An Empirical Analysis of Investor Behavioral Biases, Investment Risk Tolerance and Decision-Making

GIS Business ◽  
2020 ◽  
Vol 15 (2) ◽  
pp. 46-57
Author(s):  
Nidhi Jain ◽  
Dr. Bikrant Kesari
Keyword(s):  
Multivariate Regression Analysis ◽  
Risk Tolerance ◽  
Individual Investors ◽  
Investment Risk ◽  
Chi Square ◽  
Psychological Traits ◽  
Financial Investment ◽  
Behavioral Traits ◽  
Behavioral Biases ◽  
Investment Companies

It is very necessary for the judgment on financial investment adopted by professional investors to be able to face behavioral biases by recognition of their own psychological traits as well as to take account of their own investment risk tolerance levels. In this research, a survey has been used to assess the association among personality traits, behavioral bias as well as investment risk toleration. The research paper dataset was shortlisted from individual investors who work or operate on capital/finance markets. Chi-square assessments and multivariate regression analysis evaluated the predictions established during the research. Depending on the hypothesis analysis, there was a positive relationship among investor’s behavioral traits as well as behavioral perceptions, as well as the personality characteristics of investment companies that impacted their tolerance levels to potential risk.

scholarly journals The genetic background of the associations between sense of coherence and mental health, self-esteem and personality

2021 ◽  
Author(s):  
Karri Silventoinen ◽  
Eero Vuoksimaa ◽  
Salla-Maarit Volanen ◽  
Teemu Palviainen ◽  
Richard J. Rose ◽  
...  
Keyword(s):  
Mental Health ◽  
Sense Of Coherence ◽  
Genetic Factors ◽  
Well Being ◽  
Self Esteem ◽  
Risk Tolerance ◽  
Personality Factors ◽  
Life Questionnaire ◽  
Psychological Traits ◽  
Polygenic Scores

Abstract Purpose Sense of coherence (SOC) represents coping and can be considered an essential component of mental health. SOC correlates with mental health and personality, but the background of these associations is poorly understood. We analyzed the role of genetic factors behind the associations of SOC with mental health, self-esteem and personality using genetic twin modeling and polygenic scores (PGS). Methods Information on SOC (13-item Orientation of Life Questionnaire), four mental health indicators, self-esteem and personality (NEO Five Factor Inventory Questionnaire) was collected from 1295 Finnish twins at 20–27 years of age. Results In men and women, SOC correlated negatively with depression, alexithymia, schizotypal personality and overall mental health problems and positively with self-esteem. For personality factors, neuroticism was associated with weaker SOC and extraversion, agreeableness and conscientiousness with stronger SOC. All these psychological traits were influenced by genetic factors with heritability estimates ranging from 19 to 66%. Genetic and environmental factors explained these associations, but the genetic correlations were generally stronger. The PGS of major depressive disorder was associated with weaker, and the PGS of general risk tolerance with stronger SOC in men, whereas in women the PGS of subjective well-being was associated with stronger SOC and the PGSs of depression and neuroticism with weaker SOC. Conclusion Our results indicate that a substantial proportion of genetic variation in SOC is shared with mental health, self-esteem and personality indicators. This suggests that the correlations between these traits reflect a common neurobiological background rather than merely the influence of external stressors.

Impact of Behavioral Biases in Financial Risk Tolerance Ability of Mutual Fund Investors

2021 ◽  
Vol 7 (5) ◽  
pp. 2748-2765
Author(s):  
Nidhi Jain ◽  
Bikrant Kesari
Keyword(s):  
Mutual Fund ◽  
Financial Risk ◽  
Positive Impact ◽  
Investment Decision ◽  
Central India ◽  
Risk Tolerance ◽  
Behavioral Biases ◽  
Asset Class ◽  
Level Of Knowledge ◽  
Financial Risk Tolerance

Objective: The Behavioral bias is the term that deals with the investors’ psychology about their investment decision with their investment expertise. Every individual is biased, according to standard economic theory by his behavior and experiences which are rational. Methods: This research seeks to segregate mutual fund holders into various groups (persons and professionals) based on Behavioral biases and then investigates whether these Behavioral biases are influencing the level of knowledge of investors and the financial risk tolerance of certain mutual funds. Statistical tools compare investors characteristics and analyse how Behavioral biases are associated. Results: The factors analysed are financial circumstance, Type of Investors, Asset class preference, Time Horizon and Purpose of Investment. The primary information was gathered from 250 Central India mutual fund investors dependent on Judgment sampling. CFA, Correlation, MANOVA and Regression. Conclusions: Findings shows the effect of the behavior bias has positive impact on mutual fund investor awareness and financial risk tolerance.

