Investment Decisions Of Individual Investors Research Articles

PERSONALITY TRAITS AND IRRATIONAL DECISION MAKING OF INDIVIDUAL INVESTORS: EVIDENCE FROM INDIA USING PLS-SEM APPROACH

The main objective of this research paper is to study the impact of Big Five personality traits on the investment decisions of individual investors in India and also to explore whether the overconfidence bias mediates the relationship or not through variance-based structural equation model. Data are collected using a standardised questionnaire from 203 individual investors of Chennai city and analysed using SmartPLS 3. Through the variance-based SEM, it is found that agreeableness and conscientiousness have no relationship with irrational investment decision-making. Overconfidence fully mediates the relationship of extraversion and neuroticism with irrational investment decision-making and partially mediates the relationship between openness and irrational investment decision-making. This study makes a unique contribution by not only studying the relationship between personality traits and irrational investment decision-making through the lens of individual investors, but also analysing the mediating role of overconfidence in that relationship.

A Review of Factors Affecting the Investment Decisions of Individual Investors: An Application in the Iraqi Stock Exchange

Bireysel yatırımcılar sermaye piyasalarında önemli bir role sahiptir. Yatırımcıların yatırım kararlarını etkileyen birçok faktör vardır. Bireysel yatırımcılar, yaşadıkları toplumun kararlarından da etkilenmektedir. Yatırımcıların kararlarına etki eden faktörler alınan yatırım kararları üzerinde önemli bir etkiye sahiptir. Bu nedenle bireysel yatırımcıların davranışlarının psikolojik ve sosyolojik faktörler açısından incelenmesi gerekmektedir. Bu çalışmanın amacı, bireysel yatırımların yatırım kararları üzerinde etkili olan faktörleri araştırmaktır. Irak Menkul Kıymetler Borsası`nda yatırım yapan bireysel yatırımcılar üzerinde anket uygulanarak veri toplanmıştır. Veriler SPSS 22,0 programında frekans ve yüzde analizlerine tabi tutularak yorumlanmıştır. Analiz sonucunda bireysel yatırımcıların yatırım kararlarını etkileyen risk, finansal kriz, finansal bilgi ve sürü psikolojisi gibi birçok faktörün olduğu belirlenmiştir.

Role of Behavioral Factors in Share Market Investment Decision Making

Investment behavior of individual investors in the share market highly influenced to variety of psychological factors. All the psychological factors highly contribute for investors’ decision of allocating the surplus financial resources for different instruments and stocks in the stock market. Major psychological bias broadly classified as Heuristic Bias, Prospect Bias, Market Bias and Hardening Bias. But, in this study authors concentrated in detail to investigate the impact of Heuristic bias on the investment decision making of Indian share market investors with special focus on the representativeness, over confidence, anchoring, gambler’s fallacy and availability bias. 375 share market investors selected from different geographical areas and different share broking houses to answer structured questionnaire but response received for 310 questionnaires. Also, share broker, financial experts and regular investors informally interviewed to get in-depth knowledge on the issues related for influence of psychology on investment decision of individual investors of share market. Different behavioral variables in this study have been justified on the basis of respondents’ age, gender, geography, kind of investor, recourses for investment, amount for investment etc. Indian share market investment lagging behind just with the participation of not more than 6% of the total population due to several issues, one among is failure of both investor and share service providing agencies to understand the influence of behavioral issues and its impact on investment decision. Final justification in the present empirical paper draw by applying different statistical techniques like chi-square test, factor analysis, co-relation analysis and ANOVA techniques of SPPS 20. This research attempt may be highly helpful for both the investors and financial service providers to reconstruct strategies after considering behavioral issues and its impact on investment.

