Karnataka Law Society’s

Gogte Institute of Technology

(Approved by AICTE, Permanently Affiliated and Autonomous Institution under VTU Belagavi)

Department of MBA

“Jnana Ganga”, Udyambag, Belagavi – 590008, Karnataka, India

PROJECT REPORT ON : THE FUTURE OF BEHAVIOURAL FINANCE AN

INVESTIGATION

Submitted to: Prof Jyoti Talreja

Submitted by:
USN NO NAME
2GI20BA001 Abhijeet Rajendra Patil

2GI20BA002 Abhishek Singh Rajpurohit

2GI20BA003 Adarsh Ashok Naik

2GI20BA005 Aishwarya A Kulkarni

2GI20BA006 Aishwarya Sangappa Rugi

2GI20BA007 Akash Deshpande

2GI20BA008 Akshata B Nalattawad

2GI20BA009 Alihaanjum Saleemshah Nadaf

2GI20BA010 Amratha Shetty

2GI20BA011 Amruta Revankar

2GI20BA013 Aniket Rajram Balekundri

1. Joo, B. A., & Durri, K. (2015). Comprehensive review of literature on
behavioral finance. Indian Journal of Commerce and Management
Studies, 6(2), 11-19.

Investors are rational and that they consider all available information in
portfolio investment decision process is the main assumption of standard
finance and this holds true by Efficient Market Hypothesis (EMH), being an
important theory of Standard finance. Over the years this assumption has
been challenged by the psychologists and they argue that investors can’t be
rational as their decisions are influenced by cognitive and psychological
errors. The work done by the various prominent psychologists in this
direction resulted in the development of a new branch of financial
economics, known as Behavioral Finance. Behavioral finance considers how
various psychological traits affect the way investors make their investment
decisions. Against this backdrop, in present paper a modest attempt has
been made to review various studies in this area so as to have clear
understanding of the subject and to see how significant it is in financial
decision making. From the review of literature it is deduced that behavioral
finance tries to fill the gap between actual behavior (Normal behavior) and
expected behavior (Rational Behavior), however, currently there is no
unified theory of behavioral finance that gives a proper place to the factors
influencing financial decisions of investors.

Keywords: Finance, Behavior, Heuristics, Rationality, Herd, EMH

2. Sharma, A., & Kumar, A. (2019). A review paper on behavioral finance:

study of emerging trends. Qualitative research in financial markets.
Purpose

This paper participates in the debate on market efficiency and correct

approach for asset pricing through a comprehensive review of literature in
favor, as well as against the long held belief of market efficiency. The
purpose of this paper is to understand emerging trends in behavioral
finance and establish its future potential as a mainstream alternative
theory of asset pricing.

Design/methodology/approach

The review and discussion of literature is mainly divided into three different
sections that are –theories supporting efficient market hypothesis (EMH);
studies providing evidences from the stock market on the failure of EMH
and studies on behavioral finance, discussing separately investors’
behavioral biases keeping in mind their effect on stock prices; and providing
empirical evidences on the effect of investor sentiment on stock prices.

Findings

The review of literature from both the point of views has helped in
understanding the market efficiency issue and changing dynamics of asset
pricing approach. This is achieved by highlighting the gaps in the concept of
market efficiency and also suggesting how these gaps can be bridged with a
superior approach such as behavioral finance. Through further discussion of
emerging trends in behavioral finance, the paper also points out gaps and
how these can be abridged, for behavioral finance to be accepted as a
mainstream alternative approach to EMH.

Originality/value

This is an extensive and one of a kind study that discusses market efficiency
through discussion of EMH and behavioral finance side by side. With the
help of such a study, researchers can precisely understand the need and
can focus on the future course of action to make behavioral finance a
mainstream approach to asset pricing.

Keywords: Behavior Finance, Efficient market hypothesis, Behavior biases,

Market inefficiency,
 3. Fairchild, R. (2010). Behavioral corporate finance: existing
research and future directions. International Journal of
Behavioral Accounting and Finance, 1(4), 277-293.
Behavioral corporate finance (BCF) examines the effects of managerial and
investor psychological biases on a firm's corporate finance decisions (such
as investment appraisal and capital structure). In contrast to the well-
developed research in behavioral finance (which examines the effects of
investors' biases on the behavior of the financial markets), the emerging
research in BCF is relatively young. In this paper, we review the existing
research to date in BCF and suggest areas for future development.

Keywords: behavioral corporate finance, managerial biases,

overconfidence, financing decisions, investment appraisal, capital structure,
psychological biases

This study proposes a new behavioral finance bias, related to the Evaluation
of investment fees by investors following a significant Period of declining
investment returns. Financial theory suggests That investors would seek to
minimize their total cost of investMent fees but we show that where
investors experience falling Returns, some will chose the funds with higher
fees, even though That choice leads to lower overall returns. A possible
explanation May be the expectation that investors felt these higher fees
were

Title of Research Paper - Behavioral corporate finance: existing research and future directions

Authors - Richard Fairchild

Keywords - Behavioral corporate finance, managerial biases, overconfidence, financing
decisions, investment appraisal, capital structure, psychological biases

Behavioral corporate finance (BCF) examines the effects of managerial and investor
psychological biases on a firm's corporate finance decisions (such as investment appraisal and
capital structure). In contrast to the well-developed research in behavioral finance (which
examines the effects of investors' biases on the behavior of the financial markets), the
emerging research in BCF is relatively young. In this paper, we review the existing research to
date in BCF and suggest areas for future development.

Title of Research Paper - What can behavioral finance teach us about finance?
Authors - DeBondt W., Forbes W., Hamalainen P. & Muradoglu Y. G.
Keywords - Behavioral economics, Finance
The goal of this paper is to identify potential future behavioral finance research challenges that
have arisen as a result of the financial crisis, as well as areas of common interest for both
behavioral finance academics and the finance sector, in order to inspire creative cross-
fertilization. The article shows a number of benefits that behavioral finance research may
provide to the financial industry, but there is a clear divide between the academic and
professional worlds when it comes to how behavioral finance research is used. The paper
identifies a number of areas where behavioral finance can make a substantial contribution to a
variety of aspects of the financial industry.

Title of Research Paper - Behavioral Finance: A Review

Authors - Kapoor S.& Prasad J. M
Keywords - Behavioral finance, Behavioral anomalies, Traditional finance theories, rational
decision, Market efficiency, Behavioral biases

The current research examines the evolution of behavioral finance over the span of financial
history. It contains the earliest evidence of stock market behavioral oddities recorded by
researchers. Traditional finance is discussed first, followed by an examination of traditional
theories in instances when they are deemed insufficient. The study then discusses the
importance of behavioral finance and its unique role in bridging the gap between real-world
scenarios and classical theories.

LTitle of Research Paper - A behavioral finance approach to working capital management

Authors - Vikash Ramiaha, Yilang Zhaoa, Imad Moosaa and Michael Grahamb

Keywords - loss aversion; high confidence; anchoring; self-serving bias; working capital
management

During the global financial crisis, this article examines the behavior of company treasurers
participating in the decision-making process in the areas of cash, inventory, accounts
receivable, accounts payable and risk management. It's crucial to remember that behavioral
biases aren't always terrible traits to have, since they might help managers make better
judgments in certain situations. Highly confident managers, for example, are more likely to rely
on models and forecasting procedures. They believe that this subject is understudied and that
further research is needed in the future. Experimental studies, in which working capital
managers are given simulated decision-making scenarios to examine the effect of behavioral
biases in a controlled setting, is one way. The utilization of case studies is another option.

Title Of Research Paper - Behavioral Finance and Its Implications for Stock-Price Volatility
Author - Robert A. Olsen
 
An increasing number of academic and professional articles are being published about research
on and potential applications of behavioral finance. This article offers a more complete picture
of the origin, content, and rationale behind this emerging area of study than previously
presented. In the process, the traditional dominance in finance of the economic concepts of
subjective expected utility and rationality are discussed. In addition, the article argues that the
newer theories of chaos and adaptive decision making, which have a place in behavioral
finance, can help explain the puzzle of stock-price volatility.

Title Of Research Paper - Behavioral finance and market efficiency in the time of the COVID-19
pandemic: does fear drive the market?

Author - Evangelos Vasileiou

Keywords - Efficient Market Hypothesisruns test shealth risk Google search fear index
behavioral finance Granger causality

In this study, we examine the efficiency of the US stock markets during the COVID-19 outbreak
using a fundamental financial analysis approach, the constant growth model and a behavioral
model including a Google-based Index. We juxtapose the released news and the performance
of the US stock market during the COVID-19 outbreak and we show that during some periods
the health risk was significantly underestimated and/or ignored. The Efficient Market
Hypothesis (EMH) suggests that prices incorporate all the available information at any point in
time, yet as we show a systemic factor, the health risk, was not always rationally incorporated
in stock prices. The Runs-tests confirm our assumption that the market was not efficient during
the examined period. The reason for this inefficiency could be that something is missing from
traditional finance models, such as the impact of fear of COVID-19. For this reason we employ a
Coronavirus Fear Index (CFI) based on Google searches and using Granger causality we provide
empirical evidence that the fear drives the S&P500 performance, and using a GARCH model

we show that the fear negatively influences the performance of the US stock

market.

Title of Research paper- Behavioral biases in investment decision making

Author- Satish Kumar and Nisha Goyal
keywords- Behavioral biases in investment decision making. Herding, home bias, over
confidence, behavioral biases
Purpose
The purpose of this paper is to systematically review the literature published in past 33 years on
behavioral biases in investment decision-making. The paper highlights the major gaps in the
existing studies on behavioral biases. It also aims to raise specific questions for future research.

Design/methodology/approach
We employ systematic literature review (SLR) method in the present study. The prominence of
research is assessed by studying the year of publication, journal of publication, country of
study, types of statistical method, citation analysis and content analysis on the literature on
behavioural biases. The present study is based on 117 selected articles published in peer-
review journals between 1980 and 2013.

Findings

Much of the existing literature on behavioral biases indicates the limited research in emerging
economies in this area, the dominance of secondary data-based empirical research, the lack of
empirical research on individuals who exhibit herd behaviour, the focus on equity in home bias,
and indecisive empirical findings on herding bias.

Title of Research Paper- Recent Developments and Review in Behavioral Finance

Author- Nidhi Kumari and Ashok K
Keywords- Behavioral Finance, Psychology, Investment Behavior, Conventional Finance, Behavioral
Bias, Decision Making

Various factors such as; emotional, social, demographic, personal factors, information, biases as
subjective factors, mood, shame, pride etc. affects human behavior and their action on the aggregate
market behavior. These factors lead market participants to take a departure from the rational thinking
and conventional models of finance. The thought that comes to the mind is whether the theoretical
models based on the efficient market hypothesis and mean variance theory provides a plausible
explanation of the role of cognition on investment behavior. Statman (2008) mentioned that investors
under behavioral finance are normal and not rational; markets are not efficient; investors do not design
their portfolio as per mean variance theory and expected returns are measured by more than only risks.

Over the last two decades, this field has added many dimensions in relation to the aggregate
participants behavior. Both at the micro level and a macro level, it helps in ascertaining the individual
and aggregate behavior of the market. There is a need to analytically understand the comprehensive
field of behavioral finance, its impact on the decision making, existence of behavioral biases and their
manifestation in terms of action. A deep understanding of the concepts and developments in the field of
behavioral finance would bring a profound inspection and investigation into the overall body of
knowledge.

Title of the research paper-Investors Rationally Evaluate Investment Fees? A Behavioral Finance
Investigation

Author-Hutton, E., Ryan, K., & Osberg, J.

This study proposes a new behavioral finance bias, related to the Evaluation of investment fees by
investors following a significant Period of declining investment returns. Financial theory suggests That
investors would seek to minimize their total cost of investment fees but we show that where investors
experience falling Returns, some will chose the funds with higher fees, even though That choice leads to
lower overall returns. A possible explanation May be the expectation that investors felt these higher
fees were.

Title of the research paper-The investigation of investor behaviors in terms of behavioral finance and
investor psychology
Author-Coşkun, Y.

Today, one way of understanding the activity and inactivity of the world of finance passes Through
understanding human because the investment decisions that individuals make or not Are completely
related to human, that is to say, to themselves. In this sense, the investment Decisions that individuals
have made or not are available for research in the field of behavioral Finance and striking results have
been revealed. Within this context, the aim of this study was To reveal the investor profiles of the
farmers working in sultanhisar district of aydın province, The distinguished province of Aegean Region
and to try to determine which psychological Factors they were influenced by while making investment
decisions. As a result of the study, investor profiles were revealed and of investor psychological bias,
acquaintance delusion, Overconfidence delusion, attribution delusion, representation heuristic,
predisposition effect, And over optimism delusion was used. At the end of the research, it was
determined that there Were differences among the sub-dimensions used and suggestions were
presented.

Title of the research paper- An empherical investigation of invester behavioral biases on financial
decision making

Author- IU Chapra, M Kashif, R Rehan

Investor’s irrationality is an inevitable reality that has been time and again highlighted by researchers
(Statman, 2008). Therefore, this study is another effort to assess the role of behavioral biases in financial
decision making in Pakistan Stock Exchange (PSX). A survey questionnaire is designed and used to collect
responses using convenience sampling technique from sample of 250 investors of PSX. Behavioral biases
include overconfidence, over thinking, herding, cognitive bias, and hindsight effect of investors. Multiple
regression models are used to test influence of five behavioral biases on investment decision. The
results show that overconfidence, over thinking, herding, cognitive bias, and hindsight effect have
significant positive impact on investment decision. Overall results conclude that much change in
investment decision is due to behavioral biases. This study will help financial advisors to better advice
their clients. The one way to reduce these biases may be education and training of investors.
Title of the research paper- Decision making for trainees in administration and accounting based on
science ideas in higgin

Author- The Reina

adopted by ModernFinance. The study aims to determine among trainees in business administration
and accounting, the issueof the" promotion focus" and" prevention focus" discovered by Higgins in his
article" Making a Good Decision: Value from fit". The research is exploratory-descriptive, is a practical
study based on a survey, has a qualitative-quantitative approach, inductive logic and formulation and
testing of hypotheses. Thus, based on theresearch, it was diagnosed that future accountants feel more
conservative than future administrators whenmaking decisions in a simulation of" prevention focus".
Moreover, the second hypothesis was rejected becausefuture administrators do not feel more excited
than future accountants when making decisions in frontof a" promotion focus" simulation.