Investigating association between factors fostering attention to a stock and rationales to buy it: an empirical analysis

2021 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Ripsy Bondia ◽  
Pratap C. Biswal ◽  
Abinash Panda
Keyword(s):  
Decision Making ◽  
Categorical Data ◽  
Categorical Variables ◽  
Individual Investors ◽  
Multiple Response ◽  
Individual Investor ◽  
Test Statistic ◽  
Chi Square ◽  
Content Type ◽  
First Order

PurposeCan something that drives our initial attention toward a stock have any implications on final decision to buy it? This paper empirically and statistically tests association, if any, between factors fostering attention toward a stock and rationales to buy it.Design/methodology/approachThis paper uses survey responses of individual investors involving multiple response categorical data. Association between attention fostering factors and rationales is tested using a modified first-order corrected Rao-Scott chi-square test statistic (to adjust for within-participant dependence among responses in case of multiple response categorical variables). Further, odds ratios and mosaic plots are used to determine the effect size of association.FindingsStrong association is seen between attention fostering factors and rationales to buy a stock. Further, strongest associations are seen in cases where origin is the same underlying influencing factor. Some of the most cited attention fostering factors and rationales in this research stem from familiarity bias and expert bias.Practical implicationsWhat starts as a trivial attention fostering factor, which may not even be recognized by majority investors, can go on to become one of the rationales for buying a stock. This can result in substantial financial implications for an individual investor. Investor education agencies and regulatory authorities can make investors cognizant of such association, which can help investors to improve and adjust their decision making accordingly.Originality/valueThe extant literature discusses factors/biases influencing buying decisions of individual investors. This research takes a step ahead by distinguishing these factors in terms of whether they play role of (1) fostering attention toward a stock or (2) of reasons for ultimately buying it. Such dissection of factors/biases, to the best of authors' knowledge, has not been done previously in any empirical and statistical analysis. The paper uses multiple response categorical data and applies a modified first-order corrected Rao-Scott chi-square statistic to test association. Application of the above-mentioned test statistic has not been done previously in context of individual investor decision-making.

Retail Investors’ Financial Risk Tolerance and Risk-taking Behaviour: The Role of Psychological Factors

2021 ◽  
pp. 231971452110582
Author(s):  
Pragati Hemrajani ◽  
Rajni ◽  
Rahul Dhiman
Keyword(s):  
Risk Taking ◽  
Psychological Factors ◽  
Structural Equation ◽  
Financial Risk ◽  
Risk Tolerance ◽  
Individual Investors ◽  
Financial Advisors ◽  
Research Model ◽  
Financial Risk Tolerance

The aim of this article is to look at how two psychological factors affect financial risk tolerance (FRT) and financial risk-taking behaviour (FRB) of individual investors. The study also investigates the role of FRT in mediating the relationship between psychological factors and FRB. A standardized questionnaire was used to collect the information. For the study, a total of 303 completed questionnaires were used. The proposed research model was validated and assessed using partial least squares structural equation modelling. The findings revealed some important experiences. Emotional intelligence and impulsiveness have a significant relationship with both FRT and FRB, according to the results. The findings also support FRT’s position as a mediating factor in the proposed research model. The results emphasize the importance of psychological factors in determining an individual’s FRT and FRB. FRT is a complex mechanism that entails more than just psychological considerations. As a result, further research is needed to decide which additional factors financial advisors can use to increase the explained variance in FRT inequalities.

scholarly journals An Analysis of Behavioral Biases in Investment Decision-Making

2019 ◽  
Vol 10 (4) ◽  
pp. 55 ◽  
Author(s):  
Geetika Madaan ◽  
Sanjeet Singh
Keyword(s):  
Decision Making ◽  
Positive Impact ◽  
Stock Exchange ◽  
Investment Decision ◽  
Investment Decisions ◽  
Individual Investors ◽  
Behavioral Biases ◽  
Investment Decision Making ◽  
Survey Responses ◽  
The Impact

Individual investor’s behavior is extensively influenced by various biases that highlighted in the growing discipline of behavior finance. Therefore, this study is also one of another effort to assess the impact of behavioral biases in investment decision-making in National Stock Exchange. A questionnaire is designed and through survey responses collected from 243 investors. The present research has applied inferential statistics and descriptive statistics. In the existing study, four behavioral biases have been reviewed namely, overconfidence, anchoring, disposition effect and herding behavior. The results show that overconfidence and herding bias have significant positive impact on investment decision. Overall results conclude that individual investors have limited knowledge and more prone towards making psychological errors. The findings of the study also indicate the existence of these four behavioral biases on individual investment decisions. This study will be helpful to financial intermediaries to advice their clients. Further, study can be elaborated to study other behavioral biases on investment decisions.

