Ecological Rational Behavior of Individual Investors in Stock Investment Decisions

Abstract

While heuristics are widely applied in decision-making, they can lead to biases and are therefore considered irrational behavior. However, the Adaptive Market Hypothesis implies that heuristics are neither rational nor irrational, and individuals should learn to use heuristics appropriate to the structure of the environment, which is referred to as “ecological rational behavior”. This study examines how individual investors can succeed using heuristics. Data was collected from 395 individual investors of the Colombo Stock Exchange through a questionnaire survey and analyzed using PLS-SEM. The findings indicate that reducing inappropriate heuristics depends on selfreflection of investment experience rather than the experience itself. Further, contrary to social learning, social conformity in response to market uncertainties increased the use of inappropriate heuristics in their decision-making.