Seminar Paper 3

Under the guidance of Prof. Satyaprakash Tiwari

TO STUDY THE BIASES AND BEHAVIOUR OF

INVESTORS IN THE STOCK MARKET

NachiketParab
Roll No: 20-MF-17
Email Id: mfin.nachiketparab22@jbims.edu
Masters in Finance, Batch of 2020-22
Jamnalal Bajaj Institute of Management Studies,
164, Backbay Reclamation, H.T. Parekh Marg,
Churchgate, Mumbai 400020

1
Abstract:
Behavioral finance is an upcoming field which blends the fields of psychology and finance
focusing on the effects of the mental tendency of investors which many-a-times are against their
own best interests. These irrational actions are termed as biases. The present paper examines the
presence and relationship of behavioral factors on investment decision making of investment
professionals and retail equity investors in India. From the existing literature, the study has
identified broad behavioral factor groupings, namely heuristic methods, prospect theory and
herding behavior, which have influence on investment decisions. The present study uses a
combination of descriptive and inferential statistics to determine the difference in impacts of
these biases on the investment decisions of common retail investors and investment
professionals. The results of the study revealed that on an average, the impact of these biases are
not statistically different for both common retail investors and investment professionals, except
for the impact of Representativeness heuristic and Anchoring bias. Investment professionals
demonstrate anchoring bias to a significantly greater extent than retail investors, and the vice
versa is true for Representativeness heuristic. This study would be useful for the investors to
have a better understanding of the common mistakes made in their decisions and to identify the
behaviors which leads to better returns and also helpful to the investment professionals to build
suitable asset allocation policies for themselves and their clients, keeping their biases at bay.
Keywords: Herding Behavior, Heuristic Methods, Investment Professionals, Common Retailers,
Prospect Behavior

1. Introduction:
The Indian stock markets have performed exceedingly well in the past 20 years, wherein the
benchmark indices of Nifty 50 and BSE Sensex have given a CAGR of around 15%. Majority of
the Indian population consider having money in the Indian Stock Markets as engaging in
gambling. Many retail investors put money in the stocks listed in NSE and BSE with the hopes
of making instant profits. In case losses occur, they blame the price volatility of these stocks.
Well educated and risk averse investors who lack in-depth financial knowledge prefer to invest
through mutual funds, whose investment managers are considered to act in the best interests of
the clients taking rational decisions. But multiple investment managers still fail to meet their
benchmark indices despite having in-depth financial knowledge. This is indicative of the fact that
irrational decisions are taken not only by retail investors, but also by investment managers.
Hence, it becomes extremely important to analyze to what extent the investment managers can
demonstrate self-control as compared to that demonstrated by common retail investors.
Behavioral finance is an upcoming field which blends the fields of psychology and finance
focusing on the effects of the mental tendency of investors which many-a-times are against their
own best interests. These irrational actions are termed as biases. The behavioral biases are
majorly classified into three categories, namely Heuristic Methods, Prospect Behavior and
Herding Behavior. The further components of these categories are as follows:
1.1. Heuristic Methods:
Heuristics refer to shortcuts followed by people to make their day-to-day decisions. These
shortcuts yield a good enough accuracy and provide quick solutions. Proper detailed analysis is

