Purpose: This paper aims to review the theory and empirical evidence of institutional investor behavioral biases in the lenses of behavioral finance paradigm. It surveys the research specifically focusing on behavioral biases among institutional investors in investment management activities worldwide.Design/methodology/approach: A literature survey is done to gather and synthesize evidence on behavioral biases of institutional investors.Findings: The survey and analysis reveal the following findings. First, the theoretical underpinning of investors’ irrational behavior has been neglected in behavioral finance research. Second, the behavioral heuristics and biases are dynamic and complex. Third, understanding behavioral biases’ origin, causes and effects requires interdisciplinary perspectives from the fields of psychology, sociology and biology.Originality/value: The analysis and alternative perspectives drawn in this paper provide new insights into the field of behavioral finance and aims to suggest researchers, practitioners and regulators on the next course of actions.

This paper provides historical, theoretical, and empirical syntheses in understanding the rationality of investors, stock prices, and stock market efficiency behaviour in the theoretical lenses of behavioural finance paradigm. The inquiry is guided by multidisciplinary behavioural-related theories. The analyses employed a long span of Bursa Malaysia stock market data from 1977 to 2014 along the different phases of economic development and market states. The tests confirmed the presence of asymmetric dynamic behaviour of prices predictability as well as risk and return relationships across different market states, risk states and quantiles data segments. The efficiency tests show trends of an adaptive pattern of weak market efficiency across various economic phases and market states. Collectively, these evidences lend support to bounded-adaptive rational of investors' behaviour, dynamic stock price behaviour, and accordingly forming bounded-adaptive market efficiency.

Purpose: This paper aims to explore the relevance of bounded rationality to the practice of institutional investors in Malaysia. Understanding institutional investor behavior is important, as it can determine the asset prices and consequently the market behavior.Design/methodology/approach: A set of questionnaires is used to solicit information regarding the understanding and practical application of behavioral finance theories and strategies among fund managers in the Malaysian investment management practice. In the process, bounded rational theory is aimed to be validated. Fund managers’ possible bounded rational behavior is assessed with reference to their investment management approaches and strategies right from individual beliefs and acquisition of information, as well as investment management and strategies used.Findings: The findings lend support to the notion that institutional investors too, being normal human beings, are expected to think and behave in a boundedly rational manner as postulated in bounded rational theory. The sources of bounded rationality are individual, institutional and social forces. Thus, portfolio trading and investment management strategies are exposed to wide varieties of behavioral risks. Despite the notions that behavioral risks are real and the impact on fund performance could be pervasive, fund managers’ self-awareness regarding control and institutional readiness to govern behavioral risks in investment practices is still low.Research limitations/implications: Empirical evidence drawn in the current paper is subjected to small sample size and specific focus on Malaysian context. Despite this limitation, the sample is statistically sufficient and provides a fair representation, as well as quality opinions, of fund manager’s investment management behavior in Malaysia. This research provides valuable implications to practitioners (fund managers) and regulators (investment management and capital market policymakers). In practice, the current study draws some practical ideas, especially for buy-side institutional investors, on the source and impact of behavioral biases on fund management practices and performance. For regulators, this research highlighted the needs and possible ways to regulate these behavioral risks.Originality/value: The current paper provides new insights on the theory and practice of the institutional investor. In theory, this research provides evidence of bounded rationality of institutional investor behavior, practicing in the asset management industry in the emerging markets of Malaysia. This evidence lends support to the validity of the bounded rationality theory in explaining institutional investor behavior. In practice, thisresearch provides new insights on the relevance of behavioral finance perspectives and strategies in the asset management industry practice and policy.

Behavioral risks including investor sentiment plays an important roles in Asia’s stock market behaviors but theoretically and empirically not well understood in traditional conditional means statistic partly due to its heterogeneity roles. In contrast to the existing studies, this paper examine the heterogeneity roles of investor sentiment proxies (i.e. CSI, BCS, and FKLI) in influencing various aggregate stock market indices in Malaysia. The proposed sentiment proxies relation to stock returns are statistically analyzed using mean-based (OLS) and quantile based (QR) regression methods to uncover the relationships accross full range of stock market returns conditional distributions. In the analysis, we examine the possible multidimensional association of various conditional of sentiments (i.e. average, sentiment states, market states, and interaction between sentiment and market states) on size (i.e. big firms vs. small firms) and industry (i.e. defensive vs. speculative) segmented data. The OLS analysis does not provides conclusive significant association of sentiment to returns but the QR analysis reveal emerging patterns of sentiment heterogeneity roles. Specifically, the QR analysis reveal an asymmetric association between sentiment to returns with U-curve pattern from negative magnitude in the lower quantiles and positive magnitude in the upper quantiles. The findings not only consistent with the current hypothesis that sentiment risk is strongly affected the small firms and speculative industry but also the big firms. The sentiment-return associations are statistically significant in extreme lower quantiles and in extreme upper quantiles of return distributions. These patterns are consistent with theoretical postulates of prospect theory and evidence of assymetric overreaction of Asia investors to sentiment news. Overall, the findings from this paper provides new insights for theoretical understanding and practical application of sentiment risk in stock market.