Abstract

Purpose The purpose of this paper is to test the relationship between the annual income earned by the investors and eight behavioural biases exhibited by the investors such as mental accounting, anchoring, gambler’s fallacy, availability, loss aversion, regret aversion, representativeness and overconfidence. Design/methodology/approach The relationship is derived based on a questionnaire survey conducted on 436 secondary equity investors residing in Chennai, India. Findings Analysis of variance test was performed on the normalised and non-normalised version of the biases divided in terms of the annual income earned by the investor. The test found that for the significant biases except the overconfidence bias, the investors with higher annual income were less prone to the biases when compared to investors with lower annual income. On the other hand, with respect to the overconfidence bias, the investors with higher annual income were prone to exhibit overconfidence bias when compared to the investors with lower annual income. Correlation analysis showed that the investors with high annual income were more likely to exhibit higher overconfidence bias but lower representativeness, loss aversion, availability and mental accounting biases. Originality/value A contribution in the financial and economic front which would benefit the financial advisors to now consider the income earned by the clients as an important factor while giving financial advice to the clients and while guiding them about the biases they are prone to exhibit.

Highlights

  • Several demographic variables have been used to describe the profile of investors in both the primary and secondary equity markets

  • Objectives of the study To study the role of income in the behaviour of investors with respect to the behavioural biases, namely, mental accounting, anchoring, gambler’s fallacy, availability, loss aversion, regret aversion, representativeness and overconfidence exhibited by the secondary equity investors residing in Chennai; to examine if the investors belonging to the various income groups differed with respect to the behavioural biases exhibited; and to examine the relationship between the behavioural biases exhibited by the investors and the income earned by them

  • 436 secondary equity investors residing in Chennai were surveyed using the questionnaire survey method to measure eight behavioural biases on a Likert scale

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Summary

Introduction

Several demographic variables have been used to describe the profile of investors in both the primary and secondary equity markets. The income earned by the investors play an important role, as it determines the proportion of income which goes into savings, the proportion of income which could be invested and the proportion which could be allocated for equity investment. The affordability of expert financial advice depends on the amount of income earned. The better is the quality of the advice when more money is spent on it and the results of the financial investment are better. Very few studies look at the relationship between the income earned and investor behaviour in terms of the biases exhibited.

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