocation”, Journal of Economic Behavior and Organization, Vol. 107, Part B, pp. 630-651.
Johnson, J., Tellis, G.J. and Maclnnis, D. (2005), “Blowing bubbles: heuristics and biases in the run-up of
stock prices”, Journal of Academy of Marketing Science, Vol. 33 No. 4, pp. 486-504.
Kahneman, D. and Tversky, A. (1972), “Subjective probability: a judgment of representativeness”,
Cognitive Psychology, Vol. 3 No. 3, pp. 430-454.
Kaplanski, G., Levy, H., Veld, C. and Veld-Merkoulova, Y. (2015), “Past returns and the perceived
Sharpe ratio”, Journal of Economic Behavior and Organization, Vol. 123, pp. 149-167, available
at: http://dx.doi.org/10.1016/j.jebo.2015.11.010 (accessed January 2, 2016).
Karademas, E.C. (2006), “Self-efficacy, social support and well-being: the mediating role of optimism”,
Personality and Individual Differences, Vol. 40 No. 6, pp. 1281-1290.
Kaustia, M., Alho, E. and Puttonen, V. (2008), “How much does expertise reduce behavioral biases?
The case of anchoring effects in stock return estimates”, Financial Management, Vol. 37 No. 3,
pp. 391-412.
Khan, M.T.I., Tan, S.-H. and Chong, L.-L. (2016), “Gender differences in preferences for firm
characteristics across different groups of investors”, Qualitative Research in Financial Markets,
Vol. 8 No. 1, pp. 2-15.
Krejcie, R.V. and Morgan, D.W. (1970), “Determining sample size for research activities”, Educational
and Psychological Measurement, Vol. 30 No. 3, pp. 607-610.
Kruger, J. (1999), “Lake Wobegon be gone! ‘the below-average effect’ and the egocentric nature of
comparative ability judgments”, Journal of Personality and Social Psychology, Vol. 77 No. 2,
pp. 221-232.
Liu, Y.J., Tsai, C.L., Wang, M.C. and Zhu, N. (2010), “Prior consequences and subsequent risk taking:
new field evidence from the Taiwan futures exchange”, Management Science, Vol. 56 No. 4,
pp. 606-620.
Liu, Y.J., Wang, M.C. and Zhao, L. (2010), “Narrow framing: professions, sophistication, and
experience”, Journal of Futures Markets, Vol. 30 No. 3, pp. 203-229.
Loewenstein, G.F., Hsee, C.K., Weber, E.U. and Welch, N. (2001), “Risk as feelings”, Psychological
Bulletin, Vol. 127 No. 2, pp. 267-286.
Malmendier, U. and Nagel, S. (2011), “Depression babies: do macroeconomic experiences affect risk
taking?”, Quarterly Journal of Economics, Vol. 126 No. 1, pp. 373-416.
Menkhoff, L. (2010), “The use of technical analysis by fund managers: international evidence”, Journal Past portfolio
of Banking and Finance, Vol. 34 No. 11, pp. 2573-2586. returns
Menkhoff, L., Schmeling, M. and Schmidt, U. (2010), “Are all professional investors sophisticated?”,
German Economic Review, Vol. 11 No. 4, pp. 418-440.
Menkhoff, L., Schmeling, M. and Schmidt, U. (2013), “Overconfidence, experience, and professionalism:
an experimental study”, Journal of Economic Behavior & Organization, Vol. 86, pp. 92-101.
Merkle, C. (2013), “Financial overconfidence over time- foresight, hindsight, and insight of investors”, 97
available at: http://dx.doi.org/10.2139/ssrn.2001513 (accessed September 13, 2014).
Nielsen (2014), “Q4 2014 consumer confidence report”, available at: www.nielsen.com/my/en/insights/
reports/2015/q4-2014-consumer-confidence-report.html (accessed May 23, 2015).
Preacher, K.J. and Hayes, A.F. (2008), “Asymptotic and resampling strategies for assessing and
comparing indirect effects in multiple mediator models”, Behavior Research Methods, Vol. 40
No. 3, pp. 879-891.
Puri, M. and Robinson, D.T. (2007), “Optimism and economic choice”, Journal of Financial Economics,
Vol. 86 No. 1, pp. 71-99.
Roscoe, J.T. (1975), Fundamental Research Statistics for the Behavioural Sciences, 2nd ed., Holt Rinehart
and Winston, New York, NY.
Scheier, M.F. and Carver, C. (1985), “Optimism, coping and health: assessment and implications of
generalized outcome expectancies”, Health Psychology, Vol. 4 No. 3, pp. 219-247.
Scheier, M.F., Carver, C.S. and Bridges, M.W. (1994), “Distinguishing optimism from neuroticism
(and trait anxiety, self-mastery, and self-esteem): a reevaluation of the life orientation test”,
Journal of Personality and Social Psychology, Vol. 67 No. 6, p. 1063.
Securities Commission Malaysia (2011), Capital Market Masterplan 2, Securities Commission Malaysia,
Kuala Lumpur, available at: www.sc.com.my/capital-market-masterplan-2/ (accessed June 23, 2013).
Simon, M. Houghton, S.M. and Aquino, K. (1999), “Cognitive biases, risk perception, and venture
formation”, Journal of Business Venturing, Vol. 15 No. 2, pp. 113-134.
Smits, T. and Hoorens, V. (2005), “How probable is probably? It depends on whom you’re talking
about”, Journal of Behavioral Decision Making, Vol. 18 No. 2, pp. 83-96.
Sobel, M.E. (1982), “Asymptotic confidence intervals for indirect effects in structural equation models”,
in Leinhardt, S. (Ed.), Sociological Methodology, Jossey-Bass, San Francisco, CA, pp. 290-312.
The Edge Financial Daily (2010), “Local investor confidence restored”, available at: www.
theedgemalaysia.com/lifestyle/175684-local-investor-confidence-restored-ing-survey-shows.html
(accessed December 12, 2012).
Weber, E.U. and Hsee, C.K. (1998), “Cross-cultural differences in risk perception but cross-cultural
similarities in attitudes towards risk”, Management Science, Vol. 44 No. 9, pp. 1205-1217.
Weber, M.E.U., Weber, M. and Nosic, A. (2013), “Who takes risks when and why: determinants of
changes in investor risk taking”, Review of Finance, Vol. 17 No. 3, pp. 847-883.
Weinstock, E. and Sonsino, D. (2014), “Are risk-seekers more optimistic? Non-parametric approach”,
Journal of Economic Behavior and Organization, Vol. 108, pp. 236-251.