Behavior biases and investment decision: theoretical and research framework

PurposeThis paper developed a theoretical and research framework by identifying the behavioral biases in investment decision and by presenting a review of the available literature in the field of behavior finance-related biases. This paper aims to present a compressive review of the literature available in the public domain in past five decades on behavior finance and biases and its role in investment decision-making process. It also covers insights on the subject for developing a deeper understating of the behavior of investor and related biases.Design/methodology/approachThe work follows the comprehensive literature review approach to review the available literatures. The review carried out on different parameters such as year of publication, journal of publication, country, type of research, data type, statistical technique used and biases identified. This is a funnel approach to decrease the number of behavior biases up to six for further research.FindingsMost of the existing works have summarized behavior finance as an emerging area in finance. This indicates the limited valuable research in developing economy in this area. This literature review helps in identifying major research gap in this domain. It helps in identifying the behavior biases which work dominantly in investment decision-making. It would be interesting to explore the area of behavior biases and their impact on investment decision of individual investors in India.Originality/valueThis paper worked on literature prevailing on the subject and available on various online research data source and search engines. It covers a long time frame of almost five decades (1970-2015). This paper is an attempt to look at the impact of behavior finance and biases and its role in investment decision-making process of the investor behavior. This study builds up a strong theoretical framework for researchers and academicians by detailed demonstration of available literature on behavior biases.

Heuristic biases in investment decision-making and perceived market efficiency

PurposeThis paper aims to clarify the mechanism by which heuristics influences the investment decisions of individual investors, actively trading on the Pakistan Stock Exchange (PSX), and the perceived efficiency of the market. Most studies focus on well-developed financial markets and very little is known about investors’ behaviour in less developed financial markets or emerging markets. The present study contributes to filling this gap in the literature.Design/methodology/approachInvestors’ heuristic biases have been measured using a questionnaire, containing numerous items, including indicators of speculators, investment decisions and perceived market efficiency variables. The sample consists of 143 investors trading on the PSX. A convenient, purposively sampling technique was used for data collection. To examine the relationship between heuristic biases, investment decisions and perceived market efficiency, hypotheses were tested by using correlation and regression analysis.FindingsThe paper provides empirical insights into the relationship of heuristic biases, investment decisions and perceived market efficiency. The results suggest that heuristic biases (overconfidence, representativeness, availability and anchoring) have a markedly negative impact on investment decisions made by individual investors actively trading on the PSX and on perceived market efficiency.Research limitations/implicationsThe primary limitation of the empirical review is the tiny size of the sample. A larger sample would have given more trustworthy results and could have empowered a more extensive scope of investigation.Practical implicationsThe paper encourages investors to avoid relying on heuristics or their feelings when making investments. It provides awareness and understanding of heuristic biases in investment management, which could be very useful for decision makers and professionals in financial institutions, such as portfolio managers and traders in commercial banks, investment banks and mutual funds. This paper helps investors to select better investment tools and avoid repeating expensive errors, which occur due to heuristic biases. They can improve their performance by recognizing their biases and errors of judgment, to which we are all prone, resulting in a more efficient market. So, it is necessary to focus on a specific investment strategy to control “mental mistakes” by investors, due to heuristic biases.Originality/valueThe current study is the first of its kind, focusing on the link between heuristics, individual investment decisions and perceived market efficiency within the specific context of Pakistan.

The familiar versus the unfamiliar: Familiarity bias amongst individual investors

Purpose: The purpose of this study was to investigate the existence of familiarity bias amongst individual investors in the South African stock market. Problem investigated: According to Warren Buffet, one needs to maintain emotional detachment if one wants to be a successful investor. However, recent research indicates that the perceptions of companies’ products and brands may influence individuals’ investment decisions in the stock market. This phenomenon implies that the investment decisions of individual investors are not purely based on firm fundamentals as suggested by traditional finance theories, but might be driven partly by the positive or negative attitude they have towards certain companies’ products and brands. The existence of familiarity bias amongst individual investors was investigated to determine if individuals prefer to invest in companies they are familiar with as opposed to unfamiliar companies. Methodology: A quantitative approach was followed. An online survey was used to show images of familiar and unfamiliar company brands to respondents, whereafter respondents were asked to indicate whether they will invest in the shares of the identified companies. The statistical analysis entailed descriptive statistics as well as one-way analyses of variance to test the stated hypotheses. Main findings: The results of this exploratory study indicate that investors do exhibit familiarity bias when choosing between different companies to invest in. Value of the research: The inclination of individual investors to invest in familiar corporate brands can have implications for the marketing industry, financial markets, the performance of companies as well as the investment performance of individual investors in the sense that it would seem that company brands could have an influence on investment decisions.

