The Impact of Behavioral Biases on Investor’s Behavior in Indian Stock Market
International Journal of Management and Social Science Research Review, Vol-1, Issue – 37, July -2017
9 Pages Posted: 2 Oct 2017
Date Written: July 31, 2017
Capital Asset Pricing Model, Efficient Market Hypothesis and Modern Portfolio Theory (Traditional Financial Theories) presumes that financial markets are perfect and all the investors behave rationally. In other words, these theories believe that whatever new information comes in the market, it is instantly absorbed by the stock prices; thus, eliminating the possibility of earning more profits just by having the company’s insider information. But, there are many empirical studies done before which shows that investors while trading in stock market are not rational always, rather their decisions are affected by many other factors. Thus, the present paper focuses on determining the various behavioral biases that influence investor’s decision making process. The data for the same was gathered from 380 respondents residing in Delhi/NCR to test the presence of Loss Aversion, Regret Aversion, Herd Behavior, Overconfidence Bias and Cognitive Dissonance Bias. Further, Principal Component Analysis was used to analyse the collected data. It was found that all these biases have moderate impact on the investor’s decision making process. These findings shall help the investors in understanding the most common behavioral biases to which they are vulnerable to in order to help them to mitigate the risk factor in investment for better returns. It shall also help financial planners in customizing portfolios and asset allocation strategies for their clients.
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