The Impact of Behavioral Factors on Decisions Made by Individual Investors on the Capital Markets

Abstract

Paying attention to the investors’ behavioral inclinations is crucial, due to the relatively high incidence of all kinds of anomalies in the capital markets. Identified by researchers anomalies are manifested by excessive or delayed reaction of investors to the price changes and provided information. Understanding the schemes and motives that are used by individual investors on the capital market allow researchers to better characterize the decision-making process and it’s determinants. Knowledge about the behavioral inclinations can be used to predict and simulate the behavior of investors on the capital market in the future. The aim of this chapter is to determine the strength and direction of the impact of the behavioral factors on the investors decision-making process on the capital market. The main hypothesis assumes that psychological factors, like behavioral inclinations in preferences and opinion area, have a significant impact on the investor behavior on the capital market, changing their risk tolerance and acceptable rate of return. The first part of chapter presents the principles of construction structural equation models (SEM) and methods of their verification. The second section includes a detailed description of the questionnaire used in the survey and analysis of the results. In the last part behavioral factors characterizing the investors in the Polish capital market, like risk tolerance, inclinations in the opinions and preferences area have been identified. Additionally to verify hypotheses one structural equation model have been specified, estimated, analyzed in subgroup and interpreted.