The Impact of Psychological Factors on Investment Decision Making of Investors: An Empirical Analysis

EPRA International Journal of Economic and Business Review, Vol. 4, Issue 11, November 2016

13 Pages Posted: 5 Dec 2016

See all articles by Yamini Gupta

Yamini Gupta

Jamia Millia Islamia (A Central University) - Economics

Shahid Ahmed

Jamia Millia Islamia (A Central University) - Economics

Date Written: November 4, 2016

Abstract

In the traditional financial theory, the decision makers were assumed to be rational and stock markets were thought out to be the perfect markets i.e. whatever information is available in the market is fully reflected in share prices and nobody can earn extra profits just by having insider’s information. On the contrary, modern theory proposes that investors’ decision-making is not always propelled by these thoughts. In fact, the decisions taken by them are unpredictable sometimes. Moreover, there are many studies which have shown that investors’ decisions are influenced by numerous psychological factors. The present research aims at determining the various psychological factors that have an influence on investor’s decision making in Indian stock market. In the present article, data was collected from 380 retail investors who are further segregated in two groups on the basis of their investment experience. Four behavioral biases namely loss aversion bias, regret aversion bias, herding bias and anchoring bias are considered and analysed using discriminant analysis and chi-square test. It was found that herding bias was exhibited by both the groups in an equally likely manner. Further, experienced investors were found to be more prone to loss aversion bias, regret aversion bias and anchoring bias as compared to that of less experienced investors.

Keywords: Behavioral Finance, Herd behavior, Regret Aversion, Anchoring Bias, Loss Aversion

JEL Classification: G02, G110, G12, O16

Suggested Citation

Gupta, Yamini and Ahmed, Shahid, The Impact of Psychological Factors on Investment Decision Making of Investors: An Empirical Analysis (November 4, 2016). EPRA International Journal of Economic and Business Review, Vol. 4, Issue 11, November 2016. Available at SSRN: https://ssrn.com/abstract=2880059

Yamini Gupta

Jamia Millia Islamia (A Central University) - Economics ( email )

Shahid Ahmed (Contact Author)

Jamia Millia Islamia (A Central University) - Economics ( email )

Jamia Nagar
New Delhi, 110025
India

HOME PAGE: http://jmi.ac.in/economics/faculty-members/Prof_Shahid_Ahmed-1783

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