Reina, Donizete, et al. "Behavioral finance: an investigation on the decision-making For trainees in
administration and accounting based On science ideas in higgins." Enfoque 27.3 (2008): 32.

An investigation on behavioral biases in ship investments of small-sized shipping

companies",

Akgul, E.F. and Cetin, I.B. (2021)

Purpose
This study aims to explain the facts about behavioral biases that cannot be explained by rational
patterns in ship investments of small-size shipping companies.
Design/methodology/approach
A qualitative approach was adopted in this study. The systematic approach of Wolcott (1994) and the
action flows proposed by Miles and Huberman (1994) were taken into consideration.
Findings
Factors affecting ship investments are classified as ship finance, market timing, ship specifications and
profile and business models of ship investors. In addition, behavioral biases that stand out under each
theme are explained in the light of behavioral finance literature.
Originality/value
The originality of this study rests on the lack of studies on behavioral aspects of ship investments.

Keywords

 Ship investment  
 Behavioral bias  
  Small-sized shipping companies

Impact of behavioral biases on working capital management of manufacturing

sector of Pakistan: a non parametric investigation approach

Sajid Iqbal1(2015) The current study aims to investigate the relationship of overconfidence bias, loss
aversion bias, self-serving bias and anchoring bias with working capital management. The study used
questionnaire and acquired primary data from the companies of manufacturing sector of Pakistan, are
selected as sample of the study. The study used connivance sampling technique for data acquisition.
Moreover, descriptive statistics are applied by using item wise technique and nonparametric techniques
are also applied that supported results with historic investigations and have found significant
relationship of biases with working capital management.

Behavioral finance is the study that deals with irrational attitude and cognition of the financial
stakeholders regarding financial decisions. And it is the combination of conventional finance with
psychological theories. However, it become the plethora of behavioral finance that elaborates how
modern finance is working and is affected by investors decisions The idea of behavioral finance became
popular in 1990. And it is started to analyze investor decision in the kind of market returns and stock
price shuffulement. Therefore, cognitive factors and individual attitude are viewed as influencing factors
to originate change in market price from their fundamental value. However, various studies have found
significant results of investor attitude towards decision making. Moreover, it is commonly understood
that humans are investor’s, money exchangers, brokers, financial analysts and working capital managers
have developed principles of all financial domains including corporate and strategic finance domain. The
strategic and corporate fiancé focuses on investing, financing and risk management decisions. Thus,
these are considered as key responsibilities of finance managers. Whereas, finance mangers controls
other financial matters including working capital management as well. It is also observed that various
international companies considered importance of working capital and appointed the working capital
managers specifically. Thus, it has shown strong harmony among corporate finance and behavioral
finance domain. And these both paradigms are formally observed jointly by few researchers now days.
As Ramiah et al. (2014) has recently observed working capital managers biases impact on working
capital management and have found significant results by using prospect theory. Therefore, objective of
the current study is to explore the nature of relationship of overconfidence bias, loss aversion bias, self-
serving bias and anchoring bias with working capital management. Moreover, such nature of
relationship of two different paradigms is less investigated specifically in Asian context regarding
working capital management through primary data. Therefore, objective of the study is also to cover the
gap by incorporating such relationship in Pakistani context through scales as well.

Keywords: Biases, Working Capital Management, Non Parametric, Questionnaire, Manufacturing Sector