2
not conducted while employing heuristics which many-a-times leads to incorrect decisions. The
major heuristic methods are as follows:
Representativeness Heuristic:
The representativeness heuristic consists of estimating the possibility of an event occurring based
on the pre-available likelihood we have experienced regarding the same as per our past
experience. Psychologists Daniel Kahneman and Amos Tversky are credited with first describing
this heuristic. The major disadvantage of this heuristic is that we tend to associate currently
experienced situation to another one, overestimating its similarity. This can lead to multiple
errors, even in the field of finance when certain patterns observed are generalized to all
situations.
Overconfidence Bias:
Overconfidence bias deals with the excessive confidence people have on their own capability to
deal with or interpret the situation at hand. Psychologist Daniel Kahneman described
overconfidence as most of the strongest cognitive biases. The major disadvantage of this
heuristic is that people tend to make decisions under the illusory belief that they know the
possible consequences of their actions, and end up making mistakes. Due to this bias, investment
managers and investors lack caution while making investment decisions.
Anchoring Bias:
Anchoring bias refers to over-reliance on previously available information to make current
decisions, rather than assimilating and using the newly available information to assess the
situation objectively and take decisions accordingly. This bias was first theorized by
psychologists Daniel Kahneman and Amos Tversky. The starting value, termed as the anchor,
qualitatively and quantitatively restrict the domain of our analysis, even in the presence of newly
available, extremely different but relevant value.
Gambler’s Fallacy:
Gambler’s fallacy refers to the false belief that a random event is more or less likely than a usual
random event. This belief is based on the previous observations regarding the event. This bias
was first theorized by psychologists Daniel Kahneman and Amos Tversky. Financial analysts try
to find patterns in randomly occurring price movements in the stock market. This bias comes up
as a direct consequence of the representativeness heuristic.
Availability Bias:
Availability bias refers to the fact that we tend to make decisions based on the easily conceivable
first examples that some to put mind which was similar to the situation we have faced before.
This bias was first theorized by psychologists Daniel Kahneman and Amos Tversky.
1.2. Prospect Theory:
Prospect theory mentions that investors treat same magnitude of gains and losses unequally.
Usually, the gains are weighed more than the losses. The major biases coming under prospect
theory are:

3
Loss Aversion:
Loss aversion refers to the observation that investors are more sensitive to losses than to gains.
Loss aversion can prevent investors from squaring their unprofitable investments early on and
also it compels the investors to lock in their profitable investments early in anticipation of market
reversal and losing the gains. This bias was first theorized by psychologists Daniel Kahneman
and Amos Tversky. Overall, loss aversion causes investors to hold their losing investments and
to sell their winning ones, leading to below-par portfolio returns in reality.
Regret Aversion:
Regret aversion refers to the mentality wherein certain decisions are made only with the purpose
of not regretting choosing an alternative decision. This bias was first theorized by psychologists
Daniel Kahneman and Amos Tversky. Regret aversion also leads to indecision at times, due to
the sheer fear of making an incorrect decision, which many-a-times leads to missing out of
profit-making opportunities.
Mental Accounting:
Mental accounting implies that we mentally value the same amount of money differently based
on its consumption criterion or its source. A good example would be that money gifted by
relatives is generally given lesser value than the same amount of money earned by hard work,
and hence is spent without much caution. This bias was first theorized by economist Richard
Thaler.
1.3. Herding Behavior:
Herding behavior refers to the behavior where actions of an individual align with that taken by
the peer group in their presence, and these actions could not have been taken by the individual
otherwise. This behavior was first theorized by social psychologists Gabriel Tarde and Gustave
Le Bon. In the field of finance, many investors, rather than spending time doing their own
research, follow the general public consensus regarding whether to buy, sell or hold a stock,
which many-a-times leads to losses.

2. Research Methodology:
2.1. Hypothesis:
H1: There is no significant difference in the Representativeness heuristic demonstrated by
common retail investors and that by investment professionals
H2: There is no significant difference in the Overconfidence bias demonstrated by common retail
investors and that by investment professionals
H3: There is no significant difference in the Anchoring bias demonstrated by common retail
investors and that by investment professionals
H4: There is no significant difference in the Gambler’s fallacy demonstrated by common retail
investors and that by investment professionals
H5: There is no significant difference in the Ability bias demonstrated by common retail
investors and that by investment professionals

4
H6: There is no significant difference in the Loss aversion demonstrated by common retail
investors and that by investment professionals
H7: There is no significant difference in the Regret aversion demonstrated by common retail
investors and that by investment professionals
H8: There is no significant difference in the Mental Accounting demonstrated by common retail
investors and that by investment professionals
H9: There is no significant difference in the Herding bias demonstrated by common retail
investors and that by investment professionals

