Implications from Biased Probability Judgments for International Disparities in Momentum Returns

Momentum is a consistent phenomenon in financial data from the majority of markets around the globe. One prominent exception is the Japanese market, where returns from a momentum-investment strategy are nonexistent. The authors investigated international differences in the representativeness heurist...

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Bibliographic Details
Published in:The journal of behavioral finance 2017-04, Vol.18 (2), p.143-151
Main Authors: Duttle, Kai, Inukai, Keigo
Format: Article
Language:English
Subjects:
Cognitive reflection test
Culture
Japan
Law of small numbers
Momentum
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Summary:Momentum is a consistent phenomenon in financial data from the majority of markets around the globe. One prominent exception is the Japanese market, where returns from a momentum-investment strategy are nonexistent. The authors investigated international differences in the representativeness heuristic, which is one potential driver of momentum. After observing sequences of a random walk, subjects give probability estimates for the direction of the respective next change. The experiment was conducted in Japan and in Germany. For a subgroup of participants with lower cognitive abilities our results are perfectly in line with international momentum evidence.
ISSN:1542-7560
1542-7579
DOI:10.1080/15427560.2017.1308937