LITERATURE REVIEW
Behavioral finance developed
because of the limitations of
traditional finance theories or
standard finance theories.
According to Zeynep Copre
(2015), “Expected Utility,
Markowitz
Portfolio Model, Capital Asset
Pricing Model (CAPM) and
the Efficient Market
Hypothesis
(EMH) are the pillars of the
traditional finance theories”.
The two major assumptions
i.e.
investors are rational and the
market is efficient are based on
traditional finance theories.
But
when the investors are involved
in the money management
phenomena, they often tend
to be
nervous and behave
irrationally and hence the
traditional finance theories
do not fit in the
modern world of complex
decision making.
Ricciardian Simon (2000)
defined behavioral finance as,
“An influence in the financial
decision
making of an investor because
of the psychological and the
sociological factors” Lubis et.
al
(2015) argued that the three
major components that
influence the investors’ risk-
taking behavior
include the emotional
intelligence, defense
mechanism, and personality
trait. While Boda and
Sunitha (2018) stated that
behavioral finance identified
the reasons for the irrational
decision of
investors and also focused on
the behavioral bias of the
investors that influence the
investor’s
decision-making process. They
also identified the factors that
explain the reasons behind
taking
irrational decision making.
Amir and Muhammad (2016)
stated that there is no such
concept like the efficient
market
hypothesis as mentioned in the
traditional finance as all
investors have the same
information and
since the investors are literate
and hence they all make their
investment decision based on
their
past expectations and not mere
on the market information
available. The authors have also
found
that the overconfidence and
the financial literacy have a
statistically insignificant impact
in the
investment decision making. In
the form of suggestion, the
author said that there should
be a
special course on the stock
market for an investor before
any investment in the stock
market so
that they should be able to
make their own investment
decisions as many investors do
not have
own decision making before
investment in the stock market.
Basher Kokab (2018) stated
that investment decisions
are affected by the number
of
psychological factors while
making an investment
decision. These factors are
identified as
overconfidence and
optimism, heuristic, faith,
pessimism, herd behavior,
and confirmation
biases. Among these biases,
heuristic, confirmation and
pessimism make the
investor more
rational while the bises like
faith, overconfidence and
optimism and herd behavior
varies from
investor to investor and these
biases are responsible for
irrational behavior of the
investor. The
author has identified the most
important psychological trait
which affects the investor
negatively
is the faith. Jayaraman,
Vasanthi, and Ramaratnam (
2014) pointed out that an
investor’s
investment decision is driven
by investor sentiment and
investor sentiment is based
on the
psychology of the investor,
expectation of the investor,
optimism of the investor and
the ability
and confidence of the
investor. Such factors affect
the market which leads to
the bullish and
bearish market condition.
Sashikala and Chitramani
(2018) stated that the
emotions and cognitive
factors influence the
investor's decision-making
process is the main subject
matter of behavioral finance
and the
motivational factors are the
main determinant of behavioral
finance. The investment
decision of
the investor which is
responsible for the personal
and portfolio management
depends on the
investment intention.
However, it has also
identified the impact of the
behavioral factors,
prospect factors, the market
factors, and the herding factors
on the investors’ intention and
the
study revealed that the
prospect and herding factors
affect the short term
investment intention of
the investor while the
prospector factors and the
market factors have the long-
term intention of
the investor. However, it has
also revealed the heuristic
factors have no significant
impact on the
investment decision-making
process.
Kiyilar and Acar (2009) stated
that since humans are a social
creature and have a separate
value
system for each one of us
and the values are driven
by the emotion and
behavior of the
individual. The authors also
stated that behavioral finance
is a new way of looking at those
areas
which the traditional finance
has failed to explain. It is
nothing but an expansion of
traditional
finance. It is also argued that
behavior, emotion, and mood
play a significant role in
individual
decision-making behavior.
According to Bikas et. al.
(2013), the financial market
decisions are
based not only on the
basis of available
information from the
financial markets rather the
psychological factors also
influence the investment
decision process.
Mitroi and Oproiu (2014)
found that there is a
positive correlation between
investment
performance and emotional
intelligence. According to
the authors, when the
investors are
involved in the financial and
decision, then it is not the
rationality that works behind
the investor
decision making but the
psychological factors that
actually influence such
decisions. In the
concluding comment, the
authors have also added that if
the investors can understand
the errors
that they tend to make while
investing or managing their
portfolio and by doing so
they can
actually allocate their assets
better alternatives so that their
profit can maximize.
According to Wernet DeBondt
et. al. (2010), the three key
psychological factors that
work
behind behavioral finance
are the cognitive, emotional
response and social
psychology.
Brahmana et. al. (2012) in
their study identified two
major psychological biases.
These two
biases are affection biases
and cognitive biases. They
have identified that both the
affection
biases and the cognitive biases
are the two major
determinants of the ‘Day of the
Week Anomaly’
(DOWA). As the assumptions
of the rationality of the
investor by the traditional
finance are
contradicted by the DOWA. It is
also said that investor causes
an anomaly in the market and
such
anomaly results into irrational
behavior of the investors.
Riaz and Hunjra (2015) stated
that the major factors that
influence the investor's
decision making
are emotional bias, gut feeling,
and market sentiment.
According to the authors, risk
propensity
and risk perception are the
two aspects that actually
influence an investor in
making risky
decisions and in their study,
they have revealed that
investor decision making is
affected by the
risk perception and the
psychological factors.
Joo and Durri (2018) identified
in their study that psychological
traits such as overconfidence
and optimism, faith,
pessimism, heuristics, herd
behavior, and confirmation
biases influence
investment decision making.
Among these biases, the
most important bias that
influence
investors decision making
significantly is the faith.
Moreover, an investor’s
portfolio can be
divided into the short-term
portfolio and long-term
portfolio and for building a
short-term
portfolio, the factor that
influences the most are the
psychological traits whereas
the long-term
portfolio can be constructed
based on the expected returns
and the market behavior.
Daiva and Olga (2013)
investigated the relationship
between behavioral finance
and the
household financial decision. It
is said that like corporate
finance, the decision in
household
finance is also influenced by
different psychological traits.
However, from the
investigation, it is
found that among the literate
household, the loss aversion
bias is same as similar to those
set by
the experts in behavioral
finance while the
characteristics like the absence
of the market impact
are found as unique among the
household. Moreover, it is also
found that if the householders
are
literate then they found to be
more successful in the financial
markets.
LITERATURE REVIEW
Behavioral finance developed
because of the limitations of
traditional finance theories or
standard finance theories.
According to Zeynep Copre
(2015), “Expected Utility,
Markowitz
Portfolio Model, Capital Asset
Pricing Model (CAPM) and
the Efficient Market
Hypothesis
(EMH) are the pillars of the
traditional finance theories”.
The two major assumptions
i.e.
investors are rational and the
market is efficient are based on
traditional finance theories.
But
when the investors are involved
in the money management
phenomena, they often tend
to be
nervous and behave
irrationally and hence the
traditional finance theories
do not fit in the
modern world of complex
decision making.
Ricciardian Simon (2000)
defined behavioral finance as,
“An influence in the financial
decision
making of an investor because
of the psychological and the
sociological factors” Lubis et.
al
(2015) argued that the three
major components that
influence the investors’ risk-
taking behavior
include the emotional
intelligence, defense
mechanism, and personality
trait. While Boda and
Sunitha (2018) stated that
behavioral finance identified
the reasons for the irrational
decision of
investors and also focused on
the behavioral bias of the
investors that influence the
investor’s
decision-making process. They
also identified the factors that
explain the reasons behind
taking
irrational decision making.
Amir and Muhammad (2016)
stated that there is no such
concept like the efficient
market
hypothesis as mentioned in the
traditional finance as all
investors have the same
information and
since the investors are literate
and hence they all make their
investment decision based on
their
past expectations and not mere
on the market information
available. The authors have also
found
that the overconfidence and
the financial literacy have a
statistically insignificant impact
in the
investment decision making. In
the form of suggestion, the
author said that there should
be a
special course on the stock
market for an investor before
any investment in the stock
market so
that they should be able to
make their own investment
decisions as many investors do
not have
own decision making before
investment in the stock market.
Basher Kokab (2018) stated
that investment decisions
are affected by the number
of
psychological factors while
making an investment
decision. These factors are
identified as
overconfidence and
optimism, heuristic, faith,
pessimism, herd behavior,
and confirmation
biases. Among these biases,
heuristic, confirmation and
pessimism make the
investor more
rational while the bises like
faith, overconfidence and
optimism and herd behavior
varies from
investor to investor and these
biases are responsible for
irrational behavior of the
investor. The
author has identified the most
important psychological trait
which affects the investor
negatively
is the faith. Jayaraman,
Vasanthi, and Ramaratnam (
2014) pointed out that an
investor’s
investment decision is driven
by investor sentiment and
investor sentiment is based
on the
psychology of the investor,
expectation of the investor,
optimism of the investor and
the ability
and confidence of the
investor. Such factors affect
the market which leads to
the bullish and
bearish market condition.
Sashikala and Chitramani
(2018) stated that the
emotions and cognitive
factors influence the
investor's decision-making
process is the main subject
matter of behavioral finance
and the
motivational factors are the
main determinant of behavioral
finance. The investment
decision of
the investor which is
responsible for the personal
and portfolio management
depends on the
investment intention.
However, it has also
identified the impact of the
behavioral factors,
prospect factors, the market
factors, and the herding factors
on the investors’ intention and
the
study revealed that the
prospect and herding factors
affect the short term
investment intention of
the investor while the
prospector factors and the
market factors have the long-
term intention of
the investor. However, it has
also revealed the heuristic
factors have no significant
impact on the
investment decision-making
process.
Kiyilar and Acar (2009) stated
that since humans are a social
creature and have a separate
value
system for each one of us
and the values are driven
by the emotion and
behavior of the
individual. The authors also
stated that behavioral finance
is a new way of looking at those
areas
which the traditional finance
has failed to explain. It is
nothing but an expansion of
traditional
finance. It is also argued that
behavior, emotion, and mood
play a significant role in
individual
decision-making behavior.
According to Bikas et. al.
(2013), the financial market
decisions are
based not only on the
basis of available
information from the
financial markets rather the
psychological factors also
influence the investment
decision process.
Mitroi and Oproiu (2014)
found that there is a
positive correlation between
investment
performance and emotional
intelligence. According to
the authors, when the
investors are
involved in the financial and
decision, then it is not the
rationality that works behind
the investor
decision making but the
psychological factors that
actually influence such
decisions. In the
concluding comment, the
authors have also added that if
the investors can understand
the errors
that they tend to make while
investing or managing their
portfolio and by doing so
they can
actually allocate their assets
better alternatives so that their
profit can maximize.
According to Wernet DeBondt
et. al. (2010), the three key
psychological factors that
work
behind behavioral finance
are the cognitive, emotional
response and social
psychology.
Brahmana et. al. (2012) in
their study identified two
major psychological biases.
These two
biases are affection biases
and cognitive biases. They
have identified that both the
affection
biases and the cognitive biases
are the two major
determinants of the ‘Day of the
Week Anomaly’
(DOWA). As the assumptions
of the rationality of the
investor by the traditional
finance are
contradicted by the DOWA. It is
also said that investor causes
an anomaly in the market and
such
anomaly results into irrational
behavior of the investors.
Riaz and Hunjra (2015) stated
that the major factors that
influence the investor's
decision making
are emotional bias, gut feeling,
and market sentiment.
According to the authors, risk
propensity
and risk perception are the
two aspects that actually
influence an investor in
making risky
decisions and in their study,
they have revealed that
investor decision making is
affected by the
risk perception and the
psychological factors.
Joo and Durri (2018) identified
in their study that psychological
traits such as overconfidence
and optimism, faith,
pessimism, heuristics, herd
behavior, and confirmation
biases influence
investment decision making.
Among these biases, the
most important bias that
influence
investors decision making
significantly is the faith.
Moreover, an investor’s
portfolio can be
divided into the short-term
portfolio and long-term
portfolio and for building a
short-term
portfolio, the factor that
influences the most are the
psychological traits whereas
the long-term
portfolio can be constructed
based on the expected returns
and the market behavior.
Daiva and Olga (2013)
investigated the relationship
between behavioral finance
and the
household financial decision. It
is said that like corporate
finance, the decision in
household
finance is also influenced by
different psychological traits.
However, from the
investigation, it is
found that among the literate
household, the loss aversion
bias is same as similar to those
set by
the experts in behavioral
finance while the
characteristics like the absence
of the market impact
are found as unique among the
household. Moreover, it is also
found that if the householders
are
literate then they found to be
more successful in the financial
markets.
LITERATURE REVIEW
Behavioral finance developed
because of the limitations of
traditional finance theories or
standard finance theories.
According to Zeynep Copre
(2015), “Expected Utility,
Markowitz
Portfolio Model, Capital Asset
Pricing Model (CAPM) and
the Efficient Market
Hypothesis
(EMH) are the pillars of the
traditional finance theories”.
The two major assumptions
i.e.
investors are rational and the
market is efficient are based on
traditional finance theories.
But
when the investors are involved
in the money management
phenomena, they often tend
to be
nervous and behave
irrationally and hence the
traditional finance theories
do not fit in the
modern world of complex
decision making.
Ricciardian Simon (2000)
defined behavioral finance as,
“An influence in the financial
decision
making of an investor because
of the psychological and the
sociological factors” Lubis et.
al
(2015) argued that the three
major components that
influence the investors’ risk-
taking behavior
include the emotional
intelligence, defense
mechanism, and personality
trait. While Boda and
Sunitha (2018) stated that
behavioral finance identified
the reasons for the irrational
decision of
investors and also focused on
the behavioral bias of the
investors that influence the
investor’s
decision-making process. They
also identified the factors that
explain the reasons behind
taking
irrational decision making.
Amir and Muhammad (2016)
stated that there is no such
concept like the efficient
market
hypothesis as mentioned in the
traditional finance as all
investors have the same
information and
since the investors are literate
and hence they all make their
investment decision based on
their
past expectations and not mere
on the market information
available. The authors have also
found
that the overconfidence and
the financial literacy have a
statistically insignificant impact
in the
investment decision making. In
the form of suggestion, the
author said that there should
be a
special course on the stock
market for an investor before
any investment in the stock
market so
that they should be able to
make their own investment
decisions as many investors do
not have
own decision making before
investment in the stock market.
Basher Kokab (2018) stated
that investment decisions
are affected by the number
of
psychological factors while
making an investment
decision. These factors are
identified as
overconfidence and
optimism, heuristic, faith,
pessimism, herd behavior,
and confirmation
biases. Among these biases,
heuristic, confirmation and
pessimism make the
investor more
rational while the bises like
faith, overconfidence and
optimism and herd behavior
varies from
investor to investor and these
biases are responsible for
irrational behavior of the
investor. The
author has identified the most
important psychological trait
which affects the investor
negatively
is the faith. Jayaraman,
Vasanthi, and Ramaratnam (
2014) pointed out that an
investor’s
investment decision is driven
by investor sentiment and
investor sentiment is based
on the
psychology of the investor,
expectation of the investor,
optimism of the investor and
the ability
and confidence of the
investor. Such factors affect
the market which leads to
the bullish and
bearish market condition.
Sashikala and Chitramani
(2018) stated that the
emotions and cognitive
factors influence the
investor's decision-making
process is the main subject
matter of behavioral finance
and the
motivational factors are the
main determinant of behavioral
finance. The investment
decision of
the investor which is
responsible for the personal
and portfolio management
depends on the
investment intention.
However, it has also
identified the impact of the
behavioral factors,
prospect factors, the market
factors, and the herding factors
on the investors’ intention and
the
study revealed that the
prospect and herding factors
affect the short term
investment intention of
the investor while the
prospector factors and the
market factors have the long-
term intention of
the investor. However, it has
also revealed the heuristic
factors have no significant
impact on the
investment decision-making
process.
Kiyilar and Acar (2009) stated
that since humans are a social
creature and have a separate
value
system for each one of us
and the values are driven
by the emotion and
behavior of the
individual. The authors also
stated that behavioral finance
is a new way of looking at those
areas
which the traditional finance
has failed to explain. It is
nothing but an expansion of
traditional
finance. It is also argued that
behavior, emotion, and mood
play a significant role in
individual
decision-making behavior.
According to Bikas et. al.
(2013), the financial market
decisions are
based not only on the
basis of available
information from the
financial markets rather the
psychological factors also
influence the investment
decision process.
Mitroi and Oproiu (2014)
found that there is a
positive correlation between
investment
performance and emotional
intelligence. According to
the authors, when the
investors are
involved in the financial and
decision, then it is not the
rationality that works behind
the investor
decision making but the
psychological factors that
actually influence such
decisions. In the
concluding comment, the
authors have also added that if
the investors can understand
the errors
that they tend to make while
investing or managing their
portfolio and by doing so
they can
actually allocate their assets
better alternatives so that their
profit can maximize.
According to Wernet DeBondt
et. al. (2010), the three key
psychological factors that
work
behind behavioral finance
are the cognitive, emotional
response and social
psychology.
Brahmana et. al. (2012) in
their study identified two
major psychological biases.
These two
biases are affection biases
and cognitive biases. They
have identified that both the
affection
biases and the cognitive biases
are the two major
determinants of the ‘Day of the
Week Anomaly’
(DOWA). As the assumptions
of the rationality of the
investor by the traditional
finance are
contradicted by the DOWA. It is
also said that investor causes
an anomaly in the market and
such
anomaly results into irrational
behavior of the investors.
Riaz and Hunjra (2015) stated
that the major factors that
influence the investor's
decision making
are emotional bias, gut feeling,
and market sentiment.
According to the authors, risk
propensity
and risk perception are the
two aspects that actually
influence an investor in
making risky
decisions and in their study,
they have revealed that
investor decision making is
affected by the
risk perception and the
psychological factors.
Joo and Durri (2018) identified
in their study that psychological
traits such as overconfidence
and optimism, faith,
pessimism, heuristics, herd
behavior, and confirmation
biases influence
investment decision making.
Among these biases, the
most important bias that
influence
investors decision making
significantly is the faith.
Moreover, an investor’s
portfolio can be
divided into the short-term
portfolio and long-term
portfolio and for building a
short-term
portfolio, the factor that
influences the most are the
psychological traits whereas
the long-term
portfolio can be constructed
based on the expected returns
and the market behavior.
Daiva and Olga (2013)
investigated the relationship
between behavioral finance
and the
household financial decision. It
is said that like corporate
finance, the decision in
household
finance is also influenced by
different psychological traits.
However, from the
investigation, it is
found that among the literate
household, the loss aversion
bias is same as similar to those
set by
the experts in behavioral
finance while the
characteristics like the absence
of the market impact
are found as unique among the
household. Moreover, it is also
found that if the householders
are
literate then they found to be
more successful in the financial
markets.
LITERATURE REVIEW
Behavioral finance developed
because of the limitations of
traditional finance theories or
standard finance theories.
According to Zeynep Copre
(2015), “Expected Utility,
Markowitz
Portfolio Model, Capital Asset
Pricing Model (CAPM) and
the Efficient Market
Hypothesis
(EMH) are the pillars of the
traditional finance theories”.
The two major assumptions
i.e.
investors are rational and the
market is efficient are based on
traditional finance theories.
But
when the investors are involved
in the money management
phenomena, they often tend
to be
nervous and behave
irrationally and hence the
traditional finance theories
do not fit in the
modern world of complex
decision making.
Ricciardian Simon (2000)
defined behavioral finance as,
“An influence in the financial
decision
making of an investor because
of the psychological and the
sociological factors” Lubis et.
al
(2015) argued that the three
major components that
influence the investors’ risk-
taking behavior
include the emotional
intelligence, defense
mechanism, and personality
trait. While Boda and
Sunitha (2018) stated that
behavioral finance identified
the reasons for the irrational
decision of
investors and also focused on
the behavioral bias of the
investors that influence the
investor’s
decision-making process. They
also identified the factors that
explain the reasons behind
taking
irrational decision making.
Amir and Muhammad (2016)
stated that there is no such
concept like the efficient
market
hypothesis as mentioned in the
traditional finance as all
investors have the same
information and
since the investors are literate
and hence they all make their
investment decision based on
their
past expectations and not mere
on the market information
available. The authors have also
found
that the overconfidence and
the financial literacy have a
statistically insignificant impact
in the
investment decision making. In
the form of suggestion, the
author said that there should
be a
special course on the stock
market for an investor before
any investment in the stock
market so
that they should be able to
make their own investment
decisions as many investors do
not have
own decision making before
investment in the stock market.
Basher Kokab (2018) stated
that investment decisions
are affected by the number
of
psychological factors while
making an investment
decision. These factors are
identified as
overconfidence and
optimism, heuristic, faith,
pessimism, herd behavior,
and confirmation
biases. Among these biases,
heuristic, confirmation and
pessimism make the
investor more
rational while the bises like
faith, overconfidence and
optimism and herd behavior
varies from
investor to investor and these
biases are responsible for
irrational behavior of the
investor. The
author has identified the most
important psychological trait
which affects the investor
negatively
is the faith. Jayaraman,
Vasanthi, and Ramaratnam (
2014) pointed out that an
investor’s
investment decision is driven
by investor sentiment and
investor sentiment is based
on the
psychology of the investor,
expectation of the investor,
optimism of the investor and
the ability
and confidence of the
investor. Such factors affect
the market which leads to
the bullish and
bearish market condition.
Sashikala and Chitramani
(2018) stated that the
emotions and cognitive
factors influence the
investor's decision-making
process is the main subject
matter of behavioral finance
and the
motivational factors are the
main determinant of behavioral
finance. The investment
decision of
the investor which is
responsible for the personal
and portfolio management
depends on the
investment intention.
However, it has also
identified the impact of the
behavioral factors,
prospect factors, the market
factors, and the herding factors
on the investors’ intention and
the
study revealed that the
prospect and herding factors
affect the short term
investment intention of
the investor while the
prospector factors and the
market factors have the long-
term intention of
the investor. However, it has
also revealed the heuristic
factors have no significant
impact on the
investment decision-making
process.
Kiyilar and Acar (2009) stated
that since humans are a social
creature and have a separate
value
system for each one of us
and the values are driven
by the emotion and
behavior of the
individual. The authors also
stated that behavioral finance
is a new way of looking at those
areas
which the traditional finance
has failed to explain. It is
nothing but an expansion of
traditional
finance. It is also argued that
behavior, emotion, and mood
play a significant role in
individual
decision-making behavior.
According to Bikas et. al.
(2013), the financial market
decisions are
based not only on the
basis of available
information from the
financial markets rather the
psychological factors also
influence the investment
decision process.
Mitroi and Oproiu (2014)
found that there is a
positive correlation between
investment
performance and emotional
intelligence. According to
the authors, when the
investors are
involved in the financial and
decision, then it is not the
rationality that works behind
the investor
decision making but the
psychological factors that
actually influence such
decisions. In the
concluding comment, the
authors have also added that if
the investors can understand
the errors
that they tend to make while
investing or managing their
portfolio and by doing so
they can
actually allocate their assets
better alternatives so that their
profit can maximize.
According to Wernet DeBondt
et. al. (2010), the three key
psychological factors that
work
behind behavioral finance
are the cognitive, emotional
response and social
psychology.
Brahmana et. al. (2012) in
their study identified two
major psychological biases.
These two
biases are affection biases
and cognitive biases. They
have identified that both the
affection
biases and the cognitive biases
are the two major
determinants of the ‘Day of the
Week Anomaly’
(DOWA). As the assumptions
of the rationality of the
investor by the traditional
finance are
contradicted by the DOWA. It is
also said that investor causes
an anomaly in the market and
such
anomaly results into irrational
behavior of the investors.
Riaz and Hunjra (2015) stated
that the major factors that
influence the investor's
decision making
are emotional bias, gut feeling,
and market sentiment.
According to the authors, risk
propensity
and risk perception are the
two aspects that actually
influence an investor in
making risky
decisions and in their study,
they have revealed that
investor decision making is
affected by the
risk perception and the
psychological factors.
Joo and Durri (2018) identified
in their study that psychological
traits such as overconfidence
and optimism, faith,
pessimism, heuristics, herd
behavior, and confirmation
biases influence
investment decision making.
Among these biases, the
most important bias that
influence
investors decision making
significantly is the faith.
Moreover, an investor’s
portfolio can be
divided into the short-term
portfolio and long-term
portfolio and for building a
short-term
portfolio, the factor that
influences the most are the
psychological traits whereas
the long-term
portfolio can be constructed
based on the expected returns
and the market behavior.
Daiva and Olga (2013)
investigated the relationship
between behavioral finance
and the
household financial decision. It
is said that like corporate
finance, the decision in
household
finance is also influenced by
different psychological traits.
However, from the
investigation, it is
found that among the literate
household, the loss aversion
bias is same as similar to those
set by
the experts in behavioral
finance while the
characteristics like the absence
of the market impact
are found as unique among the
household. Moreover, it is also
found that if the householders
are
literate then they found to be
more successful in the financial
markets.
LITERATURE REVIEW
Behavioral finance developed
because of the limitations of
traditional finance theories or
standard finance theories.
According to Zeynep Copre
(2015), “Expected Utility,
Markowitz
Portfolio Model, Capital Asset
Pricing Model (CAPM) and
the Efficient Market
Hypothesis
(EMH) are the pillars of the
traditional finance theories”.
The two major assumptions
i.e.
investors are rational and the
market is efficient are based on
traditional finance theories.
But
when the investors are involved
in the money management
phenomena, they often tend
to be
nervous and behave
irrationally and hence the
traditional finance theories
do not fit in the
modern world of complex
decision making.
Ricciardian Simon (2000)
defined behavioral finance as,
“An influence in the financial
decision
making of an investor because
of the psychological and the
sociological factors” Lubis et.
al
(2015) argued that the three
major components that
influence the investors’ risk-
taking behavior
include the emotional
intelligence, defense
mechanism, and personality
trait. While Boda and
Sunitha (2018) stated that
behavioral finance identified
the reasons for the irrational
decision of
investors and also focused on
the behavioral bias of the
investors that influence the
investor’s
decision-making process. They
also identified the factors that
explain the reasons behind
taking
irrational decision making.
Amir and Muhammad (2016)
stated that there is no such
concept like the efficient
market
hypothesis as mentioned in the
traditional finance as all
investors have the same
information and
since the investors are literate
and hence they all make their
investment decision based on
their
past expectations and not mere
on the market information
available. The authors have also
found
that the overconfidence and
the financial literacy have a
statistically insignificant impact
in the
investment decision making. In
the form of suggestion, the
author said that there should
be a
special course on the stock
market for an investor before
any investment in the stock
market so
that they should be able to
make their own investment
decisions as many investors do
not have
own decision making before
investment in the stock market.
Basher Kokab (2018) stated
that investment decisions
are affected by the number
of
psychological factors while
making an investment
decision. These factors are
identified as
overconfidence and
optimism, heuristic, faith,
pessimism, herd behavior,
and confirmation
biases. Among these biases,
heuristic, confirmation and
pessimism make the
investor more
rational while the bises like
faith, overconfidence and
optimism and herd behavior
varies from
investor to investor and these
biases are responsible for
irrational behavior of the
investor. The
author has identified the most
important psychological trait
which affects the investor
negatively
is the faith. Jayaraman,
Vasanthi, and Ramaratnam (
2014) pointed out that an
investor’s
investment decision is driven
by investor sentiment and
investor sentiment is based
on the
psychology of the investor,
expectation of the investor,
optimism of the investor and
the ability
and confidence of the
investor. Such factors affect
the market which leads to
the bullish and
bearish market condition.
Sashikala and Chitramani
(2018) stated that the
emotions and cognitive
factors influence the
investor's decision-making
process is the main subject
matter of behavioral finance
and the
motivational factors are the
main determinant of behavioral
finance. The investment
decision of
the investor which is
responsible for the personal
and portfolio management
depends on the
investment intention.
However, it has also
identified the impact of the
behavioral factors,
prospect factors, the market
factors, and the herding factors
on the investors’ intention and
the
study revealed that the
prospect and herding factors
affect the short term
investment intention of
the investor while the
prospector factors and the
market factors have the long-
term intention of
the investor. However, it has
also revealed the heuristic
factors have no significant
impact on the
investment decision-making
process.
Kiyilar and Acar (2009) stated
that since humans are a social
creature and have a separate
value
system for each one of us
and the values are driven
by the emotion and
behavior of the
individual. The authors also
stated that behavioral finance
is a new way of looking at those
areas
which the traditional finance
has failed to explain. It is
nothing but an expansion of
traditional
finance. It is also argued that
behavior, emotion, and mood
play a significant role in
individual
decision-making behavior.
According to Bikas et. al.
(2013), the financial market
decisions are
based not only on the
basis of available
information from the
financial markets rather the
psychological factors also
influence the investment
decision process.
Mitroi and Oproiu (2014)
found that there is a
positive correlation between
investment
performance and emotional
intelligence. According to
the authors, when the
investors are
involved in the financial and
decision, then it is not the
rationality that works behind
the investor
decision making but the
psychological factors that
actually influence such
decisions. In the
concluding comment, the
authors have also added that if
the investors can understand
the errors
that they tend to make while
investing or managing their
portfolio and by doing so
they can
actually allocate their assets
better alternatives so that their
profit can maximize.
According to Wernet DeBondt
et. al. (2010), the three key
psychological factors that
work
behind behavioral finance
are the cognitive, emotional
response and social
psychology.
Brahmana et. al. (2012) in
their study identified two
major psychological biases.
These two
biases are affection biases
and cognitive biases. They
have identified that both the
affection
biases and the cognitive biases
are the two major
determinants of the ‘Day of the
Week Anomaly’
(DOWA). As the assumptions
of the rationality of the
investor by the traditional
finance are
contradicted by the DOWA. It is
also said that investor causes
an anomaly in the market and
such
anomaly results into irrational
behavior of the investors.
Riaz and Hunjra (2015) stated
that the major factors that
influence the investor's
decision making
are emotional bias, gut feeling,
and market sentiment.
According to the authors, risk
propensity
and risk perception are the
two aspects that actually
influence an investor in
making risky
decisions and in their study,
they have revealed that
investor decision making is
affected by the
risk perception and the
psychological factors.
Joo and Durri (2018) identified
in their study that psychological
traits such as overconfidence
and optimism, faith,
pessimism, heuristics, herd
behavior, and confirmation
biases influence
investment decision making.
Among these biases, the
most important bias that
influence
investors decision making
significantly is the faith.
Moreover, an investor’s
portfolio can be
divided into the short-term
portfolio and long-term
portfolio and for building a
short-term
portfolio, the factor that
influences the most are the
psychological traits whereas
the long-term
portfolio can be constructed
based on the expected returns
and the market behavior.
Daiva and Olga (2013)
investigated the relationship
between behavioral finance
and the
household financial decision. It
is said that like corporate
finance, the decision in
household
finance is also influenced by
different psychological traits.
However, from the
investigation, it is
found that among the literate
household, the loss aversion
bias is same as similar to those
set by
the experts in behavioral
finance while the
characteristics like the absence
of the market impact
are found as unique among the
household. Moreover, it is also
found that if the householders
are
literate then they found to be
more successful in the financial
markets.
Title of research- Behavioral finance, biased, investor decision, behavior

