Individual Investors Sentiments and Asset Pricing

Synergy - The Journal of Management, Vol. 9, No. 2, July-December 2007

Posted: 6 Mar 2009 Last revised: 4 May 2012

See all articles by Abhijeet Chandra

Abhijeet Chandra

Vinod Gupta School of Management, IIT Kharagpur

Ravinder Kumar

Jamia Millia Islamia, Central University

Date Written: December 29, 2007

Abstract

Individuals often invest in securities based on approximate rule of thumb, not strictly in tune with market conditions. Their emotions drive their trading behaviour, which in turn drives asset (stock) prices. Investors fall prey to their own mistakes and sometimes others' mistakes, referred to as herd behaviour. Markets are efficient, increasingly proving a theoretical concept as in practice they hardly move efficiently. The purely rational approach is being subsumed by a broader approach based upon the trading sentiments of investors. In this approach, security expected returns are determined by both risk and misvaluation. These are some of the issues of greater relevance to the capital market. The present paper documents the role of emotional biases towards investment (or disinvestment) decisions of individuals, which in turn force stock prices to move. The authors used a questionnaire to judge the impact of emotions on their investment related decisions and conclude that the majority of individual investors often ignore fundamentals of investments and go by their prejudice about the worth of the security in question.

Keywords: Individual investors, Emotional biases, Herd behaviour, Investment decision, Rational analysis

Suggested Citation

Chandra, Abhijeet and Kumar, Ravinder, Individual Investors Sentiments and Asset Pricing (December 29, 2007). Synergy - The Journal of Management, Vol. 9, No. 2, July-December 2007. Available at SSRN: https://ssrn.com/abstract=1321468

Abhijeet Chandra

Vinod Gupta School of Management, IIT Kharagpur ( email )

Kharagpur, 721302
India

Ravinder Kumar (Contact Author)

Jamia Millia Islamia, Central University ( email )

Jamia Nagar
New Delhi, Haryana 122002
India

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