Do Investor's Emotions Determine Their Investment Decisions?

Behavioural finance states that investor's investment decisions are influenced by psychological factors like mood, emotion and cognitive biases. Among these, emotions have a powerful impact on investor's investment behaviour. Though moods and emotions are practically considered to be the same, there is slight difference between them. Mood is considered to be less intense, whereas emotions are more intense. Emotions can get in the way of making prudent financial decisions. It is human nature that they react differently when they are in a different state of emotion. The aim of this paper is to study different emotional swing variables and its influence on investor's investment decisions. The research instrument was developed and administered at individual investors using multistage random sampling technique. The Cronbach's reliability of the emotional variables is 0.84. The data collected were analyzed quantitatively by using different statistical tools like chi-square analysis, factor analysis, cluster analysis, discriminant analysis, ANOVA and Cross tabulation. Findings suggest that based on the influence of emotions, investors are categorised as positive, negative and neutral. The characteristics of different emotional state are also discussed in this paper. An overall conclusion of this study reveals that investor's emotions become matured over a period of time on their investment life cycle.