LITERATURE REVIEW
Behavioral finance developed
because of the limitations of
traditional finance theories or
standard finance theories.
According to Zeynep Copre
(2015), “Expected Utility,
Markowitz
Portfolio Model, Capital Asset
Pricing Model (CAPM) and
the Efficient Market
Hypothesis
(EMH) are the pillars of the
traditional finance theories”.
The two major assumptions
i.e.
investors are rational and the
market is efficient are based on
traditional finance theories.
But
when the investors are involved
in the money management
phenomena, they often tend
to be
nervous and behave
irrationally and hence the
traditional finance theories
do not fit in the
modern world of complex
decision making.
Ricciardian Simon (2000)
defined behavioral finance as,
“An influence in the financial
decision
making of an investor because
of the psychological and the
sociological factors” Lubis et.
al
(2015) argued that the three
major components that
influence the investors’ risk-
taking behavior
include the emotional
intelligence, defense
mechanism, and personality
trait. While Boda and
Sunitha (2018) stated that
behavioral finance identified
the reasons for the irrational
decision of
investors and also focused on
the behavioral bias of the
investors that influence the
investor’s
decision-making process. They
also identified the factors that
explain the reasons behind
taking
irrational decision making.
Amir and Muhammad (2016)
stated that there is no such
concept like the efficient
market
hypothesis as mentioned in the
traditional finance as all
investors have the same
information and
since the investors are literate
and hence they all make their
investment decision based on
their
past expectations and not mere
on the market information
available. The authors have also
found
that the overconfidence and
the financial literacy have a
statistically insignificant impact
in the
investment decision making. In
the form of suggestion, the
author said that there should
be a
special course on the stock
market for an investor before
any investment in the stock
market so
that they should be able to
make their own investment
decisions as many investors do
not have
own decision making before
investment in the stock market.
Basher Kokab (2018) stated
that investment decisions
are affected by the number
of
psychological factors while
making an investment
decision. These factors are
identified as
overconfidence and
optimism, heuristic, faith,
pessimism, herd behavior,
and confirmation
biases. Among these biases,
heuristic, confirmation and
pessimism make the
investor more
rational while the bises like
faith, overconfidence and
optimism and herd behavior
varies from
investor to investor and these
biases are responsible for
irrational behavior of the
investor. The
author has identified the most
important psychological trait
which affects the investor
negatively
is the faith. Jayaraman,
Vasanthi, and Ramaratnam (
2014) pointed out that an
investor’s
investment decision is driven
by investor sentiment and
investor sentiment is based
on the
psychology of the investor,
expectation of the investor,
optimism of the investor and
the ability
and confidence of the
investor. Such factors affect
the market which leads to
the bullish and
bearish market condition.
Sashikala and Chitramani
(2018) stated that the
emotions and cognitive
factors influence the
investor's decision-making
process is the main subject
matter of behavioral finance
and the
motivational factors are the
main determinant of behavioral
finance. The investment
decision of
the investor which is
responsible for the personal
and portfolio management
depends on the
investment intention.
However, it has also
identified the impact of the
behavioral factors,
prospect factors, the market
factors, and the herding factors
on the investors’ intention and
the
study revealed that the
prospect and herding factors
affect the short term
investment intention of
the investor while the
prospector factors and the
market factors have the long-
term intention of
the investor. However, it has
also revealed the heuristic
factors have no significant
impact on the
investment decision-making
process.
Kiyilar and Acar (2009) stated
that since humans are a social
creature and have a separate
value
system for each one of us
and the values are driven
by the emotion and
behavior of the
individual. The authors also
stated that behavioral finance
is a new way of looking at those
areas
which the traditional finance
has failed to explain. It is
nothing but an expansion of
traditional
finance. It is also argued that
behavior, emotion, and mood
play a significant role in
individual
decision-making behavior.
According to Bikas et. al.
(2013), the financial market
decisions are
based not only on the
basis of available
information from the
financial markets rather the
psychological factors also
influence the investment
decision process.
Mitroi and Oproiu (2014)
found that there is a
positive correlation between
investment
performance and emotional
intelligence. According to
the authors, when the
investors are
involved in the financial and
decision, then it is not the
rationality that works behind
the investor
decision making but the
psychological factors that
actually influence such
decisions. In the
concluding comment, the
authors have also added that if
the investors can understand
the errors
that they tend to make while
investing or managing their
portfolio and by doing so
they can
actually allocate their assets
better alternatives so that their
profit can maximize.
According to Wernet DeBondt
et. al. (2010), the three key
psychological factors that
work
behind behavioral finance
are the cognitive, emotional
response and social
psychology.
Brahmana et. al. (2012) in
their study identified two
major psychological biases.
These two
biases are affection biases
and cognitive biases. They
have identified that both the
affection
biases and the cognitive biases
are the two major
determinants of the ‘Day of the
Week Anomaly’
(DOWA). As the assumptions
of the rationality of the
investor by the traditional
finance are
contradicted by the DOWA. It is
also said that investor causes
an anomaly in the market and
such
anomaly results into irrational
behavior of the investors.
Riaz and Hunjra (2015) stated
that the major factors that
influence the investor's
decision making
are emotional bias, gut feeling,
and market sentiment.
According to the authors, risk
propensity
and risk perception are the
two aspects that actually
influence an investor in
making risky
decisions and in their study,
they have revealed that
investor decision making is
affected by the
risk perception and the
psychological factors.
Joo and Durri (2018) identified
in their study that psychological
traits such as overconfidence
and optimism, faith,
pessimism, heuristics, herd
behavior, and confirmation
biases influence
investment decision making.
Among these biases, the
most important bias that
influence
investors decision making
significantly is the faith.
Moreover, an investor’s
portfolio can be
divided into the short-term
portfolio and long-term
portfolio and for building a
short-term
portfolio, the factor that
influences the most are the
psychological traits whereas
the long-term
portfolio can be constructed
based on the expected returns
and the market behavior.
Daiva and Olga (2013)
investigated the relationship
between behavioral finance
and the
household financial decision. It
is said that like corporate
finance, the decision in
household
finance is also influenced by
different psychological traits.
However, from the
investigation, it is
found that among the literate
household, the loss aversion
bias is same as similar to those
set by
the experts in behavioral
finance while the
characteristics like the absence
of the market impact
are found as unique among the
household. Moreover, it is also
found that if the householders
are
literate then they found to be
more successful in the financial
markets.
3. DISCUSSION
Before the development of
behavioral finance, the
standard finance theories
dominated in the
financial market. But in the
1980s, there is a drastic change
in the standard finance
theoriesand
hence a new model
developed related to human
psychological factors affecting
the financial
decision popularly known as
behavioral finance. Behavioral
finance emerged from
behavioral
economics. Researchers in
behavioral finance have
identified a number of biases
that affect
investor decision behavior.
Biases are categorized into
heuristic bias and cognitive
bias. Heuristic
biases include
representativeness, availability,
Gambler’s fallacy, and
anchoring while cognitive
biases are overconfidence,
herding, regret aversion, and
an over-reaction. While
factors that
influence the investor in
investment decision can be
categorized into four different
factors. These
factors are heuristic factors,
prospect factors, market
factors, and herding factors
(Boda and
Sunitha, 2018).
From the extensive literature,
there are some other biases
apart from the above
mentioned two
categorized biases. These
are hindsight bias, black
swan, conjunction fallacy,
confirmation
biases, scope neglect,
bystander apathy (Brahmana,
Hooy and Ahmad, 2012). All
these
psychological based biases have
a major impact on the
investment behavior of the
investor. This
will lead to irrational
investment behavior of the
investor. The following table
shows the major
psychological biases from the
available literature and the
explanation of the same
LITERATURE REVIEW
Behavioral finance developed
because of the limitations of
traditional finance theories or
standard finance theories.
According to Zeynep Copre
(2015), “Expected Utility,
Markowitz
Portfolio Model, Capital Asset
Pricing Model (CAPM) and
the Efficient Market
Hypothesis
(EMH) are the pillars of the
traditional finance theories”.
The two major assumptions
i.e.
investors are rational and the
market is efficient are based on
traditional finance theories.
But
when the investors are involved
in the money management
phenomena, they often tend
to be
nervous and behave
irrationally and hence the
traditional finance theories
do not fit in the
modern world of complex
decision making.
Ricciardian Simon (2000)
defined behavioral finance as,
“An influence in the financial
decision
making of an investor because
of the psychological and the
sociological factors” Lubis et.
al
(2015) argued that the three
major components that
influence the investors’ risk-
taking behavior
include the emotional
intelligence, defense
mechanism, and personality
trait. While Boda and
Sunitha (2018) stated that
behavioral finance identified
the reasons for the irrational
decision of
investors and also focused on
the behavioral bias of the
investors that influence the
investor’s
decision-making process. They
also identified the factors that
explain the reasons behind
taking
irrational decision making.
Amir and Muhammad (2016)
stated that there is no such
concept like the efficient
market
hypothesis as mentioned in the
traditional finance as all
investors have the same
information and
since the investors are literate
and hence they all make their
investment decision based on
their
past expectations and not mere
on the market information
available. The authors have also
found
that the overconfidence and
the financial literacy have a
statistically insignificant impact
in the
investment decision making. In
the form of suggestion, the
author said that there should
be a
special course on the stock
market for an investor before
any investment in the stock
market so
that they should be able to
make their own investment
decisions as many investors do
not have
own decision making before
investment in the stock market.
Basher Kokab (2018) stated
that investment decisions
are affected by the number
of
psychological factors while
making an investment
decision. These factors are
identified as
overconfidence and
optimism, heuristic, faith,
pessimism, herd behavior,
and confirmation
biases. Among these biases,
heuristic, confirmation and
pessimism make the
investor more
rational while the bises like
faith, overconfidence and
optimism and herd behavior
varies from
investor to investor and these
biases are responsible for
irrational behavior of the
investor. The
author has identified the most
important psychological trait
which affects the investor
negatively
is the faith. Jayaraman,
Vasanthi, and Ramaratnam (
2014) pointed out that an
investor’s
investment decision is driven
by investor sentiment and
investor sentiment is based
on the
psychology of the investor,
expectation of the investor,
optimism of the investor and
the ability
and confidence of the
investor. Such factors affect
the market which leads to
the bullish and
bearish market condition.
Sashikala and Chitramani
(2018) stated that the
emotions and cognitive
factors influence the
investor's decision-making
process is the main subject
matter of behavioral finance
and the
motivational factors are the
main determinant of behavioral
finance. The investment
decision of
the investor which is
responsible for the personal
and portfolio management
depends on the
investment intention.
However, it has also
identified the impact of the
behavioral factors,
prospect factors, the market
factors, and the herding factors
on the investors’ intention and
the
study revealed that the
prospect and herding factors
affect the short term
investment intention of
the investor while the
prospector factors and the
market factors have the long-
term intention of
the investor. However, it has
also revealed the heuristic
factors have no significant
impact on the
investment decision-making
process.
Kiyilar and Acar (2009) stated
that since humans are a social
creature and have a separate
value
system for each one of us
and the values are driven
by the emotion and
behavior of the
individual. The authors also
stated that behavioral finance
is a new way of looking at those
areas
which the traditional finance
has failed to explain. It is
nothing but an expansion of
traditional
finance. It is also argued that
behavior, emotion, and mood
play a significant role in
individual
decision-making behavior.
According to Bikas et. al.
(2013), the financial market
decisions are
based not only on the
basis of available
information from the
financial markets rather the
psychological factors also
influence the investment
decision process.
Mitroi and Oproiu (2014)
found that there is a
positive correlation between
investment
performance and emotional
intelligence. According to
the authors, when the
investors are
involved in the financial and
decision, then it is not the
rationality that works behind
the investor
decision making but the
psychological factors that
actually influence such
decisions. In the
concluding comment, the
authors have also added that if
the investors can understand
the errors
that they tend to make while
investing or managing their
portfolio and by doing so
they can
actually allocate their assets
better alternatives so that their
profit can maximize.
According to Wernet DeBondt
et. al. (2010), the three key
psychological factors that
work
behind behavioral finance
are the cognitive, emotional
response and social
psychology.
Brahmana et. al. (2012) in
their study identified two
major psychological biases.
These two
biases are affection biases
and cognitive biases. They
have identified that both the
affection
biases and the cognitive biases
are the two major
determinants of the ‘Day of the
Week Anomaly’
(DOWA). As the assumptions
of the rationality of the
investor by the traditional
finance are
contradicted by the DOWA. It is
also said that investor causes
an anomaly in the market and
such
anomaly results into irrational
behavior of the investors.
Riaz and Hunjra (2015) stated
that the major factors that
influence the investor's
decision making
are emotional bias, gut feeling,
and market sentiment.
According to the authors, risk
propensity
and risk perception are the
two aspects that actually
influence an investor in
making risky
decisions and in their study,
they have revealed that
investor decision making is
affected by the
risk perception and the
psychological factors.
Joo and Durri (2018) identified
in their study that psychological
traits such as overconfidence
and optimism, faith,
pessimism, heuristics, herd
behavior, and confirmation
biases influence
investment decision making.
Among these biases, the
most important bias that
influence
investors decision making
significantly is the faith.
Moreover, an investor’s
portfolio can be
divided into the short-term
portfolio and long-term
portfolio and for building a
short-term
portfolio, the factor that
influences the most are the
psychological traits whereas
the long-term
portfolio can be constructed
based on the expected returns
and the market behavior.
Daiva and Olga (2013)
investigated the relationship
between behavioral finance
and the
household financial decision. It
is said that like corporate
finance, the decision in
household
finance is also influenced by
different psychological traits.
However, from the
investigation, it is
found that among the literate
household, the loss aversion
bias is same as similar to those
set by
the experts in behavioral
finance while the
characteristics like the absence
of the market impact
are found as unique among the
household. Moreover, it is also
found that if the householders
are
literate then they found to be
more successful in the financial
markets.
3. DISCUSSION
Before the development of
behavioral finance, the
standard finance theories
dominated in the
financial market. But in the
1980s, there is a drastic change
in the standard finance
theoriesand
hence a new model
developed related to human
psychological factors affecting
the financial
decision popularly known as
behavioral finance. Behavioral
finance emerged from
behavioral
economics. Researchers in
behavioral finance have
identified a number of biases
that affect
investor decision behavior.
Biases are categorized into
heuristic bias and cognitive
bias. Heuristic
biases include
representativeness, availability,
Gambler’s fallacy, and
anchoring while cognitive
biases are overconfidence,
herding, regret aversion, and
an over-reaction. While
factors that
influence the investor in
investment decision can be
categorized into four different
factors. These
factors are heuristic factors,
prospect factors, market
factors, and herding factors
(Boda and
Sunitha, 2018).
From the extensive literature,
there are some other biases
apart from the above
mentioned two
categorized biases. These
are hindsight bias, black
swan, conjunction fallacy,
confirmation
biases, scope neglect,
bystander apathy (Brahmana,
Hooy and Ahmad, 2012). All
these
psychological based biases have
a major impact on the
investment behavior of the
investor. This
will lead to irrational
investment behavior of the
investor. The following table
shows the major
psychological biases from the
available literature and the
explanation of the same
LITERATURE REVIEW
Behavioral finance developed
because of the limitations of
traditional finance theories or
standard finance theories.
According to Zeynep Copre
(2015), “Expected Utility,
Markowitz
Portfolio Model, Capital Asset
Pricing Model (CAPM) and
the Efficient Market
Hypothesis
(EMH) are the pillars of the
traditional finance theories”.
The two major assumptions
i.e.
investors are rational and the
market is efficient are based on
traditional finance theories.
But
when the investors are involved
in the money management
phenomena, they often tend
to be
nervous and behave
irrationally and hence the
traditional finance theories
do not fit in the
modern world of complex
decision making.
Ricciardian Simon (2000)
defined behavioral finance as,
“An influence in the financial
decision
making of an investor because
of the psychological and the
sociological factors” Lubis et.
al
(2015) argued that the three
major components that
influence the investors’ risk-
taking behavior
include the emotional
intelligence, defense
mechanism, and personality
trait. While Boda and
Sunitha (2018) stated that
behavioral finance identified
the reasons for the irrational
decision of
investors and also focused on
the behavioral bias of the
investors that influence the
investor’s
decision-making process. They
also identified the factors that
explain the reasons behind
taking
irrational decision making.
Amir and Muhammad (2016)
stated that there is no such
concept like the efficient
market
hypothesis as mentioned in the
traditional finance as all
investors have the same
information and
since the investors are literate
and hence they all make their
investment decision based on
their
past expectations and not mere
on the market information
available. The authors have also
found
that the overconfidence and
the financial literacy have a
statistically insignificant impact
in the
investment decision making. In
the form of suggestion, the
author said that there should
be a
special course on the stock
market for an investor before
any investment in the stock
market so
that they should be able to
make their own investment
decisions as many investors do
not have
own decision making before
investment in the stock market.
Basher Kokab (2018) stated
that investment decisions
are affected by the number
of
psychological factors while
making an investment
decision. These factors are
identified as
overconfidence and
optimism, heuristic, faith,
pessimism, herd behavior,
and confirmation
biases. Among these biases,
heuristic, confirmation and
pessimism make the
investor more
rational while the bises like
faith, overconfidence and
optimism and herd behavior
varies from
investor to investor and these
biases are responsible for
irrational behavior of the
investor. The
author has identified the most
important psychological trait
which affects the investor
negatively
is the faith. Jayaraman,
Vasanthi, and Ramaratnam (
2014) pointed out that an
investor’s
investment decision is driven
by investor sentiment and
investor sentiment is based
on the
psychology of the investor,
expectation of the investor,
optimism of the investor and
the ability
and confidence of the
investor. Such factors affect
the market which leads to
the bullish and
bearish market condition.
Sashikala and Chitramani
(2018) stated that the
emotions and cognitive
factors influence the
investor's decision-making
process is the main subject
matter of behavioral finance
and the
motivational factors are the
main determinant of behavioral
finance. The investment
decision of
the investor which is
responsible for the personal
and portfolio management
depends on the
investment intention.
However, it has also
identified the impact of the
behavioral factors,
prospect factors, the market
factors, and the herding factors
on the investors’ intention and
the
study revealed that the
prospect and herding factors
affect the short term
investment intention of
the investor while the
prospector factors and the
market factors have the long-
term intention of
the investor. However, it has
also revealed the heuristic
factors have no significant
impact on the
investment decision-making
process.
Kiyilar and Acar (2009) stated
that since humans are a social
creature and have a separate
value
system for each one of us
and the values are driven
by the emotion and
behavior of the
individual. The authors also
stated that behavioral finance
is a new way of looking at those
areas
which the traditional finance
has failed to explain. It is
nothing but an expansion of
traditional
finance. It is also argued that
behavior, emotion, and mood
play a significant role in
individual
decision-making behavior.
According to Bikas et. al.
(2013), the financial market
decisions are
based not only on the
basis of available
information from the
financial markets rather the
psychological factors also
influence the investment
decision process.
Mitroi and Oproiu (2014)
found that there is a
positive correlation between
investment
performance and emotional
intelligence. According to
the authors, when the
investors are
involved in the financial and
decision, then it is not the
rationality that works behind
the investor
decision making but the
psychological factors that
actually influence such
decisions. In the
concluding comment, the
authors have also added that if
the investors can understand
the errors
that they tend to make while
investing or managing their
portfolio and by doing so
they can
actually allocate their assets
better alternatives so that their
profit can maximize.
According to Wernet DeBondt
et. al. (2010), the three key
psychological factors that
work
behind behavioral finance
are the cognitive, emotional
response and social
psychology.
Brahmana et. al. (2012) in
their study identified two
major psychological biases.
These two
biases are affection biases
and cognitive biases. They
have identified that both the
affection
biases and the cognitive biases
are the two major
determinants of the ‘Day of the
Week Anomaly’
(DOWA). As the assumptions
of the rationality of the
investor by the traditional
finance are
contradicted by the DOWA. It is
