The Influence of Behavioral Factors in Making Investment Decisions and Performance:

Study on Investors of Colombo Stock Exchange, Sri Lanka

This study aims to explore the impact of a number of prominent behavioral finance variables that
may affect the stock investment decision-making at Colombo Stock Exchange, Sri Lanka as well
as determining which of these variables has the relative importance.

The authors chose four prominent behavioral financial variables:

Herding: occurs when individuals’ private information is overwhelmed by the influence of

public information about the decisions of a herd or group.

Heuristics:

Prospect and Market

To understanding basic about the factors affecting investors’ decisions the authors choose
questionnaires to collect data from Cross-section.

Before questionaries’ the study bring existing theories in behavioral finance and proposed
hypotheses. These hypotheses are tested through the questionnaires distributed to individual
investors at the Colombo Stock Exchange. Hypothesis was tested by using multiple regression
analysis that presents the correlation. And the collected data was processed and analyzed by
using SPSS.

The major finding of the study was presented through answering of the research question and by
testing the hypothesis. The results showed that herding, heuristics (overconfidence and
availability bias), prospect and market factors all have effect on the investment decisions of
individual investors at the Colombo Stock Exchange. Most of the factors have moderate impacts
except for the anchoring variable from heuristics factor that exhibits high influence on
investment decision. On the other hand, only three of the variables examined have influence on
the investment performance. The variables are the desire of stock from herding factor with
negative influence on the performance, overconfidence variable from heuristics with negative
influence and lastly anchoring from heuristics with positive influence on investment
performance. There is also a positive correlation between investment decisions with risk averse,
prospect, anchoring and herding.

Review of Literature

The researchers raise good topics, and it’s applicable across to the world and other field. At any
business/finance area different behavioral factors are influencing individual investors’ decisions
at anywhere. The researchers are defined, explained and clearly stated the problem statement and
significance of a research topic. They are also provided adequate and recent researches when
they theoretical review for behavioral factors impact the process of investors’ decision-making,
weakness in this section is, the lack of any critique of the research studies cited.

The research questions and hypotheses also identified clearly, but there are limitations to these
findings. First, the sample size was small. Such a small sample size it is difficult to generalize
these findings to the larger. Similarly research instruments are not adequately described,
including issues of relevance, rationality and trustworthiness of the methods.

Other the researcher did not identify a conceptual frame- work on which the study had been
based.

Generally the research is very important and helpful especially for decision makers, future
research on ‘Behavioral Factors in Making Investment Decisions’ better to focus or include
different areas that need critical decision making fields.