2.2. Research Methodology:

To check the applicability of various biases and to study the behavior of common retail investors
and investment professionals in the stock market, a sample survey was conducted among the
Indian investors. For ease of responses, a survey questionnaire designed using Google forms was
circulated. This questionnaire consisted of 8 questions, one question each to analyze the impact
of representativeness heuristic, overconfidence bias, anchoring bias, gambler’s fallacy, ability
bias, loss aversion, regret aversion, mental accounting and herding bias. The responses were
collected in a six-point Likert scale. A total of 87 responses were received, 48 from common
retail investors and 39 from investment professionals. The data collected was descriptively
analyzed using frequencies and percentages. Further, based on the responses of the investors,
hypothesis testing has been conducted using Chi-square Analysis, wherein the six-point Likert
scale was condensed to a binary scale, to study the different of impacts of these biases common
retail investors and investment professionals.

3. Research Findings:
3.1. Descriptive Findings:
The descriptive findings for the demographic characteristics and the inferential findings for the
investment behavior of the retail investors have been presented in this section. The descriptive
findings of the study in the form of demographic characteristics have been summarized in Table
2.

Demographic Distribution Frequency %

Characteristics
Age 18 – 25 20 41.67
26 – 35 26 54.17
36 – 45 0 0
46 – 55 0 0
More than 55 2 4.16
Highest Educational Diploma 0 0
Qualification
Masters 44 91.67

5
 Bachelors 4 8.33
Ph.D. 0 0
Others (CA, CFA, FRM, 0 0
etc.)
Experience in stock Less than 5 44 91.67
exchange (years)
5 - 10 2 4.16
More than 10 2 4.16
Table 2: Demographic characteristics (Common Retail Investors)

The descriptive findings for the demographic characteristics and the inferential findings for the
investment behavior of the investment professionals have been presented in this section. The
descriptive findings of the study in the form of demographic characteristics have been
summarized in Table 3.

Demographic Distribution Frequency %

Characteristics
Age 18 – 25 24 61.54
26 – 35 12 30.77
36 – 45 0 0
46 – 55 0 0
More than 55 3 7.69
Highest Educational Diploma 0 0
Qualification
Masters 30 76.92
Bachelors 6 15.38
Ph.D. 0 0
Others (CA, CFA, FRM, 3 7.69
etc.)
Experience in stock Less than 5 36 92.31
exchange (years)
5 - 10 0 0
More than 10 3 7.69
Table 3: Demographic characteristics (Investment Professionals)

3.2. Inferential Findings:

Representativeness heuristic in investors:

6
The null hypothesis in this case would be:
H1: There is no significant difference in the Representativeness heuristic demonstrated by
common retail investors and that by investment professionals
The question which was asked to gauge the impact of Representativeness heuristic on common
retail investors and investment professionals was:
“You use trend analysis of some representative stocks to make investment decisions for all
stocks that you invest”.
The actual responses from the participants are summarized below:

Observed Frequency (Oij)

Agree Disagree Total Proportion Affected
Common Retailers 32 16 48 66.67%
Investment Professionals 15 24 39 38.46%
Total 47 40 87 54.02%

Expected Frequency (Eij)

Agree Disagree Total
Common Retailers 25.93 22.07 48
Investment Professionals 21.07 17.93 39
Total 47 40 87

Calculation of the Chi-Square

Cell (ij) Oij Eij (Oij-Eij)2/Eij
(1,1) 32 25.93 1.42
(1,2) 16 22.07 1.67
(2,1) 15 21.07 1.75
(2,2) 24 17.93 2.05