Impact of Personality Traits on Risk Tolerance and Investors' Decision Making

2019 ◽  
Vol 8 (1) ◽  
pp. 1-20 ◽  
Author(s):  
Misbah Sadiq ◽  
Hareem Amna
Keyword(s):  
Personality Traits ◽  
Big Five ◽  
Descriptive Analysis ◽  
Investment Decisions ◽  
Risk Tolerance ◽  
Primary Data ◽  
Individual Investors ◽  
Confirmatory Factor ◽  
The Relationship ◽  
Practical Implications

This article investigates the relationships between personality traits, risk tolerance, and investment decisions and highlights the importance of personality traits in determining risk tolerance levels and investment decisions. Personality traits are classified according to the Big Five taxonomy: extroversion, agreeableness, conscientiousness, neuroticism and openness to experience. Primary data was collected from 330 individual investors from Islamabad. Descriptive analysis of the data was run on SPSS, reliability of the constructs was assessed through Confirmatory Factor Analysis (CFA), whereas, Structural Equational Modelling (SEM) was used to conduct hypothesis testing through path analysis. As per the results of CFA, the constructs were found to be reliable. Mediation analysis confirmed that risk tolerance partially mediated the relationship between personality traits and investment decisions. This study and results have theoretical and practical implications for the investors, financial planners and managers.

scholarly journals How do emotional intelligence and behavioral biases of investors determine their investment decisions?

2020 ◽  
Vol 14 (1) ◽  
pp. 35-47
Author(s):  
Saloni Raheja ◽  
Babli Dhiman
Keyword(s):  
Decision Making ◽  
Stock Exchange ◽  
Investment Decision ◽  
Sample Selection ◽  
Investment Decisions ◽  
Risk Tolerance ◽  
Content Type ◽  
Behavioral Biases ◽  
Investment Decision Making ◽  
The Impact

Purpose In earlier studies, research has shown that EI is the only element, which influences the ways in which people develop in their lives, jobs and social skills control their emotions and get along with other people. It is EI that dictates the way people deal with one another and understand emotions. The research gap is to explore the impact of behavioral factors and investors psychology on their investment decision-making. Design/methodology/approach The information was gathered from 500 financial specialists. The region of research was the financial specialists who contribute through LSC Securities Ltd. in Punjab State. The purposive testing system was used in this examination. Findings The investigation found that the positive connection between the conduct predispositions of the financial specialists and venture choices of the speculators and positive connection between enthusiastic insight of the financial specialists and their venture choices. Yet, the authors found that the enthusiastic insight better foresees the venture choices of the financial specialists than the conduct predispositions of the speculators. Among the different elements of conduct inclinations of the speculator’s lament and carelessness are identified with the financial specialist’s venture choices. Among the various estimations of eager understanding – care, dealing with emotions, motivation, empathy and social aptitudes are related to the hypothesis decisions of the monetary pros. Research limitations/implications The sample selection was based on purposive sampling, rather than a random probability sample. The sample was area specific, restricted only to Ludhiana Stock Exchange in Punjab state. Therefore, the results of the study cannot be generalized with certainty to all the investors investing through other exchanges in other states. The inferences are based on the assumption that the data provided by the investors are true and correct. The findings may be relevant for other stock exchanges as that of the Ludhiana Stock Exchange. However, the authors do not claim the generalization of the results. Practical implications This study also helps to understand the relationship between investment decision-making and risk tolerance of investors. It will helpful for the financial advisors to know the behavioral biases of investors while making an investment decision, and therefore, they can advise investors properly to mitigate such biases. It may help the investors in understanding the subjective part of their behavior and control their emotions while taking decisions for their investment in stock market options. Social implications This research will help investment advisors and finance professionals to judge investors’ attitudes toward risk in a better way, which leads to better investment decisions. Originality/value This study is my own study and it is original and has not been published anywhere.

Development and validation of behavioral biases scale: a SEM approach

2020 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Ritika ◽  
Nawal Kishor
Keyword(s):  
Decision Making ◽  
Investment Decision ◽  
Phase 1 ◽  
Secondary Data ◽  
Higher Order ◽  
Second Order ◽  
Individual Investors ◽  
Content Type ◽  
Behavioral Biases ◽  
Investment Decision Making

PurposeThis paper attempts to identify the biases in decision-making of individual investors. The paper aims to develop and validate a higher-order behavioral biases scale.Design/methodology/approachScale development is done by identifying the relevant items of the scale through existing literature and then, adding new items for some biases. In phase 1, using a structured questionnaire, data was collected from 274 investors who invest in financial markets. The major dimensions of the scale have been pruned by using exploratory factor analysis administered on data collected in phase 1. Higher-order CFA is used to analyze the data and to validate the scale on another set of data (collected in phase 2) containing 576 investors.FindingsThe study reveals that the scale for measuring behavioral biases has many dimensions. It has two second-order factors and 13 zero-order constructs. Two second-order constructs have been modeled on the basis of cause of errors in investment decision-making, that is, biases caused due to cognition, biases caused due to emotions.Originality/valueBehavioral biases are yet to receive a due attention, especially, in the Indian context. The present research is focusing on providing an empirically tested scale to test the behavioral biases. Some of the biases, which have been analyzed using secondary data in previous studies, have been tested with the help of statements in this study.

Sign in / Sign up

Export Citation Format

Share Document