Author Details

In the modern finance theory, behavioral finance is a new paradigm, which seeks to appreciate and expect systematic financial market inference of psychological decision-making (Olsen, 1998)1. By understanding the human behavior, attitude and psychological mechanisms involved in financial decision-making, standard financial approaches may be better replicated and explain the reality in today’s developing markets.

Full Text

References

The study indicated that all the respondents invest in the market with the motto of earnings only and that the majority of the investors are worried about the implications of entry and exit from the market. Moreover, a loss in capital appreciation followed by the change in the market trend is main concern for worry for the investors at the time bull phase in the market and most of the investors get advice from portfolio management services. All the respondents felt that investment in mediclaim is a safer avenue for them.

It has been established by the finding that the socio-economic characteristics have association with the frequency of trading and investment strategy adopted by the investors.

The same socio-economic characteristics have association with the source of information on investment opportunities, intermediaries who provide necessary information regarding the various investment avenues are to be strengthened further, so that the same intermediaries can further improve the investors’ confidence.

The investment horizon of the respondents specifies that a majority of investors have an investment horizon covering a period of more than a year. Besides, the respondents did not increase their frequency of monitoring, which indicates that investors’ investment objective is long-term and they think the market crash is a short-term phenomenon and will revive again. The composition of investments has changed to some extent after the market crash. The investors have reduced their allocation of investments in companies with high risk and high returns and moved towards companies with stable but lesser returns.

The abnormally high returns of stocks in the market experienced before the crash may have induced the investors to take higher risk but the decline in the market after January 21, 2008 has reversed this tendency. This change in investment strategies of investors was also confirmed in the statistical analysis, which indicates a significant difference between the investment strategies and the investments the respondents made since the bear market began after January 2008 market crash.

It is also found that a majority of the investors who responded to the questionnaire considered the market was overvalued during the period before the crash may help to clarify why the market sometimes acts in an irrational manner.

People thought they were following winner stocks blinded by easy profits and they abstained from contrary financial exposure even though faced with conflicting information. This phenomenon was further supported by herd behavior, which respondents admit as an important contributing factor to the overvaluation of the market. Investors who thought the market was overvalued during the crash think that the market is currently undervalued which is an instinctive result. This is also conformed through the statistical analysis. The statistical analysis also showed that there was a distinction in the behavior of investors towards investment in companies before and after the crash of 2008.

This study assumes that even though a majority of the investors realized the gravity of speculative bubble, they, however, continued their investment activities knowing that the risk for a collapse is imminent. This exemplifies as an irrational investor behavior. It is evident from the present study that if investors recognize the psychological factors which affect their decision-making process, they can avoid the occurrence of such speculative bubbles and enhance the efficiency of today’s global financial market. From a long-term historical viewpoint, investing in the equity market has been profitable and the realization of behavioral factors affecting this market can help to better understand its periodic unpredictability.

Investors in the present study have invested in various investment vehicles in the BSE and NSE. Age, education, and income were found to be the most influencing factors of the individual investors’ competence in the stock market activities and trading behavior.

The results of the study reveal that a person invests as per his/her own judgments once he/she perceives himself/herself more knowledgeable about investing. Since this is a study of behavioral finance, the study tried to measure investors’ competence by using the survey method rather than relying on assumptions about psychological biases. It is found that investors having high, high to moderate income and professional qualification are supposed to be more confident about their competence when it comes to trading in stock markets. It was observed that highly competent investors show more frequent trading behavior.

The study finds that level of education and income of individual investors are likely to have a significant impact on their behaviour, followed by factors, such as, age, investment and gender. Through this study, it was shown that investors who feel themselves more competent tend to trade more frequently than those with less perceived competence. This trading behavior is attributed to the competence effect. Thus, it can be said that competence effect rules the trading behavior of individual investors.

The psychological factors put forth in this study are two-fold. First, any factor leading an individual to believe in the occurrence of a drop is relevant because such beliefs will act as self-fulfilling prophecies. Those beliefs can stem, for instance, from herding, market rumors, fear of contagion or panic (or a combination of all these). We do not sort which one seems most likely, but rather point out that they are all relevant because they lead to the same phenomenon-a crash anticipation. Second, it must be true that all the agents in the economy agree on the anticipation (rumors have reached the whole market for instance).It implies that anticipations can have a significant effect on prices formation. This view is consistent where crashes are driven by successive releases of public information on the actual state of the economy.