2 2
(Oij−Eij)2
Chi-Square Value = ∑ ∑ = 6.89
i=1 j=1 Eij
The degree of freedom is {(r-1)*(c-1)}, where r equals to row involved, and c is the no. of
columns, so the degree of freedom is {(2-1)*(2-1)} or 1. The level of significance chosen is 0.05.
On this basis, the critical Chi-Square value is 3.84. Since the calculated Chi-Square value of 6.89
is more than the critical Chi-Square value, so the null hypothesis is rejected.
This proves that there is a statistically significant difference in the Representativeness heuristic
demonstrated by common retail investors and that by investment professionals. Common
retailers are much more affected by this heuristic as compared to that of investment
professionals.
Overconfidence bias in investors:

7
The null hypothesis in this case would be:
H2: There is no significant difference in the Overconfidence bias demonstrated by common retail
investors and that by investment professionals
The question which was asked to gauge the impact of Overconfidence bias on common retail
investors and investment professionals was:
“You believe that your skills and knowledge of stock market can help you to outperform the
market”.
The actual responses from the participants are summarized below:

Observed Frequency (Oij)

Agree Disagree Total Proportion Affected
Common Retailers 34 14 48 70.83%
Investment Professionals 33 6 39 84.62%
Total 67 20 87 77.01%

Expected Frequency (Eij)

Agree Disagree Total
Common Retailers 36.97 11.03 48
Investment Professionals 30.03 8.97 39
Total 67 20 87

Calculation of the Chi-Square

Cell (ij) Oij Eij (Oij-Eij)2/Eij
(1,1) 34 36.97 0.24
(1,2) 14 11.03 0.80
(2,1) 33 30.03 0.29
(2,2) 6 8.97 0.98

2 2
(Oij−Eij)2
Chi-Square Value = ∑ ∑ = 2.31
i=1 j=1 Eij
The degree of freedom is {(r-1)*(c-1)}, where r equals to row involved, and c is the no. of
columns, so the degree of freedom is {(2-1)*(2-1)} or 1. The level of significance chosen is 0.05.
On this basis, the critical Chi-Square value is 3.84. Since the calculated Chi-Square value of 2.31
is less than the critical Chi-Square value, so the null hypothesis cannot be rejected.
This proves that there is no statistically significant difference in the Overconfidence bias
demonstrated by common retail investors and that by investment professionals. Both common
retailers and investment professionals very highly demonstrate Overconfidence bias.
Anchoring bias in investors:
The null hypothesis to determine the difference in impact of this bias would be:

8
H3: There is no significant difference in the Anchoring bias demonstrated by common retail
investors and that by investment professionals
The question which was asked to gauge the impact of Anchoring bias on common retail investors
and investment professionals was:
“You rely on your previous experiences in the market for your next investment”.
The actual responses from the participants are summarized below:

Observed Frequency (Oij)

Agree Disagree Total Proportion Affected
Common Retailers 40 8 48 83.33%
Investment Professionals 39 0 39 100%
Total 79 8 87 90.80%

Expected Frequency (Eij)

Agree Disagree Total
Common Retailers 43.59 4.41 48
Investment Professionals 35.41 3.59 39
Total 79 8 87

Calculation of the Chi-Square

Cell (ij) Oij Eij (Oij-Eij)2/Eij
(1,1) 40 43.59 0.30
(1,2) 8 4.41 2.91
(2,1) 39 35.41 0.36
(2,2) 0 3.59 3.59

2 2
(Oij−Eij)2
Chi-Square Value = ∑ ∑ = 7.16
i=1 j=1 Eij
The degree of freedom is {(r-1)*(c-1)}, where r equals to row involved, and c is the no. of
columns, so the degree of freedom is {(2-1)*(2-1)} or 1. The level of significance chosen is 0.05.
On this basis, the critical Chi-Square value is 3.84. Since the calculated Chi-Square value of 7.16
is more than the critical Chi-Square value, so the null hypothesis is rejected.
This proves that there is a statistically significant difference in the Anchoring bias demonstrated
by common retail investors and that by investment professionals. Investment professionals are
much more affected by this bias as compared to that of common retail investors.
Gambler’s fallacy committed by investors:
The null hypothesis to determine the difference in impact of this bias would be:
H4: There is no significant difference in the Gambler’s fallacy demonstrated by common retail
investors and that by investment professionals

