Elucidating investors rationality and behavioural biases in Indian stock market

Venkata Narasimha Chary Mushinada · Venkata Subrahmanya Sarma Veluri

66 citations0/0 files storedReview of Behavioral Finance

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Financial Markets and Investment Strategies Decision-Making and Behavioral Economics Financial Literacy and Behavior

Abstract

Purpose The purpose of this paper is to empirically test the relationship between investors’ rationality and behavioural biases like self-attribution, overconfidence. Design/methodology/approach The study applies structural equation modelling to understand whether individual investors, besides being rational, are subjected to self-attribution bias and overconfidence bias. Findings The study shows the empirical evidence in the support of behavioural biases like self-attribution and overconfidence existing besides investors’ rationality. Moreover, there is a statistically significant positive covariance found between self-attribution and overconfidence, implying that an increase/decrease in self-attribution results in the increase/decrease in overconfidence and vice versa. It is also observed that the personal characteristics of an investor such as gender, age, occupation, annual income and their trading experience have an impact on behavioural biases. Research limitations/implications The study focused on rational decision making, self-attribution and overconfidence biases using primary data. Further studies can be encouraged to test the existence of behavioural biases based on both market level and individual account data simultaneously. Practical implications Insights from the study suggest that the investors should perform a post-analysis of each investment, so that they become aware of past behavioural mistakes and stop continuing the same. This might help investors to minimise the negative impact of self-attribution and overconfidence on their expected utility. Originality/value To the best of the authors’ knowledge, this is the first study to examine the relationship among investors’ rationality, self-attribution and overconfidence in the Indian context using a comprehensive survey.

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References

1979Prospect Theory: An Analysis of Decision under Risk 1988Prospect theory: An analysis of decision under risk 1974Judgment under Uncertainty: Heuristics and Biases 1986Self-Reports in Organizational Research: Problems and Prospects 1965The Behavior of Stock-Market Prices 1959The Science of "Muddling Through"1998Investor Psychology and Security Market Under‐ and Overreactions 2001Boys will be Boys: Gender, Overconfidence, and Common Stock Investment

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