Empirical evaluation of a heuristic approach to value investing: an examination of S&P/TSX 60 from 2006-2010

Abstract

Heuristics are useful practical tools for cutting through the complex confluence of uncertainty, limited information and bounded rationality. A disciplined use of heuristics can help to overcome the tendency for cognitive biases to creep in to investment decision making. A simple heuristic is developed based on a parsimonious set of firm characteristics and decision rules. This heuristic is then applied to the S&P/TSX 60 group of companies. Analysis of the data shows that the portfolio that is picked from this group by the heuristic has desirable descriptive statistics of a genuine value portfolio.