9
The question which was asked to gauge the impact of Gambler’s fallacy on common retail
investors and investment professionals was:
“You are normally able to anticipate the end of good or poor market returns at the Indian Stock
Exchanges”.
The actual responses from the participants are summarized below:

Observed Frequency (Oij)

Agree Disagree Total Proportion Affected
Common Retailers 22 26 48 45.83%
Investment Professionals 21 18 39 53.84%
Total 43 44 87 49.43%

Expected Frequency (Eij)

Agree Disagree Total
Common Retailers 23.72 24.28 48
Investment Professionals 19.28 19.72 39
Total 43 44 87

Calculation of the Chi-Square

Cell (ij) Oij Eij (Oij-Eij)2/Eij
(1,1) 22 23.72 0.13
(1,2) 26 24.28 0.12
(2,1) 21 19.28 0.15
(2,2) 18 19.72 0.15

2 2
(Oij−Eij)2
Chi-Square Value = ∑ ∑ = 0.55
i=1 j=1 Eij
The degree of freedom is {(r-1)*(c-1)}, where r equals to row involved, and c is the no. of
columns, so the degree of freedom is {(2-1)*(2-1)} or 1. The level of significance chosen is 0.05.
On this basis, the critical Chi-Square value is 3.84. Since the calculated Chi-Square value of 0.55
is less than the critical Chi-Square value, so the null hypothesis cannot be rejected.
This proves that there is no statistically significant difference in the Gambler’s fallacy
demonstrated by common retail investors and that by investment professionals. Both common
retailers and investment professionals moderately demonstrate Gambler’s fallacy on a moderate
level.

Ability bias in investors:

The null hypothesis to determine the difference in impact of this bias would be:

10
H5: There is no significant difference in the Ability bias demonstrated by common retail
investors and that by investment professionals
The question which was asked to gauge the impact of Ability bias on common retail investors
and investment professionals was:
“You prefer to buy local stocks than international stocks because the information of local stocks
is more available”.
The actual responses from the participants are summarized below:

Observed Frequency (Oij)

Agree Disagree Total Proportion Affected
Common Retailers 30 18 48 62.50%
Investment Professionals 30 9 39 76.92%
Total 60 27 87 68.97%

Expected Frequency (Eij)

Agree Disagree Total
Common Retailers 33.10 14.90 48
Investment Professionals 26.90 12.10 39
Total 60 27 87

Calculation of the Chi-Square

Cell (ij) Oij Eij (Oij-Eij)2/Eij
(1,1) 30 33.10 0.29
(1,2) 18 14.90 0.65
(2,1) 30 26.90 0.36
(2,2) 9 12.10 0.80

2 2
(Oij−Eij)2
Chi-Square Value = ∑ ∑ = 2.09
i=1 j=1 Eij
The degree of freedom is {(r-1)*(c-1)}, where r equals to row involved, and c is the no. of
columns, so the degree of freedom is {(2-1)*(2-1)} or 1. The level of significance chosen is 0.05.
On this basis, the critical Chi-Square value is 3.84. Since the calculated Chi-Square value of 2.09
is less than the critical Chi-Square value, so the null hypothesis cannot be rejected.
This proves that there is no statistically significant difference in the Ability bias demonstrated
by common retail investors and that by investment professionals. Both common retailers and
investment professionals highly demonstrate Ability bias.
Loss Aversion in investors:
The null hypothesis to determine the difference in impact of this bias would be:

11
H6: There is no significant difference in the Loss aversion demonstrated by common retail
investors and that by investment professionals
The question which was asked to gauge the impact of Loss Aversion on common retail investors
and investment professionals was:
“After a prior loss, you become more risk averse”.
The actual responses from the participants are summarized below:

Observed Frequency (Oij)

Agree Disagree Total Proportion Affected
Common Retailers 22 26 48 45.83%
Investment Professionals 24 15 39 61.54%
Total 46 41 87 52.87%

Expected Frequency (Eij)

Agree Disagree Total
Common Retailers 25.38 22.62 48
Investment Professionals 20.62 18.38 39
Total 46 41 87

Calculation of the Chi-Square

Cell (ij) Oij Eij (Oij-Eij)2/Eij
(1,1) 22 25.38 0.45
(1,2) 26 22.62 0.50
(2,1) 24 20.62 0.55
(2,2) 15 18.38 0.62

2 2
(Oij−Eij)2
Chi-Square Value = ∑ ∑ = 2.13
i=1 j=1 Eij
The degree of freedom is {(r-1)*(c-1)}, where r equals to row involved, and c is the no. of
columns, so the degree of freedom is {(2-1)*(2-1)} or 1. The level of significance chosen is 0.05.
On this basis, the critical Chi-Square value is 3.84. Since the calculated Chi-Square value of 2.13
is less than the critical Chi-Square value, so the null hypothesis cannot be rejected.
This proves that there is no statistically significant difference in the Loss aversion demonstrated
by common retail investors and that by investment professionals. Both common retailers and
investment professionals moderately demonstrate Loss aversion.

Regret Aversion in investors:

The null hypothesis to determine the difference in impact of this bias would be:

12
H7: There is no significant difference in the Regret aversion demonstrated by common retail
investors and that by investment professionals
The question which was asked to gauge the impact of Regret Aversion on common retail
investors and investment professionals was:
“You feel more sorrow about holding losing stocks too long than about selling winning stocks
too soon”.
The actual responses from the participants are summarized below:

Observed Frequency (Oij)

Agree Disagree Total Proportion Affected
Common Retailers 32 16 48 66.67%
Investment Professionals 18 21 39 46.15%
Total 50 37 87 57.47%

Expected Frequency (Eij)

Agree Disagree Total
Common Retailers 27.59 20.41 48
Investment Professionals 22.41 16.59 39
Total 50 37 87

Calculation of the Chi-Square

Cell (ij) Oij Eij (Oij-Eij)2/Eij
(1,1) 32 27.59 0.71
(1,2) 16 20.41 0.95
(2,1) 18 22.41 0.87
(2,2) 21 16.59 1.17

2 2
(Oij−Eij)2
Chi-Square Value = ∑ ∑ = 3.70
i=1 j=1 Eij
The degree of freedom is {(r-1)*(c-1)}, where r equals to row involved, and c is the no. of
columns, so the degree of freedom is {(2-1)*(2-1)} or 1. The level of significance chosen is 0.05.
On this basis, the critical Chi-Square value is 3.84. Since the calculated Chi-Square value of 3.70
is less than the critical Chi-Square value, so the null hypothesis cannot be rejected.
This proves that there is no statistically significant difference in the Regret Aversion
demonstrated by common retail investors and that by investment professionals. Both common
retailers and investment professionals significantly moderately demonstrate Regret Aversion.

Mental Accounting used by investors:

13
The null hypothesis to determine the difference in impact of this bias would be:
H8: There is no significant difference in the Mental Accounting demonstrated by common retail
investors and that by investment professionals
The question which was asked to gauge the impact of Mental Accounting on common retail
investors and investment professionals was:
“You tend to treat each element of your investment portfolio separately”.
The actual responses from the participants are summarized below:

Observed Frequency (Oij)

Agree Disagree Total Proportion Affected
Common Retailers 38 10 48 79.17%
Investment Professionals 33 6 39 84.62%
Total 71 16 87 81.61%

Expected Frequency (Eij)

Agree Disagree Total
Common Retailers 39.17 8.83 48
Investment Professionals 31.83 7.17 39
Total 71 16 87

