Open Access Open Access  Restricted Access Subscription Access
Open Access Open Access Open Access  Restricted Access Restricted Access Subscription Access

Impact of Behavioural Disposition on Portfolio Investment Decisions of Individual Investors - A Structural Analysis


Affiliations
1 SGT University, Gurugram, Haryana, India
     

   Subscribe/Renew Journal


In the past two decades, behavioural finance, a new criterion of finance gained power on the basis of traditional finance. An ongoing debate between behavioural theorists and traditional theorists provides horizon for interrogation into the changing landscape of investment behaviour. Behavioural finance deals with the influence of psychological; factors on investment decisions. It diverges from the presumption of rationality and can describe how an investor takes investment decisions. In the alternating investment scenario and extreme dynamism in the capital market, investors do not adhere to rational thinking and reflect several dispositions. Therefore, studying how psychology plays a significant role in investment decisions becomes important. A structured questionnaire on impact of behavioral biases on investment decisions of individual investors on 5 point Likert scale was prepared and responses were collected from investors who make their own investment decisions. The paper identified through Confirmatory Factor analysis (CFA) and afterwards through Structural Equation Model (SEM) that Herd Mentality, Overconfidence, Disposition, Mental Accounting Anchoring, Representativeness, Loss Aversion and Regret Aversion are a few biases affects the portfolio investment decisions of individual investors.

Keywords

Behavioural Finance, Behavioural Disposition, Portfolio Investment Decisions, Confirmatory Factor Analysis, Structural Equation Model.
Subscription Login to verify subscription
User
Notifications
Font Size


