Heuristic valuation and investment performance of individual investors

Mariusz Kicia

Abstract


The paper presents a  concept of simplified valuation models and tests their usefulness in application by individual investors at the Polish stock market over 2000–2013. It is discussed whether it would be rational to combine common fundamental valuation methods of multiples and DCF, preserving the relative simplicity of multiples as well as complexity and consistency of discounted cash flows to provide useful hybrid tool even when individual investors follow behavioral heuristics and simplifications while making investment decisions. Results of experiments indicate that use of proposed valuation methods wouldn’t have an unequivocal impact on investment strategy of irrational individual investors with quite low average improvements of annual returns (from 5.2% to 10.3% extra return) only in about half of all 415 analyzed stocks.

Keywords


individual investor; valuation; behavioral finance

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DOI: http://dx.doi.org/10.17951/h.2013.47.4.67
Date of publication: 2015-07-23 22:45:57
Date of submission: 2015-07-23 19:38:20


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