Antecedents to heuristics: decoding the role of herding and prospect theory for Indian millennial investors

Abstract

Purpose

The purpose of this paper is to explore how heuristics are formed and whether herding and prospect theory act as antecedents to heuristics. The relationship is explored specifically for millennials.

Design/methodology/approach

The proposed relationship is explored specifically for millennials. Herding and prospect theory are modelled as antecedents to heuristics. The study uses survey data from 923 millennials from India to test the model for two financial products: equity and mutual funds. Regression analysis is used to evaluate the model.

Findings

Findings support the role of herding and prospect theory as antecedents to heuristics of millennials although to varying degrees for equity and mutual fund investments. The impact of herding on heuristics is likely to be smaller for equity investments as compared to mutual fund investments.

Research limitations/implications

The findings provide insights into how heuristics are formed for millennials. The findings add to literature by beginning a new line of inquiry on how heuristics are formed. Since the model is tested on a single generation, future research can test the model on other generations. In addition, future research can also add more antecedents to our proposed model.

Practical implications

Findings from this study can provide financial planners and marketers with an understanding of how heuristics are formed for millennials. Financial planners can use these insights while providing financial advice to this generation and marketers can use them to create more relevant outreach.

Social implications

Financial investments are an important conduit for financial security. By understanding the cognitive processes that influence financial investment decision-making, it is possible for educators to create content appropriately and for financial planners to advise clients accordingly to enable optimal financial decisions that will be wealth-creating.

Originality/value

Existing literature primarily treats heuristics, herding and prospect theory as being independent of each other. The authors take a novel approach to model the antecedents to heuristics to be herding and prospect theory. The model is tested on millennials for two financial products: equity and mutual funds.

Citation

Goyal, P., Gupta, P. and Yadav, V. (2023), "Antecedents to heuristics: decoding the role of herding and prospect theory for Indian millennial investors", Review of Behavioral Finance, Vol. 15 No. 1, pp. 79-102. https://doi.org/10.1108/RBF-04-2021-0073