Behavioral Finance to Understand the Psychological Behavior of Individuals in Investment

What is it about?

The concept of behavioral finance is becoming more recognized in the financial and investment environment. The concept of behavioral finance implies that investors do not necessarily make rational investment decisions. It argues that investment decisions are often influenced by emotional factors or other non-rational factors, leading to irrational investment choices. Investor’s behavior is one of the most important discussions of the science in the financial and non - financial market. It includes rational behaviour, herding behaviour, reaction behaviour and heuristic behaviour. This research paper is an attempt to comprehend and distinguish the importance of psychological behaviour of individuals towards investment and decision making. The study aimed to figure out how investors among different age categories make investment decisions based on behavioral finance biases. This research is practical as objective and implies a descriptive - survey research method. The different phases of the research include the purpose of identifying the factors that impact the investors’ behavior and also the most preferred instrument among the respondents. This research paper exhibits key analysis tools like factor analysis, binomial distribution, chi-square analysis, correlation analysis, percentage analysis, weighted average, Kendall’s W test and regression analysis with Three Hundred as the sample size and the research was conducted within the Chennai City in Tamil Nadu, India. Questionnaires were fairly structured and the responses were collected through Google forms. The SPSS software was used for analyzing the data. The statistically significant correlations indicate that the behavioural biases influence investor’s decision. Nevertheless, motive on investment return wasn’t significantly related to loss aversion bias, mental accounting bias, anchoring bias, regret avoidance bias, and over confidence bias. However, there are many instances where emotion and psychology influence ones’ decisions, causing them to behave in unpredictable or irrational ways. The research findings indicate conscientiousness plays a key role in influencing investor decision making and the investors are dynamic to the changes in the investment and portfolio market. A small degree of change in the probability will have a high impact on investment decision making as the investors risk preference is highly risk-averse. The reflexive and reflective approaches to decision making will influence behavioral biases. The investor’s behavior is predominantly based on the risk and return-trade off which impacts the psychology of the investor decision making. Results show that respondents might not essentially build choices on the premise of a rational analysis of all the information.

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Photo by Chronis Yan on Unsplash

Photo by Chronis Yan on Unsplash

Why is it important?

Behavioural finance is an emerging and fastest growing field that combines the understanding of behavioural and cognitive psychology with investment decision making process. Behavioural finance propagates that markets are not efficient, especially in the short duration. Individual investors do not make rational decisions to maximise profits. They are susceptible to various behavioural anomalies. This may become counter-productive to the maximisation of wealth leading to irrational behaviour.

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