  • Agrawal, K. (2012). A conceptual framework of behavioural biases in finance. The IUP Journal of Behavioural Finance, 8(3), 7–24.
  • Benos, A. (1998). Aggressiveness and survival of overconfident traders. Journal of Financial Markets, 1(3–4), 353–383.
  • Chandra, S., & Sharma, D. (2010). Investment management by individual investors: A behavioral approach. The IUP Journal of Behavioral Finance, 7(1), 7–18.
  • De Bondt, W. F. M., & Thaler, R. H. (1995). Financial decision-making in markets and firms: A behavioral perspective. In R. Jarrow, V. Maksimovic, & W. T. Ziemba (Eds.), Handbooks in operations research and management science (Vol. 9, pp. 385–410). Amsterdam: Elsevier.
  • De Bondt, W., & Thaler, R. H. (1995). Financial decisionmaking in markets and firms: A behavioral perspective. Finance, Handbooks in Operations Research and Management Science, 9, 385–410. Amsterdam: North Holland.
  • Devenow, A., & Welch, I. (1996). Rational herding in financial economics. European Economic Review, 40(3–5), 603–615.
  • Evans, D. A. (2006). Subject perceptions of confidence and predictive validity in financial cues. Journal of Behavioral Finance, 7(1), 12–28.
  • Fogel, O., & Berry, T. (2006). The disposition effect and individual investor decisions: The roles of regret and counterfactual alternatives. Journal of Behavioral Finance, 7(2), 107–116.
  • Fromlet, H. (2001). Behavioural finance – Theory and practical application. Business Economics, 36–39.
  • Gervais, S., & Odean, T. (2001). Learning to be Overconfident, Review of Financial Studies, 14(1), 1–27.
  • Gilovich, T., & Griffin, D. (2002). Introduction – Heuristics and biases: Then and now (pp. 1–18). Cambridge: Cambridge University Press.
  • Grinblaltt, M., & Han, B. (2004). Prospect theory, mental accounting, and momentum, Yale ICF Working Paper No. 00-071, 1–38.
  • Hirshliefer, D., & Luo, G. (2001). On the survival of overconfident traders in a competitive security market. Journal of Financial Markets, 4, 73–84.
  • Iyer, B. S., & Bhaskar, K. S. (2002). Investor’s psychology: A study of investor behaviour in the indian capital market. Finance India, 16(4), 1357–1375.
  • Jaiswal, B., & Kamil, N. (2012). Gender, behavioral finance and the investment decision. Business Review, 7(2), 8–22.
  • Kumar, S., & Goyal, N. (2014). Behavioral biases in investment decision making – A systematic literature review. Quantitative Research in Financial Markets, 7(1), 88–108.
  • Kyle, A., & Wang, F. (1997). Speculation duopoly with agreement to disagree: Can overconfidence survive the market test? Journal of Finance, 52, 2073–2090.
  • Lakshmi, P., Visalakshmi, S., Thamaraiselvan, N., & Senthilarasu, B. (2013). Assessing the linkage of behavioural traits and investment decisions using SEM approach. International Journal of Economics and Management, 7(2), 221–241.
  • Lehenkari, M., & Perttunen, J. (2004). Holding onto the losers: finish evidence. The Journal of Behavioral Finance, 5(2), 116–126.
  • Lintner, G. (1998). Behavioural finance: Why investors make bad decisions. The Planner, 13(1), 7–8.
  • Merli, M., & Roger, T. (2013). What drives the herding behavior of individual investors? Finance, 34(3), 67–104.
  • Oberlechner, T., & Osler, C. (2009). Overconfidence in Currency Markets, 1–46.
  • Odean, T. (1998a). Volume, volatility, price and profit when all trades are above average. Journal of Finance, 53(6), 1887–1934.
  • Olsen, R A. (2008). Cognitive dissonance: The problem facing behavioral finance. Journal of Behavioral Finance, 9(1), 1–4.
  • Olsen, R. (1998). Behavioural finance and its implications for stock-price volatility. Financial Analyst Journal, 54(2), 10–17.
  • Razek, Y. H. (2011). An overview of behavioural finance and revisiting the behavioural life cycle hypothesis. The IUP Journal of Behavioural Finance, 8(3), 7–24.
  • Ricciardi, V., & Simon, H. (2000). What is behavioural finance? Business Education and Technology Journal, 1(1), 1–9.
  • Rekik, Y. M., & Boujelbene, Y. (2013). Determinants of individual investors’ behaviors: Evidence from Tunisian stock market. Journal of Business and Management, 8(2), 109–119.
  • Scharfstein, D. S., & Stein, J. C. (1990). Herd behavior and investment. The American Economic Review, 8(3), 465–479.
  • Sewell, M. (2007). Behavioural finance. Cambridge: University of Cambridge Press.
  • Shiller, R. J. (1998). Survey evidence on diffusion of interest and information among investors. Journal of Economic Behavior and Organization, 12(1), 47–66.
  • Slovic, P., & Lichtenstein, S. (1971). Comparison of Bayesian and regression approaches to the study of information processing in judgment. Organizational Behaviour and Human Performance, 6(6), 649–744.
  • Srivastava, A. (2007). An analysis of behavior of investors in India. The ICFAI University Journal of Behavioral Finance, 4(1), 43–52.
  • Thaler, R. H. (1999). The end of behavioural finance. Financial Analyst Journal, 55(6), 12–17.
  • Tversky, A., & Kahneman, D. (1974). Judgement under uncertainty: Heuristics and biases. Science, 185(4157), 1124–1131.
  • Tversky, A., & Kahneman, D. (1974). Judgment under uncertainty: Heuristics and biases. Science, 1124–1131.
  • Waweru, N. M., Munyoki, E., & Uliana, E. (2008). The effects of behavioral factors in investment decisionmaking: a survey of institutional investors operating at the Nairobi Stock Exchange. International Journal of Business and Emerging Markets, 1(1), 24–41.

Abstract Views: 225

PDF Views: 0




  • Impact of Behavioural Disposition on Portfolio Investment Decisions of Individual Investors - A Structural Analysis

Abstract Views: 225  |  PDF Views: 0

Authors

Renuka Sharma
SGT University, Gurugram, Haryana, India

Abstract


In the past two decades, behavioural finance, a new criterion of finance gained power on the basis of traditional finance. An ongoing debate between behavioural theorists and traditional theorists provides horizon for interrogation into the changing landscape of investment behaviour. Behavioural finance deals with the influence of psychological; factors on investment decisions. It diverges from the presumption of rationality and can describe how an investor takes investment decisions. In the alternating investment scenario and extreme dynamism in the capital market, investors do not adhere to rational thinking and reflect several dispositions. Therefore, studying how psychology plays a significant role in investment decisions becomes important. A structured questionnaire on impact of behavioral biases on investment decisions of individual investors on 5 point Likert scale was prepared and responses were collected from investors who make their own investment decisions. The paper identified through Confirmatory Factor analysis (CFA) and afterwards through Structural Equation Model (SEM) that Herd Mentality, Overconfidence, Disposition, Mental Accounting Anchoring, Representativeness, Loss Aversion and Regret Aversion are a few biases affects the portfolio investment decisions of individual investors.

Keywords


Behavioural Finance, Behavioural Disposition, Portfolio Investment Decisions, Confirmatory Factor Analysis, Structural Equation Model.

References