also said that investor causes
an anomaly in the market and
such
anomaly results into irrational
behavior of the investors.
Riaz and Hunjra (2015) stated
that the major factors that
influence the investor's
decision making
are emotional bias, gut feeling,
and market sentiment.
According to the authors, risk
propensity
and risk perception are the
two aspects that actually
influence an investor in
making risky
decisions and in their study,
they have revealed that
investor decision making is
affected by the
risk perception and the
psychological factors.
Joo and Durri (2018) identified
in their study that psychological
traits such as overconfidence
and optimism, faith,
pessimism, heuristics, herd
behavior, and confirmation
biases influence
investment decision making.
Among these biases, the
most important bias that
influence
investors decision making
significantly is the faith.
Moreover, an investor’s
portfolio can be
divided into the short-term
portfolio and long-term
portfolio and for building a
short-term
portfolio, the factor that
influences the most are the
psychological traits whereas
the long-term
portfolio can be constructed
based on the expected returns
and the market behavior.
Daiva and Olga (2013)
investigated the relationship
between behavioral finance
and the
household financial decision. It
is said that like corporate
finance, the decision in
household
finance is also influenced by
different psychological traits.
However, from the
investigation, it is
found that among the literate
household, the loss aversion
bias is same as similar to those
set by
the experts in behavioral
finance while the
characteristics like the absence
of the market impact
are found as unique among the
household. Moreover, it is also
found that if the householders
are
literate then they found to be
more successful in the financial
markets.
3. DISCUSSION
Before the development of
behavioral finance, the
standard finance theories
dominated in the
financial market. But in the
1980s, there is a drastic change
in the standard finance
theoriesand
hence a new model
developed related to human
psychological factors affecting
the financial
decision popularly known as
behavioral finance. Behavioral
finance emerged from
behavioral
economics. Researchers in
behavioral finance have
identified a number of biases
that affect
investor decision behavior.
Biases are categorized into
heuristic bias and cognitive
bias. Heuristic
biases include
representativeness, availability,
Gambler’s fallacy, and
anchoring while cognitive
biases are overconfidence,
herding, regret aversion, and
an over-reaction. While
factors that
influence the investor in
investment decision can be
categorized into four different
factors. These
factors are heuristic factors,
prospect factors, market
factors, and herding factors
(Boda and
Sunitha, 2018).
From the extensive literature,
there are some other biases
apart from the above
mentioned two
categorized biases. These
are hindsight bias, black
swan, conjunction fallacy,
confirmation
biases, scope neglect,
bystander apathy (Brahmana,
Hooy and Ahmad, 2012). All
these
psychological based biases have
a major impact on the
investment behavior of the
investor. This
will lead to irrational
investment behavior of the
investor. The following table
shows the major
psychological biases from the
available literature and the
explanation of the same
LITERATURE REVIEW
Behavioral finance developed
because of the limitations of
traditional finance theories or
standard finance theories.
According to Zeynep Copre
(2015), “Expected Utility,
Markowitz
Portfolio Model, Capital Asset
Pricing Model (CAPM) and
the Efficient Market
Hypothesis
(EMH) are the pillars of the
traditional finance theories”.
The two major assumptions
i.e.
investors are rational and the
market is efficient are based on
traditional finance theories.
But
when the investors are involved
in the money management
phenomena, they often tend
to be
nervous and behave
irrationally and hence the
traditional finance theories
do not fit in the
modern world of complex
decision making.
Ricciardian Simon (2000)
defined behavioral finance as,
“An influence in the financial
decision
making of an investor because
of the psychological and the
sociological factors” Lubis et.
al
(2015) argued that the three
major components that
influence the investors’ risk-
taking behavior
include the emotional
intelligence, defense
mechanism, and personality
trait. While Boda and
Sunitha (2018) stated that
behavioral finance identified
the reasons for the irrational
decision of
investors and also focused on
the behavioral bias of the
investors that influence the
investor’s
decision-making process. They
also identified the factors that
explain the reasons behind
taking
irrational decision making.
Amir and Muhammad (2016)
stated that there is no such
concept like the efficient
market
hypothesis as mentioned in the
traditional finance as all
investors have the same
information and
since the investors are literate
and hence they all make their
investment decision based on
their
past expectations and not mere
on the market information
available. The authors have also
found
that the overconfidence and
the financial literacy have a
statistically insignificant impact
in the
investment decision making. In
the form of suggestion, the
author said that there should
be a
special course on the stock
market for an investor before
any investment in the stock
market so
that they should be able to
make their own investment
decisions as many investors do
not have
own decision making before
investment in the stock market.
Basher Kokab (2018) stated
that investment decisions
are affected by the number
of
psychological factors while
making an investment
decision. These factors are
identified as
overconfidence and
optimism, heuristic, faith,
pessimism, herd behavior,
and confirmation
biases. Among these biases,
heuristic, confirmation and
pessimism make the
investor more
rational while the bises like
faith, overconfidence and
optimism and herd behavior
varies from
investor to investor and these
biases are responsible for
irrational behavior of the
investor. The
author has identified the most
important psychological trait
which affects the investor
negatively
is the faith. Jayaraman,
Vasanthi, and Ramaratnam (
2014) pointed out that an
investor’s
investment decision is driven
by investor sentiment and
investor sentiment is based
on the
psychology of the investor,
expectation of the investor,
optimism of the investor and
the ability
and confidence of the
investor. Such factors affect
the market which leads to
the bullish and
bearish market condition.
Sashikala and Chitramani
(2018) stated that the
emotions and cognitive
factors influence the
investor's decision-making
process is the main subject
matter of behavioral finance
and the
motivational factors are the
main determinant of behavioral
finance. The investment
decision of
the investor which is
responsible for the personal
and portfolio management
depends on the
investment intention.
However, it has also
identified the impact of the
behavioral factors,
prospect factors, the market
factors, and the herding factors
on the investors’ intention and
the
study revealed that the
prospect and herding factors
affect the short term
investment intention of
the investor while the
prospector factors and the
market factors have the long-
term intention of
the investor. However, it has
also revealed the heuristic
factors have no significant
impact on the
investment decision-making
process.
Kiyilar and Acar (2009) stated
that since humans are a social
creature and have a separate
value
system for each one of us
and the values are driven
by the emotion and
behavior of the
individual. The authors also
stated that behavioral finance
is a new way of looking at those
areas
which the traditional finance
has failed to explain. It is
nothing but an expansion of
traditional
finance. It is also argued that
behavior, emotion, and mood
play a significant role in
individual
decision-making behavior.
According to Bikas et. al.
(2013), the financial market
decisions are
based not only on the
basis of available
information from the
financial markets rather the
psychological factors also
influence the investment
decision process.
Mitroi and Oproiu (2014)
found that there is a
positive correlation between
investment
performance and emotional
intelligence. According to
the authors, when the
investors are
involved in the financial and
decision, then it is not the
rationality that works behind
the investor
decision making but the
psychological factors that
actually influence such
decisions. In the
concluding comment, the
authors have also added that if
the investors can understand
the errors
that they tend to make while
investing or managing their
portfolio and by doing so
they can
actually allocate their assets
better alternatives so that their
profit can maximize.
According to Wernet DeBondt
et. al. (2010), the three key
psychological factors that
work
behind behavioral finance
are the cognitive, emotional
response and social
psychology.
Brahmana et. al. (2012) in
their study identified two
major psychological biases.
These two
biases are affection biases
and cognitive biases. They
have identified that both the
affection
biases and the cognitive biases
are the two major
determinants of the ‘Day of the
Week Anomaly’
(DOWA). As the assumptions
of the rationality of the
investor by the traditional
finance are
contradicted by the DOWA. It is
also said that investor causes
an anomaly in the market and
such
anomaly results into irrational
behavior of the investors.
Riaz and Hunjra (2015) stated
that the major factors that
influence the investor's
decision making
are emotional bias, gut feeling,
and market sentiment.
According to the authors, risk
propensity
and risk perception are the
two aspects that actually
influence an investor in
making risky
decisions and in their study,
they have revealed that
investor decision making is
affected by the
risk perception and the
psychological factors.
Joo and Durri (2018) identified
in their study that psychological
traits such as overconfidence
and optimism, faith,
pessimism, heuristics, herd
behavior, and confirmation
biases influence
investment decision making.
Among these biases, the
most important bias that
influence
investors decision making
significantly is the faith.
Moreover, an investor’s
portfolio can be
divided into the short-term
portfolio and long-term
portfolio and for building a
short-term
portfolio, the factor that
influences the most are the
psychological traits whereas
the long-term
portfolio can be constructed
based on the expected returns
and the market behavior.
Daiva and Olga (2013)
investigated the relationship
between behavioral finance
and the
household financial decision. It
is said that like corporate
finance, the decision in
household
finance is also influenced by
different psychological traits.
However, from the
investigation, it is
found that among the literate
household, the loss aversion
bias is same as similar to those
set by
the experts in behavioral
finance while the
characteristics like the absence
of the market impact
are found as unique among the
household. Moreover, it is also
found that if the householders
are
literate then they found to be
more successful in the financial
markets.
3. DISCUSSION
Before the development of
behavioral finance, the
standard finance theories
dominated in the
financial market. But in the
1980s, there is a drastic change
in the standard finance
theoriesand
hence a new model
developed related to human
psychological factors affecting
the financial
decision popularly known as
behavioral finance. Behavioral
finance emerged from
behavioral
economics. Researchers in
behavioral finance have
identified a number of biases
that affect
investor decision behavior.
Biases are categorized into
heuristic bias and cognitive
bias. Heuristic
biases include
representativeness, availability,
Gambler’s fallacy, and
anchoring while cognitive
biases are overconfidence,
herding, regret aversion, and
an over-reaction. While
factors that
influence the investor in
investment decision can be
categorized into four different
factors. These
factors are heuristic factors,
prospect factors, market
factors, and herding factors
(Boda and
Sunitha, 2018).
From the extensive literature,
there are some other biases
apart from the above
mentioned two
categorized biases. These
are hindsight bias, black
swan, conjunction fallacy,
confirmation
biases, scope neglect,
bystander apathy (Brahmana,
Hooy and Ahmad, 2012). All
these
psychological based biases have
a major impact on the
investment behavior of the
investor. This
will lead to irrational
investment behavior of the
investor. The following table
shows the major
psychological biases from the
available literature and the
explanation of the same
LITERATURE REVIEW
Behavioral finance developed
because of the limitations of
traditional finance theories or
standard finance theories.
According to Zeynep Copre
(2015), “Expected Utility,
Markowitz
Portfolio Model, Capital Asset
Pricing Model (CAPM) and
the Efficient Market
Hypothesis
(EMH) are the pillars of the
traditional finance theories”.
The two major assumptions
i.e.
investors are rational and the
market is efficient are based on
traditional finance theories.
But
when the investors are involved
in the money management
phenomena, they often tend
to be
nervous and behave
irrationally and hence the
traditional finance theories
do not fit in the
modern world of complex
decision making.
Ricciardian Simon (2000)
defined behavioral finance as,
“An influence in the financial
decision
making of an investor because
of the psychological and the
sociological factors” Lubis et.
al
(2015) argued that the three
major components that
influence the investors’ risk-
taking behavior
include the emotional
intelligence, defense
mechanism, and personality
trait. While Boda and
Sunitha (2018) stated that
behavioral finance identified
the reasons for the irrational
decision of
investors and also focused on
the behavioral bias of the
investors that influence the
investor’s
decision-making process. They
also identified the factors that
explain the reasons behind
taking
irrational decision making.
Amir and Muhammad (2016)
stated that there is no such
concept like the efficient
market
hypothesis as mentioned in the
traditional finance as all
investors have the same
information and
since the investors are literate
and hence they all make their
investment decision based on
their
past expectations and not mere
on the market information
available. The authors have also
found
that the overconfidence and
the financial literacy have a
statistically insignificant impact
in the
investment decision making. In
the form of suggestion, the
author said that there should
be a
special course on the stock
market for an investor before
any investment in the stock
market so
that they should be able to
make their own investment
decisions as many investors do
not have
own decision making before
investment in the stock market.
Basher Kokab (2018) stated
that investment decisions
are affected by the number
of
psychological factors while
making an investment
decision. These factors are
identified as
overconfidence and
optimism, heuristic, faith,
pessimism, herd behavior,
and confirmation
biases. Among these biases,
heuristic, confirmation and
pessimism make the
investor more
rational while the bises like
faith, overconfidence and
optimism and herd behavior
varies from
investor to investor and these
biases are responsible for
irrational behavior of the
investor. The
author has identified the most
important psychological trait
which affects the investor
negatively
is the faith. Jayaraman,
Vasanthi, and Ramaratnam (
2014) pointed out that an
investor’s
investment decision is driven
by investor sentiment and
investor sentiment is based
on the
psychology of the investor,
expectation of the investor,
optimism of the investor and
the ability
and confidence of the
investor. Such factors affect
the market which leads to
the bullish and
bearish market condition.
Sashikala and Chitramani
(2018) stated that the
emotions and cognitive
factors influence the
investor's decision-making
process is the main subject
matter of behavioral finance
and the
motivational factors are the
main determinant of behavioral
finance. The investment
decision of
the investor which is
responsible for the personal
and portfolio management
depends on the
investment intention.
However, it has also
identified the impact of the
behavioral factors,
prospect factors, the market
factors, and the herding factors
on the investors’ intention and
the
study revealed that the
prospect and herding factors
affect the short term
investment intention of
the investor while the
prospector factors and the
market factors have the long-
term intention of
the investor. However, it has
also revealed the heuristic
factors have no significant
impact on the
investment decision-making
process.
Kiyilar and Acar (2009) stated
that since humans are a social
creature and have a separate
value
system for each one of us
and the values are driven
by the emotion and
behavior of the
individual. The authors also
stated that behavioral finance
is a new way of looking at those
areas
which the traditional finance
has failed to explain. It is
nothing but an expansion of
traditional
finance. It is also argued that
behavior, emotion, and mood
play a significant role in
individual
decision-making behavior.
According to Bikas et. al.
(2013), the financial market
decisions are
based not only on the
basis of available
information from the
financial markets rather the
psychological factors also
influence the investment
decision process.
Mitroi and Oproiu (2014)
found that there is a
positive correlation between
investment
performance and emotional
intelligence. According to
the authors, when the
investors are
involved in the financial and
decision, then it is not the
rationality that works behind
the investor
decision making but the
psychological factors that
actually influence such
decisions. In the
concluding comment, the
authors have also added that if
the investors can understand
the errors
that they tend to make while
investing or managing their
portfolio and by doing so
they can
actually allocate their assets
better alternatives so that their
profit can maximize.
According to Wernet DeBondt
et. al. (2010), the three key
psychological factors that
work
behind behavioral finance
are the cognitive, emotional
response and social
psychology.
Brahmana et. al. (2012) in
their study identified two
major psychological biases.
These two
biases are affection biases
and cognitive biases. They
have identified that both the
affection
biases and the cognitive biases
are the two major
determinants of the ‘Day of the
Week Anomaly’
(DOWA). As the assumptions
of the rationality of the
investor by the traditional
finance are
contradicted by the DOWA. It is
also said that investor causes
an anomaly in the market and
such
anomaly results into irrational
behavior of the investors.
Riaz and Hunjra (2015) stated
that the major factors that
influence the investor's
decision making
are emotional bias, gut feeling,
and market sentiment.
According to the authors, risk
propensity
and risk perception are the
two aspects that actually
influence an investor in
making risky
decisions and in their study,
they have revealed that
investor decision making is
affected by the
risk perception and the
psychological factors.
Joo and Durri (2018) identified
in their study that psychological
traits such as overconfidence
and optimism, faith,
pessimism, heuristics, herd
behavior, and confirmation
biases influence
investment decision making.
Among these biases, the
most important bias that
influence
investors decision making
significantly is the faith.
Moreover, an investor’s
portfolio can be
divided into the short-term
portfolio and long-term
portfolio and for building a
short-term
portfolio, the factor that
influences the most are the
psychological traits whereas
the long-term
portfolio can be constructed
based on the expected returns
and the market behavior.
Daiva and Olga (2013)
investigated the relationship
between behavioral finance
and the
household financial decision. It
is said that like corporate
finance, the decision in
household
finance is also influenced by
different psychological traits.
However, from the
investigation, it is
found that among the literate
household, the loss aversion
bias is same as similar to those
set by
the experts in behavioral
finance while the
characteristics like the absence
of the market impact
are found as unique among the
household. Moreover, it is also
found that if the householders
are
literate then they found to be
more successful in the financial
markets.
3. DISCUSSION
Before the development of
behavioral finance, the
standard finance theories
dominated in the
financial market. But in the
1980s, there is a drastic change
in the standard finance
theoriesand
hence a new model
developed related to human
psychological factors affecting
the financial
decision popularly known as
behavioral finance. Behavioral
finance emerged from
behavioral
economics. Researchers in
behavioral finance have
identified a number of biases
that affect
investor decision behavior.
Biases are categorized into
heuristic bias and cognitive
bias. Heuristic
biases include
representativeness, availability,
Gambler’s fallacy, and
anchoring while cognitive
biases are overconfidence,
herding, regret aversion, and
an over-reaction. While
factors that
influence the investor in
investment decision can be
categorized into four different
factors. These
factors are heuristic factors,
prospect factors, market
factors, and herding factors
(Boda and
Sunitha, 2018).
From the extensive literature,
there are some other biases
apart from the above
mentioned two
categorized biases. These
are hindsight bias, black
swan, conjunction fallacy,
confirmation
biases, scope neglect,
bystander apathy (Brahmana,
Hooy and Ahmad, 2012). All
these
psychological based biases have
a major impact on the
investment behavior of the
investor. This
will lead to irrational
investment behavior of the
investor. The following table
shows the major
psychological biases from the
available literature and the
explanation of the same
LITERATURE REVIEW
Behavioral finance developed
because of the limitations of
traditional finance theories or
standard finance theories.
According to Zeynep Copre
(2015), “Expected Utility,
Markowitz
Portfolio Model, Capital Asset
Pricing Model (CAPM) and
the Efficient Market
Hypothesis
(EMH) are the pillars of the
traditional finance theories”.
The two major assumptions
i.e.
investors are rational and the
market is efficient are based on
traditional finance theories.
But
when the investors are involved
in the money management
phenomena, they often tend
to be
nervous and behave
irrationally and hence the
traditional finance theories
do not fit in the
modern world of complex
decision making.
Ricciardian Simon (2000)
defined behavioral finance as,
“An influence in the financial
decision
making of an investor because
of the psychological and the
sociological factors” Lubis et.
al
(2015) argued that the three
major components that
influence the investors’ risk-
taking behavior
include the emotional
intelligence, defense
mechanism, and personality
trait. While Boda and
Sunitha (2018) stated that
behavioral finance identified
the reasons for the irrational
decision of
investors and also focused on
the behavioral bias of the
investors that influence the
investor’s
decision-making process. They
also identified the factors that
explain the reasons behind
taking
irrational decision making.
Amir and Muhammad (2016)
stated that there is no such
concept like the efficient
market
hypothesis as mentioned in the
traditional finance as all
investors have the same
information and
since the investors are literate
and hence they all make their
investment decision based on
their
past expectations and not mere
on the market information
available. The authors have also
found
that the overconfidence and
the financial literacy have a
statistically insignificant impact
in the
investment decision making. In
the form of suggestion, the
author said that there should
be a
special course on the stock
market for an investor before
any investment in the stock
market so
that they should be able to
make their own investment
decisions as many investors do
not have
own decision making before
investment in the stock market.
Basher Kokab (2018) stated
that investment decisions
are affected by the number
of
psychological factors while
making an investment
decision. These factors are
identified as
overconfidence and
optimism, heuristic, faith,
pessimism, herd behavior,
and confirmation
biases. Among these biases,
heuristic, confirmation and
pessimism make the
investor more
rational while the bises like
faith, overconfidence and
optimism and herd behavior
varies from
investor to investor and these
biases are responsible for