Discrimination, Social Risk, and Portfolio Choice

This study examines whether social discrimination affects the risk perceptions and, subsequently, the investment decisions of individual investors. We conjecture that minority groups such as gays/lesbians, African Americans, and women, who are more likely to experience discrimination, over-estimate their risk exposures (i.e., they experience social risk) and invest more cautiously. Consistent with our conjecture, we find that minorities with high social risk participate less in the stock market and allocate a lower proportion of their wealth to risky assets. These results indicate that non-financial risks, such as social risk, influence financial risk-taking behavior of U.S. households.

Trust and Local Bias of Individual Investors

It has been widely documented that investment decisions of individual investors exhibit local bias. Yet little is known of how societal forces affect investors' portfolio allocations of local versus nonlocal assets. We propose that social capital, and trust in particular, decreases the local bias of individual investors. Using the trading records of Chinese retail investors, we find that investors with a higher level of trust exhibit less local bias in their stock investments, and this pattern survives under various robustness checks. Furthermore, we document that trust has less effect on local bias of small stocks and potentially informed investors. These findings suggest that trust plays an important role in individual investors' financial decisions, especially for their non-information-driven trading behaviors.

Developing an instrument for measuring the effects of heuristics on investment decisions

Purpose Based on a thorough review and synthesis of the literature in behavioral finance, the purpose of this paper is to develop three measures of heuristics that tend to influence investment decisions of individual investors. Design/methodology/approach Using perceptual data collected from a sample of 167 individual investors in the USA, the reliability and validity of heuristics measures are assessed by confirmatory factor analysis with structural equation modeling. Then, the second-order model is executed in order to indicate the paths among the study’s constructs. Finally, a multiple-group analysis is conducted to analyze the moderating effects of demographic factors on the relationship between the perceived level of heuristics and their constituent dimensions. Findings Of the three groups of heuristics, salience is found to be the most important followed by mental accounting, while representativeness features as relatively less important. Regarding the moderating effects, only investment experience is noted to have a significant moderating impact. Research limitations/implications The data utilized for testing and validating this instrument was acquired from a relatively small sample of individual investors in the USA, which makes the generalization of findings somewhat limited. Practical implications Both researchers and practitioners in behavioral finance can use these measurement scales to better understand the impact of heuristics on individual investment decisions and also to develop models that relate the critical factors of heuristics to the performance of individual investment decisions. Originality/value To date, there has been no systematic attempt in the extant behavioral finance literature to develop a valid and reliable instrument on heuristics which would aid to improve the quality of decision making in investment analysis.

Gender attitudes and investor behaviour: evidence from individual investors in north western province

Individual investment behaviour has become more sophisticated in past decades. Some scholars have explored how various demographic factors, predominantly gender, influence individual investor behaviour. Besides, they have concluded that there are three behavioural factors affecting the investment decisions of individual investors, such as cognitive factors (i.e. overconfidence, anchoring, hindsight bias, gambler’s fallacy, investor optimism), emotional factors (i.e. mental accounting, endowment effect, loss aversion, regret aversion), and herding factors (i.e. following the habits of other investors in buying , selling , choice and trading of investments). This paper discusses the influence of investors’ gender attitudes on investor behaviour, and in turn, their impact on the selection of different investment avenues in the Colombo Stock Exchange (CSE) in Sri Lanka. It reports the views of 97 (N=97) individual investors in the CSE, randomly selected from the North Western Province (NWP). The results reveal that, though people accepted the importance of investing in the CSE, less investors actually have an appropriate plan to invest in shares a majority of them male. The results validate that individual gender attitude differences significantly influence cognitive factors, emotional factors, and herding factors, and in turn, individual investor behaviour in CSE. These findings also illustrate that there seems to be a strong correlation among the investor’s demographic factors, market factors, risk-bearing capacity, lifestyle characteristics, and behaviour.

