Do Investors’ Exhibit Cognitive Biases: Evidence From Indian Equity Market

Manika Sharma,Mohammad Firoz

doi:10.5430/ijfr.v11n2p26

Abstract

The current article examines the influence of cognitive biases on the process of decision making among equity investors of India. The research is being directed by conducting a survey on a sample of 400 investors investing in Indian capital market. This study measures behavioural biases of individual investors' using a structured questionnaire as a research instrument of the study. By means of cross section data analysis, this analysis steadily provides evidence that behavioural biases adversely affect rational decision-making of an investor. This research indicates that a statistically significant relationship exists between behavioural biases among investors and the process of rational decision-making. The findings of the study are imperative to investors investing Indian capital market, brokers, financial consultants and investment advisors; responsible for managing assets and constructing portfolios for investment clients, as they can alter the investment decision by accessing the susceptibility of investors towards cognitive biases, which often lead to erroneous decision.

Highlights

Behavioural finance has emerged as a respective discipline which seeks the reasons of stock market anomalies by justifying them with the explanation of various biases that the investor has while taking investment decisions
The investigative outcome of the research indicates the relationship amid behavioural biases and decision-making process whereby only herd bias is significantly related to the first stage of the decision-making process (β=0.371, p-value
Keeping in consideration the above stated facts, the persistence of the present research focused on analysing the association between behavioural biases and rational decision-making procedure followed among Indian individual investors

Summary

Introduction

Behavioural finance has emerged as a respective discipline which seeks the reasons of stock market anomalies by justifying them with the explanation of various biases that the investor has while taking investment decisions. It helps in exploring the reasons of why an investor needs tailor-made investment solution depending on his age, income, education, sex, information about security and peer behaviour. Behavioural finance is not limited to asset pricing, portfolio construction and market efficiency (Kahneman et al 1991) It emphasizes that financial choices are affected by behavioural, psychological and emotional biases of an individual. The prior literature documents that investors are affected by multiple biases and mental filters while making investments in the capital market (Kahneman and Tversky 1979; Bondt et al, 1994; Lui Yu-Hon et al 1998; Wicoz, 1999; Barber and Odean, 2000; Dhar and Zhu, 2006; Frazzini, 2006; Chira et al 2008; Chun and Ming, 2009; Chiang and Zheng 2010; Lao and Singh 2011; Muradoglu et al 2012; Rekik 2013; Jamal et al 2014; Prosad et al 2015; Haron 2016)

Methods

Results

Conclusion