irrational behavior of the
investor. The
author has identified the most
important psychological trait
which affects the investor
negatively
is the faith. Jayaraman,
Vasanthi, and Ramaratnam (
2014) pointed out that an
investor’s
investment decision is driven
by investor sentiment and
investor sentiment is based
on the
psychology of the investor,
expectation of the investor,
optimism of the investor and
the ability
and confidence of the
investor. Such factors affect
the market which leads to
the bullish and
bearish market condition.
Sashikala and Chitramani
(2018) stated that the
emotions and cognitive
factors influence the
investor's decision-making
process is the main subject
matter of behavioral finance
and the
motivational factors are the
main determinant of behavioral
finance. The investment
decision of
the investor which is
responsible for the personal
and portfolio management
depends on the
investment intention.
However, it has also
identified the impact of the
behavioral factors,
prospect factors, the market
factors, and the herding factors
on the investors’ intention and
the
study revealed that the
prospect and herding factors
affect the short term
investment intention of
the investor while the
prospector factors and the
market factors have the long-
term intention of
the investor. However, it has
also revealed the heuristic
factors have no significant
impact on the
investment decision-making
process.
Kiyilar and Acar (2009) stated
that since humans are a social
creature and have a separate
value
system for each one of us
and the values are driven
by the emotion and
behavior of the
individual. The authors also
stated that behavioral finance
is a new way of looking at those
areas
which the traditional finance
has failed to explain. It is
nothing but an expansion of
traditional
finance. It is also argued that
behavior, emotion, and mood
play a significant role in
individual
decision-making behavior.
According to Bikas et. al.
(2013), the financial market
decisions are
based not only on the
basis of available
information from the
financial markets rather the
psychological factors also
influence the investment
decision process.
Mitroi and Oproiu (2014)
found that there is a
positive correlation between
investment
performance and emotional
intelligence. According to
the authors, when the
investors are
involved in the financial and
decision, then it is not the
rationality that works behind
the investor
decision making but the
psychological factors that
actually influence such
decisions. In the
concluding comment, the
authors have also added that if
the investors can understand
the errors
that they tend to make while
investing or managing their
portfolio and by doing so
they can
actually allocate their assets
better alternatives so that their
profit can maximize.
According to Wernet DeBondt
et. al. (2010), the three key
psychological factors that
work
behind behavioral finance
are the cognitive, emotional
response and social
psychology.
Brahmana et. al. (2012) in
their study identified two
major psychological biases.
These two
biases are affection biases
and cognitive biases. They
have identified that both the
affection
biases and the cognitive biases
are the two major
determinants of the ‘Day of the
Week Anomaly’
(DOWA). As the assumptions
of the rationality of the
investor by the traditional
finance are
contradicted by the DOWA. It is
also said that investor causes
an anomaly in the market and
such
anomaly results into irrational
behavior of the investors.
Riaz and Hunjra (2015) stated
that the major factors that
influence the investor's
decision making
are emotional bias, gut feeling,
and market sentiment.
According to the authors, risk
propensity
and risk perception are the
two aspects that actually
influence an investor in
making risky
decisions and in their study,
they have revealed that
investor decision making is
affected by the
risk perception and the
psychological factors.
Joo and Durri (2018) identified
in their study that psychological
traits such as overconfidence
and optimism, faith,
pessimism, heuristics, herd
behavior, and confirmation
biases influence
investment decision making.
Among these biases, the
most important bias that
influence
investors decision making
significantly is the faith.
Moreover, an investor’s
portfolio can be
divided into the short-term
portfolio and long-term
portfolio and for building a
short-term
portfolio, the factor that
influences the most are the
psychological traits whereas
the long-term
portfolio can be constructed
based on the expected returns
and the market behavior.
Daiva and Olga (2013)
investigated the relationship
between behavioral finance
and the
household financial decision. It
is said that like corporate
finance, the decision in
household
finance is also influenced by
different psychological traits.
However, from the
investigation, it is
found that among the literate
household, the loss aversion
bias is same as similar to those
set by
the experts in behavioral
finance while the
characteristics like the absence
of the market impact
are found as unique among the
household. Moreover, it is also
found that if the householders
are
literate then they found to be
more successful in the financial
markets.
3. DISCUSSION
Before the development of
behavioral finance, the
standard finance theories
dominated in the
financial market. But in the
1980s, there is a drastic change
in the standard finance
theoriesand
hence a new model
developed related to human
psychological factors affecting
the financial
decision popularly known as
behavioral finance. Behavioral
finance emerged from
behavioral
economics. Researchers in
behavioral finance have
identified a number of biases
that affect
investor decision behavior.
Biases are categorized into
heuristic bias and cognitive
bias. Heuristic
biases include
representativeness, availability,
Gambler’s fallacy, and
anchoring while cognitive
biases are overconfidence,
herding, regret aversion, and
an over-reaction. While
factors that
influence the investor in
investment decision can be
categorized into four different
factors. These
factors are heuristic factors,
prospect factors, market
factors, and herding factors
(Boda and
Sunitha, 2018).
From the extensive literature,
there are some other biases
apart from the above
mentioned two
categorized biases. These
are hindsight bias, black
swan, conjunction fallacy,
confirmation
biases, scope neglect,
bystander apathy (Brahmana,
Hooy and Ahmad, 2012). All
these
psychological based biases have
a major impact on the
investment behavior of the
investor. This
will lead to irrational
investment behavior of the
investor. The following table
shows the major
psychological biases from the
available literature and the
explanation of the same
LITERATURE REVIEW
Behavioral finance developed
because of the limitations of
traditional finance theories or
standard finance theories.
According to Zeynep Copre
(2015), “Expected Utility,
Markowitz
Portfolio Model, Capital Asset
Pricing Model (CAPM) and
the Efficient Market
Hypothesis
(EMH) are the pillars of the
traditional finance theories”.
The two major assumptions
i.e.
investors are rational and the
market is efficient are based on
traditional finance theories.
But
when the investors are involved
in the money management
phenomena, they often tend
to be
nervous and behave
irrationally and hence the
traditional finance theories
do not fit in the
modern world of complex
decision making.
Ricciardian Simon (2000)
defined behavioral finance as,
“An influence in the financial
decision
making of an investor because
of the psychological and the
sociological factors” Lubis et.
al
(2015) argued that the three
major components that
influence the investors’ risk-
taking behavior
include the emotional
intelligence, defense
mechanism, and personality
trait. While Boda and
Sunitha (2018) stated that
behavioral finance identified
the reasons for the irrational
decision of
investors and also focused on
the behavioral bias of the
investors that influence the
investor’s
decision-making process. They
also identified the factors that
explain the reasons behind
taking
irrational decision making.
Amir and Muhammad (2016)
stated that there is no such
concept like the efficient
market
hypothesis as mentioned in the
traditional finance as all
investors have the same
information and
since the investors are literate
and hence they all make their
investment decision based on
their
past expectations and not mere
on the market information
available. The authors have also
found
that the overconfidence and
the financial literacy have a
statistically insignificant impact
in the
investment decision making. In
the form of suggestion, the
author said that there should
be a
special course on the stock
market for an investor before
any investment in the stock
market so
that they should be able to
make their own investment
decisions as many investors do
not have
own decision making before
investment in the stock market.
Basher Kokab (2018) stated
that investment decisions
are affected by the number
of
psychological factors while
making an investment
decision. These factors are
identified as
overconfidence and
optimism, heuristic, faith,
pessimism, herd behavior,
and confirmation
biases. Among these biases,
heuristic, confirmation and
pessimism make the
investor more
rational while the bises like
faith, overconfidence and
optimism and herd behavior
varies from
investor to investor and these
biases are responsible for
irrational behavior of the
investor. The
author has identified the most
important psychological trait
which affects the investor
negatively
is the faith. Jayaraman,
Vasanthi, and Ramaratnam (
2014) pointed out that an
investor’s
investment decision is driven
by investor sentiment and
investor sentiment is based
on the
psychology of the investor,
expectation of the investor,
optimism of the investor and
the ability
and confidence of the
investor. Such factors affect
the market which leads to
the bullish and
bearish market condition.
Sashikala and Chitramani
(2018) stated that the
emotions and cognitive
factors influence the
investor's decision-making
process is the main subject
matter of behavioral finance
and the
motivational factors are the
main determinant of behavioral
finance. The investment
decision of
the investor which is
responsible for the personal
and portfolio management
depends on the
investment intention.
However, it has also
identified the impact of the
behavioral factors,
prospect factors, the market
factors, and the herding factors
on the investors’ intention and
the
study revealed that the
prospect and herding factors
affect the short term
investment intention of
the investor while the
prospector factors and the
market factors have the long-
term intention of
the investor. However, it has
also revealed the heuristic
factors have no significant
impact on the
investment decision-making
process.
Kiyilar and Acar (2009) stated
that since humans are a social
creature and have a separate
value
system for each one of us
and the values are driven
by the emotion and
behavior of the
individual. The authors also
stated that behavioral finance
is a new way of looking at those
areas
which the traditional finance
has failed to explain. It is
nothing but an expansion of
traditional
finance. It is also argued that
behavior, emotion, and mood
play a significant role in
individual
decision-making behavior.
According to Bikas et. al.
(2013), the financial market
decisions are
based not only on the
basis of available
information from the
financial markets rather the
psychological factors also
influence the investment
decision process.
Mitroi and Oproiu (2014)
found that there is a
positive correlation between
investment
performance and emotional
intelligence. According to
the authors, when the
investors are
involved in the financial and
decision, then it is not the
rationality that works behind
the investor
decision making but the
psychological factors that
actually influence such
decisions. In the
concluding comment, the
authors have also added that if
the investors can understand
the errors
that they tend to make while
investing or managing their
portfolio and by doing so
they can
actually allocate their assets
better alternatives so that their
profit can maximize.
According to Wernet DeBondt
et. al. (2010), the three key
psychological factors that
work
behind behavioral finance
are the cognitive, emotional
response and social
psychology.
Brahmana et. al. (2012) in
their study identified two
major psychological biases.
These two
biases are affection biases
and cognitive biases. They
have identified that both the
affection
biases and the cognitive biases
are the two major
determinants of the ‘Day of the
Week Anomaly’
(DOWA). As the assumptions
of the rationality of the
investor by the traditional
finance are
contradicted by the DOWA. It is
also said that investor causes
an anomaly in the market and
such
anomaly results into irrational
behavior of the investors.
Riaz and Hunjra (2015) stated
that the major factors that
influence the investor's
decision making
are emotional bias, gut feeling,
and market sentiment.
According to the authors, risk
propensity
and risk perception are the
two aspects that actually
influence an investor in
making risky
decisions and in their study,
they have revealed that
investor decision making is
affected by the
risk perception and the
psychological factors.
Joo and Durri (2018) identified
in their study that psychological
traits such as overconfidence
and optimism, faith,
pessimism, heuristics, herd
behavior, and confirmation
biases influence
investment decision making.
Among these biases, the
most important bias that
influence
investors decision making
significantly is the faith.
Moreover, an investor’s
portfolio can be
divided into the short-term
portfolio and long-term
portfolio and for building a
short-term
portfolio, the factor that
influences the most are the
psychological traits whereas
the long-term
portfolio can be constructed
based on the expected returns
and the market behavior.
Daiva and Olga (2013)
investigated the relationship
between behavioral finance
and the
household financial decision. It
is said that like corporate
finance, the decision in
household
finance is also influenced by
different psychological traits.
However, from the
investigation, it is
found that among the literate
household, the loss aversion
bias is same as similar to those
set by
the experts in behavioral
finance while the
characteristics like the absence
of the market impact
are found as unique among the
household. Moreover, it is also
found that if the householders
are
literate then they found to be
more successful in the financial
markets.
3. DISCUSSION
Before the development of
behavioral finance, the
standard finance theories
dominated in the
financial market. But in the
1980s, there is a drastic change
in the standard finance
theoriesand
hence a new model
developed related to human
psychological factors affecting
the financial
decision popularly known as
behavioral finance. Behavioral
finance emerged from
behavioral
economics. Researchers in
behavioral finance have
identified a number of biases
that affect
investor decision behavior.
Biases are categorized into
heuristic bias and cognitive
bias. Heuristic
biases include
representativeness, availability,
Gambler’s fallacy, and
anchoring while cognitive
biases are overconfidence,
herding, regret aversion, and
an over-reaction. While
factors that
influence the investor in
investment decision can be
categorized into four different
factors. These
factors are heuristic factors,
prospect factors, market
factors, and herding factors
(Boda and
Sunitha, 2018).
From the extensive literature,
there are some other biases
apart from the above
mentioned two
categorized biases. These
are hindsight bias, black
swan, conjunction fallacy,
confirmation
biases, scope neglect,
bystander apathy (Brahmana,
Hooy and Ahmad, 2012). All
these
psychological based biases have
a major impact on the
investment behavior of the
investor. This
will lead to irrational
investment behavior of the
investor. The following table
shows the major
psychological biases from the
available literature and the
explanation of the same
LITERATURE REVIEW
Behavioral finance developed
because of the limitations of
traditional finance theories or
standard finance theories.
According to Zeynep Copre
(2015), “Expected Utility,
Markowitz
Portfolio Model, Capital Asset
Pricing Model (CAPM) and
the Efficient Market
Hypothesis
(EMH) are the pillars of the
traditional finance theories”.
The two major assumptions
i.e.
investors are rational and the
market is efficient are based on
traditional finance theories.
But
when the investors are involved
in the money management
phenomena, they often tend
to be
nervous and behave
irrationally and hence the
traditional finance theories
do not fit in the
modern world of complex
decision making.
Ricciardian Simon (2000)
defined behavioral finance as,
“An influence in the financial
decision
making of an investor because
of the psychological and the
sociological factors” Lubis et.
al
(2015) argued that the three
major components that
influence the investors’ risk-
taking behavior
include the emotional
intelligence, defense
mechanism, and personality
trait. While Boda and
Sunitha (2018) stated that
behavioral finance identified
the reasons for the irrational
decision of
investors and also focused on
the behavioral bias of the
investors that influence the
investor’s
decision-making process. They
also identified the factors that
explain the reasons behind
taking
irrational decision making.
Amir and Muhammad (2016)
stated that there is no such
concept like the efficient
market
hypothesis as mentioned in the
traditional finance as all
investors have the same
information and
since the investors are literate
and hence they all make their
investment decision based on
their
past expectations and not mere
on the market information
available. The authors have also
found
that the overconfidence and
the financial literacy have a
statistically insignificant impact
in the
investment decision making. In
the form of suggestion, the
author said that there should
be a
special course on the stock
market for an investor before
any investment in the stock
market so
that they should be able to
make their own investment
decisions as many investors do
not have
own decision making before
investment in the stock market.
Basher Kokab (2018) stated
that investment decisions
are affected by the number
of
psychological factors while
making an investment
decision. These factors are
identified as
overconfidence and
optimism, heuristic, faith,
pessimism, herd behavior,
and confirmation
biases. Among these biases,
heuristic, confirmation and
pessimism make the
investor more
rational while the bises like
faith, overconfidence and
optimism and herd behavior
varies from
investor to investor and these
biases are responsible for
irrational behavior of the
investor. The
author has identified the most
important psychological trait
which affects the investor
negatively
is the faith. Jayaraman,
Vasanthi, and Ramaratnam (
2014) pointed out that an
investor’s
investment decision is driven
by investor sentiment and
investor sentiment is based
on the
psychology of the investor,
expectation of the investor,
optimism of the investor and
the ability
and confidence of the
investor. Such factors affect
the market which leads to
the bullish and
bearish market condition.
Sashikala and Chitramani
(2018) stated that the
emotions and cognitive
factors influence the
investor's decision-making
process is the main subject
matter of behavioral finance
and the
motivational factors are the
main determinant of behavioral
finance. The investment
decision of
the investor which is
responsible for the personal
and portfolio management
depends on the
investment intention.
However, it has also
identified the impact of the
behavioral factors,
prospect factors, the market
factors, and the herding factors
on the investors’ intention and
the
study revealed that the
prospect and herding factors
affect the short term
investment intention of
the investor while the
prospector factors and the
market factors have the long-
term intention of
the investor. However, it has
also revealed the heuristic
factors have no significant
impact on the
investment decision-making
process.
Kiyilar and Acar (2009) stated
that since humans are a social
creature and have a separate
value
system for each one of us
and the values are driven
by the emotion and
behavior of the
individual. The authors also
stated that behavioral finance
is a new way of looking at those
areas
which the traditional finance
has failed to explain. It is
nothing but an expansion of
traditional
finance. It is also argued that
behavior, emotion, and mood
play a significant role in
individual
decision-making behavior.
According to Bikas et. al.
(2013), the financial market
decisions are
based not only on the
basis of available
information from the
financial markets rather the
psychological factors also
influence the investment
decision process.
Mitroi and Oproiu (2014)
found that there is a
positive correlation between
investment
performance and emotional
intelligence. According to
the authors, when the
investors are
involved in the financial and
decision, then it is not the
rationality that works behind
the investor
decision making but the
psychological factors that
actually influence such
decisions. In the
concluding comment, the
authors have also added that if
the investors can understand
the errors
that they tend to make while
investing or managing their
portfolio and by doing so
they can
actually allocate their assets
better alternatives so that their
profit can maximize.
According to Wernet DeBondt
et. al. (2010), the three key
psychological factors that
work
behind behavioral finance
are the cognitive, emotional
response and social
psychology.
Brahmana et. al. (2012) in
their study identified two
major psychological biases.
These two
biases are affection biases
and cognitive biases. They
have identified that both the
affection
biases and the cognitive biases
are the two major
determinants of the ‘Day of the
Week Anomaly’
(DOWA). As the assumptions
of the rationality of the
investor by the traditional
finance are
contradicted by the DOWA. It is
also said that investor causes
an anomaly in the market and
such
anomaly results into irrational
behavior of the investors.
Riaz and Hunjra (2015) stated
that the major factors that
influence the investor's
decision making
are emotional bias, gut feeling,
and market sentiment.
According to the authors, risk
propensity
and risk perception are the
two aspects that actually
influence an investor in
making risky
decisions and in their study,
they have revealed that
investor decision making is
affected by the
risk perception and the
psychological factors.
Joo and Durri (2018) identified
in their study that psychological
traits such as overconfidence
and optimism, faith,
pessimism, heuristics, herd
behavior, and confirmation
biases influence
investment decision making.
Among these biases, the
most important bias that
influence
investors decision making
significantly is the faith.
Moreover, an investor’s
portfolio can be
divided into the short-term
portfolio and long-term
portfolio and for building a
short-term
portfolio, the factor that
influences the most are the
psychological traits whereas
the long-term
portfolio can be constructed
based on the expected returns
and the market behavior.
Daiva and Olga (2013)
investigated the relationship
between behavioral finance
and the
household financial decision. It
is said that like corporate
finance, the decision in
household
finance is also influenced by
different psychological traits.
However, from the
investigation, it is
found that among the literate
household, the loss aversion
bias is same as similar to those
set by
the experts in behavioral
finance while the
characteristics like the absence
of the market impact
are found as unique among the
household. Moreover, it is also
found that if the householders
are
literate then they found to be
more successful in the financial
markets.
LITERATURE REVIEW Behavioral finance developed because of the limitations of traditional
finance theories or standard finance theories. According to Zeynep Copra (2015), “Expected
Utility, Markowitz Portfolio Model, Capital Asset Pricing Model (CAPM) and the Efficient Market
Hypothesis(EMH) are the pillars of the traditional finance theories”. The two major
assumptions i.e. Investors are rational and the market is efficient are based on traditional finance
theories. But when the investors are involved in the money management phenomena, they often
tend to be nervous and behave irrationally and hence the traditional finance theories do
not fit in the modern world of complex decision making .Ricardian Simon (2000) defined behavioral
finance as, “An influence in the financial decision making of an investor because of the psychological
and the sociological factors” Lubis et. al

