Behavioural biases in investment decision making: A research study on snakebite and house money effects on indian individuals

Abstract

Investor's previous experience appears to be one of the major determining factors in investment decision making. It is observed that investors avoid those stocks which resulted in losses earlier. The painful experience known as snakebite effect makes the investor more risk averse when the repeat behaviour comes into the picture. A completely opposite behaviour is observed when the repeat behaviour is related to reinvestment of their earlier earned profit. It is like a gambler who takes greater risk while playing with the house's money, an investor also becomes willing to take greater risk if she/he plans to reinvest their earlier earned profit. Loss of the earlier earned profit is not considered as loss of their own money which insists them to undertake greater risks. A risk averse investor becomes increasingly risk seeker due to this house money effect. In this research study, it is strongly evidenced that both the snakebite and house money effects influence the investors in their decision making process which may lead to a serious error in judgement in many occasions.