Calculation of the Chi-Square

Cell (ij) Oij Eij (Oij-Eij)2/Eij
(1,1) 38 39.17 0.04
(1,2) 10 8.83 0.16
(2,1) 33 31.83 0.04
(2,2) 6 7.17 0.19

2 2
(Oij−Eij)2
Chi-Square Value = ∑ ∑ = 0.43
i=1 j=1 Eij
The degree of freedom is {(r-1)*(c-1)}, where r equals to row involved, and c is the no. of
columns, so the degree of freedom is {(2-1)*(2-1)} or 1. The level of significance chosen is 0.05.
On this basis, the critical Chi-Square value is 3.84. Since the calculated Chi-Square value of 0.43
is less than the critical Chi-Square value, so the null hypothesis cannot be rejected.
This proves that there is no statistically significant difference in the Mental Accounting
demonstrated by common retail investors and that by investment professionals. Both common
retailers and investment professionals significantly very highly demonstrate Mental
Accounting.

14
Herding bias in investors:
The null hypothesis to determine the difference in impact of this bias would be:
H9: There is no significant difference in the Herding bias demonstrated by common retail
investors and that by investment professionals
The question which was asked to gauge the impact of Herding bias on common retail investors
and investment professionals was:
“Other investors’ decisions of buying and selling stocks have impact on your investment
decisions”.
The actual responses from the participants are summarized below:

Observed Frequency (Oij)

Agree Disagree Total Proportion Affected
Common Retailers 30 18 48 62.50%
Investment Professionals 30 9 39 76.92%
Total 60 27 87 68.97%

Expected Frequency (Eij)

Agree Disagree Total
Common Retailers 33.10 14.90 48
Investment Professionals 26.90 12.10 39
Total 60 27 87

Calculation of the Chi-Square

Cell (ij) Oij Eij (Oij-Eij)2/Eij
(1,1) 30 33.10 0.29
(1,2) 18 14.90 0.65
(2,1) 30 26.90 0.36
(2,2) 9 12.10 0.80

2 2
(Oij−Eij)2
Chi-Square Value = ∑ ∑ = 2.09
i=1 j=1 Eij
The degree of freedom is {(r-1)*(c-1)}, where r equals to row involved, and c is the no. of
columns, so the degree of freedom is {(2-1)*(2-1)} or 1. The level of significance chosen is
0.05. On this basis, the critical Chi-Square value is 3.84. Since the calculated Chi-Square value
of 2.09 is less than the critical Chi-Square value, so the null hypothesis cannot be rejected.
This proves that there is no statistically significant difference in the Herding bias demonstrated
by common retail investors and that by investment professionals. Both common retailers and
investment professionals significantly very highly demonstrate Herding bias.

15
4. Conclusions:
To conclude the analysis, the following were the findings:
Null hypothesis Rejected/Not rejected Conclusion
H1: There is no significant difference in Rejected There is a statistically
the Representativeness heuristic significant difference in
demonstrated by common retail investors the Representativeness
and that by investment professionals heuristic demonstrated
by common retail
investors and that by
investment
professionals. Common
retailers are much more
affected by this
heuristic as compared
to that of investment
professionals.
H2: There is no significant difference in Not rejected There is no statistically
the Overconfidence bias demonstrated by significant difference in
common retail investors and that by the Overconfidence
investment professionals bias demonstrated by
common retail
investors and that by
investment
professionals. Both
common retailers and
investment
professionals very
highly demonstrate
Overconfidence bias.
H3: There is no significant difference in Rejected There is a statistically
the Anchoring bias demonstrated by significant difference in
common retail investors and that by the Anchoring bias
investment professionals demonstrated by
common retail
investors and that by
investment
professionals.
Investment
professionals are much
more affected by this
bias as compared to
that of common retail
investors.
H4: There is no significant difference in Not rejected There is no statistically
the Gambler’s fallacy demonstrated by significant difference in