In spite of the phenomenal growth in the security market and quality Initial Public Offerings (IPOs) in the market, the individual investors prefer less risky investments, viz., life insurance policies, fixed deposits with banks and post office, PPF and NSC. Occasions of blind investments are scarce, as a majority of investors are found to be using some source and reference groups for taking decisions. Though they are in the trap of some kind of cognitive illusions such as overconfidence and narrow framing, they consider multiple factors and seek diversified information before executing some kind of investment transaction.

Investors have made media as a part of their investment life. According to them, financial dailies, TV channels and peer groups can play a pivotal role in making investment decisions. Psychographics play an important role in determining investment behavior and preferences of individual investors. Brokers who are in direct touch with investors play a vital role in keeping the capital market lively by providing various services to investors. Furnishing update and relevant information, probably would be the major contribution of these middlemen. Consultants and analysts in the capital market could play a similar role.

Mental mistakes such as loss aversion and framing induce investors to make decisions that make intuitive sense, but produce inferior results. They are, in effect, mental shortcuts allow to make decisions ineffectively, without formal analysis.

With mounting complexity in investment decision making, behavioral finance has emerged as an important branch to provide answers to intricate financial puzzles. In harmony with behavioral finance concepts, our research validates that personality factors do affect individual investors’ decisions and that he acts ‘normal’ and ‘usual’ and not always ‘objective’ and ‘rational’. In the present research, scale has been created based on the examples from heuristics (rule of thumb) and frame dependency (the way problem is presented to investor that can affect his choice).

The results exhibited that the cognitive biases— heuristics and frame dependency are not independent. The tendency to conform to behavior finance scale that developed for measuring the phenomenon exhibited two dimensions. One dimension was strongly related to experience and the other dimension was strongly related to the personality dimensions of openness and extraversion. The results show that extraversion scores have a positive relationship, and openness scores have negative relationship with tendency to comply with behavioral finance concepts.

This study has brought out interesting facets of the Indian retail investors. It identifies the existence of strong association between demographic characteristics and the risk bearing capacity of Indian investors.

This study confirms the relationship between age and income and the risk bearing capacity of investors. The financial product designers armed with this sort of fascinating information on the risk bearing capacity of investors can develop products to suit the risk characteristics of the investors. Also the financial product marketers can specifically target the prospective investors for the products instead of approaching every individual with an array of products which may not suit them at all.

The study revealed that most of the investors were highly educated and therefore, they considered own study and observation as an important factor for their investment decisions.

It was also found that most of the investors took own decisions regarding their investments. They get the information from sources like agents, newspapers and magazines.

The study revealed that only 16 per cent of the investors faced difficulties in buying or selling their investments and their difficulties covered the problems like inadequate prices, delay in transfer.

An interesting and important inference which emerged was that 36 per cent of the investors did not know about the safety of new issues of company shares, debentures and shares bought on stock exchanges. Though the middle class investors were highly educated, they lacked in skill and knowledge in deciding about their avenues in investing.

The study revealed that the female retail investors in Bangalore have higher monthly income than the male investors. The study also revealed that male investors were highly educated as compared to female investors. Most of the female investors also prefer to invest in risky securities for the future investments as compared to male investors.

The broader hypothesis in the study was that there is a massive shift towards Mutual Fund products. However, the study revealed that there is a moderate shift towards Mutual Fund products from present circumstances to the future investments. The hypothesis also stated that there is a moderate and continuing shift towards shares and debentures. However, the study revealed that the preference of the investors has shifted away for shares 24% and for debentures 66% from present circumstances to the future investments.

The preference for traditionally important financial instruments viz small saving, bank and company fixed deposits have also shifted away during the same period. However, there is a massive shift towards traditionally important financial instruments viz., life insurance policies, and Government securities.

The sub-hypothesis of the study was that the preferences of Middle class investors in Bangalore towards financial instruments differ according to the sex, age, education, occupation and income level of the investors.

The study revealed that the investors prefer various financial instruments uniformly for their next year’s investments irrespective of their age, level of education and occupation. However, their preferences for various financial instruments for the next year’s investments differ on the basis of their sex and level of income.

Username
Password
Remember me