(2015) argued that the three major components that influence the investors’ risk-taking behavior
include the emotional intelligence, defense mechanism, and personality trait. While Boda and
Sunitha (2018) stated that behavioral finance identified the reasons for the irrational decision of
investors and also focused on the behavioral bias of the investors that influence the investor’s decision-
making process. They also identified the factors that explain the reasons behind taking irrational
decision making. Amir and Muhammad (2016) stated that there is no such concept like the
efficient market hypothesis as mentioned in the traditional finance as all investors have the same
information and since the investors are literate and hence they all make their investment decision based
on their past expectations and not mere on the market information available. The authors have also
found that the overconfidence and the financial literacy have a statistically insignificant impact in the
investment decision making. In the form of suggestion, the author said that there should be a special
course on the stock market for an investor before any investment in the stock market so that they
should be able to make their own investment decisions as many investors do not have own decision
making before investment in the stock market. Basher Kokab (2018) stated that investment
decisions are affected by the number of psychological factors while making an investment
decision. These factors are identified as overconfidence and optimism, heuristic, faith,
pessimism, herd behavior, and confirmation biases. Among these biases, heuristic, confirmation
and pessimism make the investor more rational while the biases like faith, overconfidence and
optimism and herd behavior varies from investor to investor and these biases are responsible for
irrational behavior of the investor. The author has identified the most important psychological trait
which affects the investor negatively is the faith. Jayaraman, Vasanth, and Rajaratnam ( 2014)
pointed out that an investor’s investment decision is driven by investor sentiment and
investor sentiment is based on the psychology of the investor, expectation of the investor, optimism
of the investor and the ability and confidence of the investor. Such factors affect the market which
leads to the bullish and bearish market condition .Shashikala and Chitramani (2018) stated that the
emotions and cognitive factors influence the investor's decision-making process is the main
subject matter of behavioral finance and the motivational factors are the main determinant of
behavioral finance. The investment decision of the investor which is responsible for the personal and
portfolio management depends on the investment intention. However, it has also identified the
impact of the behavioral factors ,prospect factors, the market factors, and the herding factors on
the investors’ intention and the study revealed that the prospect and herding factors affect the short
term investment intention of the investor while the prospector factors and the market factors have the
long-term intention of the investor. However, it has also revealed the heuristic factors have no
significant impact on the investment decision-making process.

