A study on stock market investors during COVID phase – prospect theory approach

Abstract

At the macro-level, behavioral finance challenges classic financial theories. It shows that investor behavior in the real world is incompatible with the fundamental assumption of rationality in traditional finance, as studied by Sedaghati. While taking decisions, including financial decisions, rational thoughts are not involved, as suggested by modern theory. Additionally, these decisions are taken by them are also often inconsistent. Contrarily, human decisions are subject to several irrational principles, as in an evaluator study by Kannadhasan. These decisions are taken by considering the risks and returns involved. Prospect theory is one of the many theories derived from behavioral finance was first invented in a 1979 paper by Daniel Kahneman and Amos Tversky. It is commonly seen as the best explanation of how people evaluate risk in experimental settings, as researched by Barberis. This theory mainly includes how individuals or groups of investors decide between the alternatives under the umbrella of risk and uncertainty. This research evaluates the stock investors’ behaviors during the COVID-19 phase in India using prospect theory; many factors affect the decision of stock investors, such as loss aversion, risk aversion, certainty effect, reflective effect, etc., observed by Kahneman & Tversky. This study explores the possibility of factors of prospect theory on investors’ decisions about their investments during the COVID-19 phase. The results provide insights into how individual investors’ decisions vary during this pandemic situation.