Online published on 28 February, 2020.
In the past two decades, behavioural finance, a new paradigm of finance gained momentum on the foundation of conventional finance. An ongoing debate between behavioural theorists and conventional theorists provides scope for investigation into the changing landscape of investment behaviour. Behavioural finance deals with the impact of psychological factors on investment decisions. It deviates from the assumption of rationality and can explain how an investor takes investment decisions. In the changing investment scenario and extreme volatility in the capital market, investors do notconform torational thinking andreflect numerous biases. Therefore, studying howpsychology plays an important role in investment decisions becomes imperative.
Researchers have investigated the role of behavioural finance and its implications on investors and financial markets at both micro and macro level. Extant literature has documented plausible reasons for deviation from approaches guided by conventional financial theories. However, morestudyneeds to be done in India on this phenomenon. This thesis has focused on three major parts of a review of literature, (a) deviation from rational investment decisions, (b) drivers of behavioural biases and (c) establishing relationship between drivers of behavioural biases and investment decision.
Based on the extensive review of literature, the key question that came for perusal-do individual investors’ exhibitdeviationfrom rational investment decision making based onconventionalfinance approaches? To explore further into the problem, three biases have been studied, a) overconfidence bias b) herd behaviour bias and c) risk tolerance bias. The objective of the thesis is to examine the impact of these three biases on the extent of investment in the capital market pertaining to Eastern India. As studies are sparse in the Indian context and individual investors are less proficient than institutional investors, studying their behavioural pattern by using primary data would serve to gain deeperinsightsintothe dynamics of investmentdecisions. Furthermore, three hypotheses were verified to examine the impact of overconfidence bias, herd behaviour bias and risk tolerance bias on the extent of investment in the capital market.
Accordingly, four states of Eastern India: Odisha, West Bengal, Jharkhand and Bihar have been taken into consideration as the scope of research. Studying the investment behaviour of investors in these segments would represent the overall behaviour of Entire East India. A survey using a structured questionnaire was conducted on 385 investors of different segments of the capital market. The thesis work was conducted from July 2014 to July 2017.
The analysis of data was done using factoranalysis, correlation and regression. Principalfactor analysis was done to reduce the number of factors from a large set of variables. The reliability of the data was checked to measure the internal consistency among the variables using Cronbach alpha (á). To test the validity of the instruments used, both content validity and convergent validity were checked. The content validity was checked as the measurement scales were borrowed from the preceding studies. To measure the convergent validity of the scale, factor analysis was performed to check whether the theoretical measures of the construct were related to each other. Correlation was done to assess the relationship among the constructs. Consequently, linear regression was performed to measure how the overconfidence bias, herd behaviourbiasand risk tolerance bias predicts the extentof investment in the capital market. Which of the three biases significantly predicts the extent of investment in capital market?
The findings of the study revealed that overconfidence bias, herd behaviour bias and risk tolerance bias have a positive and strong impact on the extent of investment in capital market. Risk tolerance bias has found to be the most significant bias that affects the extent of investment. A moderate and positive correlation was found among overconfidence bias, herd behaviour bias, risk tolerance bias and the extent of investment in capital market. There was a strong influence of overconfidence bias and herd behaviour bias on investment decisions. The various factors derived from the factor analysis as against thethree biases reflectstrong predictabilitytoexplain variation in the investment decision.
To conclude, the study contributes to the theory in relation to overconfidence bias, herd behaviour bias and risk tolerance bias and helps to gain insights into the significance of behavioural biases on the investment decision of investors in India. It throws a light on the investment behaviour that is driven by the behavioural dimensions and proves the proposition that there is a deviation from conventional theories due to the impact of behavioural and psychological factors. To reaffirm, the investment behaviour on capital market cannot be ignored anymore. It lends credence to the importance of studying behavioural aspects of Indian investors in the capital market. Conversely, application of behavioural f inance would help to understand the deeper application of bias in investment scenario.