(The Appendix follows overleaf.)

RBF Appendix
9,1
Relative Personal
investment investment
optimism optimism Mean SD
Survey items Retail Institutional Retail Institutional Retail Institutional Retail Institutional
98
1. The likelihood of
getting positive
return of my
portfolio is high,
compared to other
investors 0.635 0.846 3.387 3.572 0.566 0.638
2. The likelihood of
losing my invested
capital is low,
compared to other
investors 0.751 0.803
3. My portfolio is
likely to doing well
under uncertainty,
compared to other
investors 0.665 0.517
4. The likelihood of my
financial success is
more compared to
other investors 0.791 0.796
1. I expect superior
returns of my
investment in the
future 0.755 0.746 3.871 3.924 0.641 0.637
Table AI. 2. I expect to achieve
Factor loadings, my investment
descriptive statistics goals in the future 0.829 0.795
of relative investment 3. I expect to improve
optimism and my investment
personal investment performance in the
optimism future 0.787 0.798

Corresponding author
Mohammad Tariqul Islam Khan can be contacted at: stepshanto2000@gmail.com; tariqul.
islam@mmu.edu.my

For instructions on how to order reprints of this article, please visit our website:
www.emeraldgrouppublishing.com/licensing/reprints.htm
Or contact us for further details: permissions@emeraldinsight.com