Title of research: Relationship between behavioral finance and the household

financial decisions.
Diva and Olga (2013) investigated the relationship between behavioral finance and the
household financial decision. It is said that like corporate finance, the decision in household

finance is also influenced by different psychological traits. However, from the investigation, it is found
that among the literate household, the loss aversion bias is same as similar to those set by the experts in
behavioral finance while the characteristics like the absence of the market impact are found as unique
among the household. Moreover, it is also found that if the householders are literate then they found to
be more successful in the financial markets.

The Financial/Economic Dichotomy in Social Behavioral Dynamics: The

Socionomic Perspective
Robert R Pretcher(2007)Neoclassical economics does not offer a useful model of finance, because
economic and financial behavior have different motivational dynamics. The law of supply and
demandoperates among rational valuers to produce equilibrium in the marketplace for utilitarian goods
and services. The efficient market hypothesis (EMH) is a related model applied to financial markets. The
socionomic theory of finance (STF) posits that contextual differences between economics and finance
produce different behavior, so that in finance the law of supply and demand is irrelevant, and EMH is
inappropriate. In finance, uncertainty about valuations by other homogeneous agents induces
unconscious, non-rational herding, which follows endogenously regulated fluctuations in social mood,
which in turn determine financial fluctuations. This dynamic produces non-mean-reverting dynamism in
financial markets, not equilibrium.

Behavioural biases in investment decision making – a systematic literature review

Satish Kumar(2015)
Purpose
The purpose of this paper is to systematically review the literature published in past 33 years on
behavioural biases in investment decision-making. The paper highlights the major gaps in the existing
studies on behavioural biases. It also aims to raise specific questions for future research.
Design/methodology/approach
We employ systematic literature review (SLR) method in the present study. The prominence of research
is assessed by studying the year of publication, journal of publication, country of study, types of
statistical method, citation analysis and content analysis on the literature on behavioural biases. The
present study is based on 117 selected articles published in peer- review journals between 1980 and
2013.
Findings
Much of the existing literature on behavioural biases indicates the limited research in emerging
economies in this area, the dominance of secondary data-based empirical research, the lack of empirical
research on individuals who exhibit herd behaviour, the focus on equity in home bias, and indecisive
empirical findings on herding bias.
Research limitations/implications
This study focuses on individuals’ behavioural biases in investment decision-making. Our aim is to
analyse the impact of cognitive biases on trading behaviour, volatility, market returns and portfolio
selection.
Originality/value
The paper covers a considerable period of time (1980-2013). To the best of authors’ knowledge, this
study is the first using systematic literature review method in the area of behavioural finance and also
the first to examine a combination of four different biases involved in investment decision-making. This
paper will be useful to researchers, academicians and those working in the area of behavioural finance
in understanding the impact of behavioural biases on investment decision-making.

Keywords

Herding Home bias Overconfidence Disposition effect Behavioural biases

A portrait of the individual investor

lWerner F.MDe Bondt(1998)

Behavioral finance models often rely on a concept of noise traders who are prone to judgment and decision-
making errors. What do noise traders do? We review prior research and present new survey evidence on the
behavior of small individual investors who manage their own equity portfolios. Many people (1) discover naive
patterns in past price movements, (2) share popular models of value, (3) are not properly diversified, and (4) trade
in suboptimal ways.
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