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Indian Behavioral Finance: Review of Empirical Evidence

Introduction.

Investment is the sacrifice of the present asset(s) to use that saved money with an expectation of earning higher returns in the future (Graham & Dodd 2002). The expectation of an investment is called a return. Higher returns are proportional to risk taken in an investment. The investors have a strategy or a plan to invest based on certain demographic and physiological factors. Investors rely on the availability of information to take a relevant decision on investing. The human mind has a limitation in assimilating the information often referred to as 'bounded Rationality' (Barber 2009).

The modern financial theory is based on the concept of homo economics, adopted from neoclassical economics. This ideal, self-interested, and perfectly rational agent maximizes his utility by choosing at each point in time the best options available. This perfect rationality, combined with the efficient markets hypothesis, was assumed by when he developed his portfolio selection theory, which is considered the starting point of modern finance theories. The market efficiency concept was formally set out by and modern financial theories are founded on the assumptions of rational investors and efficient markets.

In contrast, the agent of behavioral finance is not perfectly rational, but a normal human (Bailey, 2011) who acts and takes decisions under the influence of emotions and cognitive errors. The confirmation of such evidence emerged from, from which interdisciplinary elements (in particular from psychology) began to be incorporated into behavioral theories of finance, in attempts to understand the process of decision-making under risk.

Factors affecting Investment Behavior are:

Demographic Factors

Psychological Factors

Financial determinants

Investment Pattern

Personality

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An Analytical Study on Behavioural Finance And Its Impact on Portfolio Investment Decisions – Evidence: India

2016, Savithribai Phule Pune University

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Shabarisha Narayan

Decision-making is a versatile action. Decisions cannot be made in an annulled by relying on the personal resources and complex models, which do not take into consideration the situations. A situation based on decision-making activity encompasses not only the explicit dilemma faced by the individual but also drag out to the environment. The most decisive challenge faced by the investors is in the vicinity of investment decisions. In designing the investment portfolio, the investors should consider their financial and investment goals, risk forbearance level, and other constraints. In addition to that, they have to envisage the output return-risk optimization. This process is better suited for institutional investors; it often fails for individuals, who are vulnerable to heuristic and behavioural biases. The presence of frequently occurring anomalies in conventional economic theory was a big contributor to the configuration of behavioral finance. These ostensible anomalies, and their unrelenting subsistence, directly infringe modern financial and economic theories, which assume rational and logical behaviour. Such a decision-maker would consider all relevant information and come up with the best choice under the situations in a progression known as constrained optimization. The present paper spotlights on Heuristic and Biases Related to Financial Investment and the Role of Behavioural Finance in Investment.

TJPRC Publication

Behavioral finance is an open-minded finance which includes the study of psychology, sociology, and finance. Behavioral finance micro examines behavior or biases of investors and behavioral finance macro describe anomalies in the efficient market. Nowadays, behavioral finance is not a new concept, the existence, and impact of behavioral biases in investor's behavior and human judgment are huge. In this paper, we will review various studies in this area so as to have a clear understanding of the behavioral finance and its significance in the financial decision making of investors. JEL CLASSIFICATION: G11, G14

Nada Ibrahim

This study investigates the existence of behavioral biases in Amman Stock Exchange and their effect on investment performance from investor's point of view. In specific, the effects of overconfidence bias, familiarity bias, loss aversion bias, disposition bias, availability bias, representativeness bias, confirmation bias and herding bias are investigated. Moreover, the study inspects whether the behavioral biases differ between males and females. The results show that there is a statistically significant effect of overconfidence bias, familiarity bias, availability bias, representativeness bias and herding bias on investment performance (p≤5%). Moreover, disposition bias, confirmation bias and loss aversion bias significantly affect investment performance but at a critical level of (p≤10%). No statistically significant differences are found between the answers of males and females.

Imran Umer Chhapra

Investor’s irrationality is an inevitable reality that has been time and again highlighted by researchers (Statman, 2008). Therefore, this study is another effort to assess the role of behavioral biases in financial decision making in Pakistan Stock Exchange (PSX). A survey questionnaire is designed and used to collect responses using convenience sampling technique from sample of 250 investors of PSX. Behavioral biases include overconfidence, over thinking, herding, cognitive bias, and hindsight effect of investors. Multiple regression models are used to test influence of five behavioral biases on investment decision. The results show that overconfidence, over thinking, herding, cognitive bias, and hindsight effect have significant positive impact on investment decision. Overall results conclude that much change in investment decision is due to behavioral biases. This study will help financial advisors to better advice their clients. The one way to reduce these biases may be education and training of investors.

IJREAM EDITOR

Finance is the system that includes the granting of money and credit, making of investments and provision of banking facilities. Behavioral finance is a new academic discipline which seeks to apply the insights of the psychologists to understand the behavior of both investors and financial markets. This study analyse the Investors behavior through 600 respondents using Factor analysis test. The results of the study show that the 16 variables selected for the study had been reduced to 5 factor models using the principle component analysis such as Market Dynamics, Logical Analysis , Herding Bias, Regret Aversion and Heuristic Bias. Thus, Behavioral finance is becoming a primary part of the decision making process, since it influences investors' behavior greatly.

Journal of Research in Business

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This paper aims to assess whether there is a behavioral bias of Turkish FDI investors in Ethiopia. Besides, it addresses the influence of firm size, investment duration, target customers and amount of investment on the behavioral variables. In order to do so, a survey was conducted on a sample of Turkish FDI investors in Ethiopia which tries to examine their cognitive psychological factors towards their investment decisions. The survey result was analyzed using factor analysis. The statistical findings confirm that some psychological anomalies such as representativeness, herding, regret aversion and mental accounting have been observed on Turkish FDI investors. The regression analysis shows that amount of investment of the firms significantly and positively affects herding, representativeness, regret aversion and mental accounting behaviors. Furthermore, duration of investment in Ethiopia affects their representativeness and mental accounting behavioral biases of investors positively.

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rayhan kabir

Salman Shahid

This research aims to investigate behavioral factors influencing the decisions of individual investors at the Securities Companies in Ho Chi Minh City, Vietnam. Data for this research was collated from 188 responses from individual investors, accounting for the response rate of 63%. There are five behavioral factors of individual investors at the Ho Chi Minh Stock Exchange: Herding, Market, Prospect, Overconfidence-gamble's fallacy, and Anchoring-ability bias. Securities Companies may also use the findings of this research for better understanding on investors' decision to give better recommendations to them. Stock prices then reflect their true value and Ho Chi Minh stock market becomes the yardstick of the economy's wealth and helps enterprises to raise capital for business activities.

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