Myopic loss aversion and stock investments: An empirical study of private investors

Abstract Myopic loss aversion was suggested by Benartzi and Thaler (1995) as an explanation for the equity premium puzzle. Its main prediction is that loss averse investors, who evaluate their investment performance too frequently and therefore often observe small losses on their stock portfolios, would invest too little in equity. We investigate the link between myopic loss aversion and actual investment decisions of individual investors, using survey data. Our results are consistent with the predictions of Benartzi and Thaler. Higher myopic loss aversion is associated with lower stock investment as a share of total assets. Investors tend to evaluate their stock portfolio performance too often, which contributes to the prevalence of myopic loss aversion. The effect of myopia is most apparent when investors both evaluate their portfolios frequently and trade stocks regularly.

The Influence of Behavioral Factors in Making Investment Decisions and Performance: Study on Investors of Colombo Stock Exchange, Sri Lanka

The main objective of this study is exploring the behavioral factors influencing individual investors’ decisions at the Colombo Stock Exchange. Furthermore, the relations between these factors and investment performance are also examined. As there are limited studies about behavioral finance in Sri Lanka, this study is expected to contribute significantly to the development of this field in Sri Lanka. The study begins with the existing theories in behavioral finance, based on which, hypotheses are proposed. Then, these hypotheses are tested through the questionnaires distributed to individual investors at the Colombo Stock Exchange. The collected data are analyzed by using SPSS. The result shows that there are four behavioral factors affecting the investment decisions of individual investors at the Colombo Stock Exchange which are Herding, Heuristics, Prospect and Market. Most of the variables from all factors have moderate impacts whereas anchoring variable from heuristic factor has high influence and choice of stock variable from herding factor has low influence on investment decision. This study also tries to find out the influence of behavioral factors on investment performance. Among the behavioral factors mentioned above, only three variables are found to influence the investment performance: choice of stock has negative influence which is from herding factor. Over confidence from heuristics factor has negative influence on investment performance. Anchoring from heuristics factor has positive influence on investment performance. All other variables which are volume of stock, buying and selling and speed of herding variables of herding factor, loss aversion and regret aversion variables of prospect factor and market information and customer preference variables of market factor do not have influence on investment performance.

How Do Decision Frames Influence the Stock Investment Choices of Individual Investors?

This study examines whether the framing mode (narrow versus broad) influences the stock investment decisions of individual investors. Motivated by the experimental evidence, which suggests that separate decisions are more likely to be narrowly framed than simultaneous decisions, we propose trade clustering as a proxy for narrow framing. Using this framing proxy, we show that investors who execute more clustered trades exhibit weaker disposition effects and hold better-diversified portfolios. We also find that the degree of trade clustering is related to investors' stock preferences and portfolio returns. Collectively, the evidence indicates that the choice of decision frames is likely to be an important determinant of investment decisions.

How Do Decision Frames Influence the Stock Investment Choices of Individual Investors?

This study examines whether the framing mode (narrow versus broad) influences the stock investment decisions of individual investors. Motivated by the experimental evidence, which suggests that separate decisions are more likely to be narrowly framed than simultaneous decisions, we propose trade clustering as a proxy for narrow framing. Using this framing proxy, we show that investors who execute more clustered trades exhibit weaker disposition effects and hold better diversified portfolios. We also find that the degree of trade clustering is related to investors' stock preferences and portfolio returns. Collectively, the evidence indicates that the choice of decision frames is likely to be an important determinant of investment decisions.

Individual investors' risk judgments and investment decisions: The impact of accounting and market data

This study experimentally investigates whether risk judgments and investment decisions of individual investors are affected by the variables noted in portfolio theory (i.e. variance of returns and covariance of returns with the market return) and/or accounting risk measures. Results indicate that investors are able to assess and do (not) use return variance (covariance) as described in portfolio theory. When accounting and market measures are in conflict, the participants' risk judgments correspond with accounting measures rather than market measures.