The Impact of Behavioural Factors on Investment Decision Making and Performance of CSE Investors in Eastern Province of Sri Lanka

N Rajeshwaran

doi:10.4038/sljer.v8i1.123

Abstract

Objectives of the study are twofold; first, to identify behaviour of CSE investors in Eastern province of Sri Lanka; second, to examine how behavioural factors impact on investment performance of CSE investors in the province. The research was conducted from positivism perspective and deductive reasoning was used as research approach. Survey strategy was applied to collect data and time horizon was cross sectional. Proportionate stratified random sampling technique was applied to choose the sample from the districts. Data were collected via questionnaires from 374 investors of CSE in the province. Mean, standard deviation, correlation and multiple regression were applied. Results show that all four behavioural factors and investment performance have fallen to moderate levels. According to Heuristic variables, investors rely on their skill, knowledge and previous experience. The investors mostly avoid loss and regret in investment on stocks as per the Prospect variables. Out of Market variables, the investors carefully consider the price changes of stocks while moderately analyse the companies’ customer preference. In line with Herding variable, the investors also follow others’ decision to invest. Heuristic variables are positively related with investment performance while other variables namely prospect variables, market variables and Herding variables are negatively related with investment performance. Recommendations are given to current and potential investors as well as executives in the stock market for promoting investment in stock exchange.

Highlights

Traditional financial theories are classical decision theory, rationality, risk aversion, model portfolio theory (MPT), the capital asset pricing model (CAPM), and the efficient market hypothesis (EMH) which is dominant over the several decades (Huang et al, 2016; Fama, 1970)
“Behavioural finance theories, which are based on psychology attempt to understand how emotions and cognitive errors influence individual investors’ behaviors” (Luong and Ha, 2011)
To examine how behavioural factors impact on investment performance of CSE investors in Eastern province of Sri Lanka THEORETICAL PERSPECTIVES OF BEHAVIOURAL FINANCE Heuristic Theory According to Ritter (2003), Heuristic refers to rules of thumb which people use to make decisions in complex, uncertain environments

Summary

Introduction

Traditional financial theories are classical decision theory, rationality, risk aversion, model portfolio theory (MPT), the capital asset pricing model (CAPM), and the efficient market hypothesis (EMH) which is dominant over the several decades (Huang et al, 2016; Fama, 1970). Ackert (2014) found that many of the assumptions and findings associated with traditional finance theories are not accurate. Despite there are a lot of studies available pertaining to stock market share price movement, capital structure in Sri Lanka (Menike, 2006; Menike & Prabath, 2014; Hettiarachchi, & Rajeshwaran, 2016), investors’ behaviour are not clearly studied. An understanding of how investors generally respond to market movements would help them in devising appropriate asset allocation strategies for clients (Al-Tamimi, 2006)

Methods

Results

Conclusion