16
common retail investors and that by the Gambler’s fallacy
investment professionals demonstrated by
common retail
investors and that by
investment
professionals. Both
common retailers and
investment
professionals
moderately
demonstrate Gambler’s
fallacy on a moderate
level.
H5: There is no significant difference in Not rejected There is no statistically
the Ability bias demonstrated by common significant difference in
retail investors and that by investment the Ability bias
professionals demonstrated by
common retail
investors and that by
investment
professionals. Both
common retailers and
investment
professionals highly
demonstrate Ability
bias.
H6: There is no significant difference in Not rejected There is no statistically
the Loss aversion demonstrated by significant difference in
common retail investors and that by the Loss aversion
investment professionals demonstrated by
common retail
investors and that by
investment
professionals. Both
common retailers and
investment
professionals
moderately
demonstrate Loss
aversion.
H7: There is no significant difference in Not rejected There is no statistically
the Regret aversion demonstrated by significant difference in
common retail investors and that by the Regret Aversion
investment professionals demonstrated by
common retail
investors and that by

17
 investment
professionals. Both
common retailers and
investment
professionals
significantly
moderately
demonstrate Regret
Aversion.
H8: There is no significant difference in Not rejected There is no statistically
the Mental Accounting demonstrated by significant difference in
common retail investors and that by the Mental Accounting
investment professionals demonstrated by
common retail
investors and that by
investment
professionals. Both
common retailers and
investment
professionals
significantly very
highly demonstrate
Regret Aversion.
H9: There is no significant difference in Not rejected There is no statistically
the Herding bias demonstrated by common significant difference in
retail investors and that by investment the Herding bias
professionals demonstrated by
common retail
investors and that by
investment
professionals. Both
common retailers and
investment
professionals
significantly very
highly demonstrate
Herding bias.

The results of the study have revealed that on an average, the impact of these biases are not
statistically different for investment professionals, as compared to that for common retail
investors, except for the impact of Representativeness heuristic and anchoring bias. Investment
professionals demonstrate anchoring bias to a significantly greater extent than retail investors,
and the vice versa is true for Representativeness heuristic. The study has overall established that
despite having specialized knowledge in finance, they still have an overall similar EQ level, and
are prone to making irrational decisions due to lack of emotional self-restraint. Investment
professionals need to work on improving control over their emotions and handle wealth of the

18
investors in a purely mechanical way, without letting their emotions and fears interfering with
their decisions.

4. References:
1. Dr. Vikram Bisen, M. P. (2013). Applying Behavioural Finance by Analysing Investor
Behaviour in Lucknow City. Indian Journal of Applied Research, 353-355.
2. Pompain, M. (2006). Behavioral Finance and Wealth Management. New Jersey: John Wiley &
Sons.
3. Thakur, S. (2018). The Impact of Behavioral Finance on Stock Markets. Joseph's Journal of
Multidisciplinary Studies, 44-49.
4. Vinu, R. C. (2020). A Study of Investment Behaviour of Mumbai Residents with Reference to
Behavioural Finance. World Wide Journal of Multidisciplinary Research and Development, 22-
32.
5. Vijaya, E. (2016). An Empirical Analysis on Behavioural Pattern of Indian Retail Equity
Investors. Journal of Resources Development and Management, 103-112.
6. Geetika Madaan, S. S. (2019). An Analysis of Behavioral Biases in Investment Decision-
Making. International Journal of Financial Research, 55-67.
7. Dr. Mohammad Ranjbar, Dr. B.A., N.J. (2014). Analyzing the effective behavioral factors on
the investors' performance in Tehran Stock Exchange (TSE). International Journal of Art &
Humanity Science (IJAHS), 80-86.
8. L.P. Luong, D.T.T.H. (2011). Behavioral factors influencing individual investors´ decision-
making and performance: A survey at the Ho Chi Minh Stock Exchange. Master Thesis, Spring
Semester, Umeå School of Business.

19