Indira School Of Business Studies, PGDM,

Pune

Course: Post Graduation Diploma in

Management

Submission Year: 2024

IMPACT OF BEHAVIORAL FINANCE

ON INVESTMENT DECISION
Guided by: Dr. Anagha Bhope

Submitted by group 2 :

A1F-06 Priya Bisen

A1F-07 Chetna Makode

A1F-08 Sakshi Daga

A1F-09 Ishwari Devadkar

A1F-10 Ekta Vaswani

Table of Contents

1.INTRODUCTION 3

BRIEF OVERVIEW 4

OBJECTIVES OF THE RESEARCH 5

SCOPE 5

LIMITATIONS 6

2.LITERATURE REVIEW 7

3.RESEARCH METHODOLOGY 12

4.DATA ANALYSIS AND INTERPRETATION 14

5.RESULTS AND FINDINGS 22

6.CONCLUSION 26

7.REFRENCES 29

8.APPENDICE 31
ABSTRACT:

The purpose of this study is to study investor’s attitude

towards investment and identify the factors investors consider when
making investment decisions. A survey was
conducted among individuals using a questionnaire.
Traditional finance theory assumes that people make
rational investments decisions after carefully considering risk and
return factors to maximize profits while limiting losses. Behavioral
finance challenges traditional finance and suggests
that various biases influence individuals' investment
decisions. Studies show that personality is very
important when making investment decisions, so investors should
consider life goals, finances, costs, etc. when choosing
investment options. It concludes that all factors must be taken into
account.Income, investment strategy, life cycle,
timing, investment nature, opinions, behaviour, financial research,
risk, well-considered strategy and desire for profit.

KEY WORDS: Behavioral finance, Investment decision making,

Investors psychology, Traditional finance, Rational, Personality.

Introduction:
Finance as the branch of economics that deals with the monetary
aspects and the capital markets. Evolutionary changes are part of a
subject’s growth and this subject is no exception as it has laid emphasis
on describing the market environment and valuing individual
securities. With emerging market trends in the recent years, the focus
has drifted towards broader aspects of valuation. Traditional
investment theory assumes that investors are rational in making
their decisions and maximize profits while limiting risk. Modern
finance has set a new dawn with rapid development of methodologies
used for valuing excessive of assets with characteristics extending
across times, and which create intricate as well as complex risks for the
investors. However, recent theories challenge these suggestions and
assumptions. The human mind does not always
think rationally. Markets always work efficiently. Psychological
factors such as greed and fear often
influence people's investment decisions. Rational thinking is
possible, for example, it suggests that investing in the stock market is
ideal for certain types of investors. However, the fear of losing money
and seeing colleagues who have lost money in the stock
market can influence an investor's decisions. Therefore, behavioral
finance has become an important research field.
Behavioral finance is a field of study that focuses on how
psychological influences can affect market outcomes.
By analysing behavioural finance, you can understand different
outcomes across different sectors and industries. One of the key
aspects of behavioral finance research is the impact of psychological
biases. Common aspects of behavioral finance include loss aversion,
consensus bias, and
familiarity bias. The theory of efficient markets, which
states that all stocks are priced fairly based on all available
public information, has often been proven false because it fails to acco
unt for irrational emotional behavior.

Objective of the study:

Primary objective: To study the impact and relevance of behavioral
financing in investment decision of investors.
Secondary objective:

● To study various factors influencing the investors while

investment decisions.
● To analyze the behavior and psychology of investors

● To know the preference of people towards investing.

Significance :
The significance of behavioral finance in investment decisions lies in
its acknowledgment that investors are not always rational and can be
influenced by psychological biases, emotions, and cognitive errors.
Here are some key reasons why behavioral finance is significant in
investment decisions:

Understanding Investor Behavior: Behavioral finance helps investors

understand their own behavior and the behavior of others in the
market. By recognizing common biases and tendencies, investors can
better navigate the complexities of financial markets.
Improving Decision-Making: By incorporating insights from
behavioral finance, investors can make more informed and rational
decisions. Understanding how psychological biases affect decision-
making can help investors avoid common pitfalls and make better
choices.
Managing Emotions: Emotions such as fear and greed often drive
investment decisions. Behavioral finance provides strategies for
managing these emotions and making decisions based on logic rather
than impulse.
Identifying Market Anomalies: Behavioral finance identifies market
anomalies that cannot be explained by traditional finance theories. By
recognizing these anomalies, investors can potentially exploit
mispricings in the market and generate superior returns.
Enhancing Risk Management: Behavioral finance helps investors
better understand risk perception and tolerance. By recognizing how
psychological biases influence risk perception, investors can develop
more effective risk management strategies.
Improving Investor Communication: Financial advisors can use
insights from behavioral finance to communicate more effectively with
their clients. By understanding clients' psychological biases and
tendencies, advisors can tailor their communication strategies to better
meet clients' needs and objectives.
Developing Better Investment Strategies: Behavioral finance has led to
the development of innovative investment strategies that incorporate
psychological insights. By integrating these strategies into their
investment approach, investors can potentially achieve better risk-
adjusted returns.
Adapting to Market Conditions: Financial markets are dynamic and
constantly evolving. Behavioral finance helps investors adapt to
changing market conditions by providing insights into how investor
behavior may change over time.
Enhancing Long-Term Performance: Over the long term,
understanding and incorporating insights from behavioral finance can
lead to improved investment performance. By making more rational
decisions and avoiding common behavioral biases, investors can
potentially achieve better long-term outcomes.

SCOPE :

Behavioral finance has a significant scope in investment decisions

because it recognizes that investors are not always rational and can be
influenced by psychological biases, emotions, and cognitive errors.
Here are some key areas where behavioral finance plays a crucial role
in investment decisions:

Understanding Investor Behavior: Behavioral finance helps in

understanding how investors make decisions, why they sometimes
deviate from rationality, and how their behavior affects financial
markets.
Identifying Biases: It identifies various cognitive biases such as
overconfidence, loss aversion, herd mentality, and anchoring, which
can lead investors to make irrational decisions. Recognizing these
biases can help investors avoid common pitfalls.
Risk Perception and Tolerance: Behavioral finance examines how
investors perceive and react to risks. It acknowledges that investors
often have subjective perceptions of risk, which may not align with
objective measures. Understanding risk perception helps investors
better manage their portfolios and set appropriate risk tolerance levels.
Market Anomalies: Behavioral finance studies market anomalies that
cannot be explained by traditional finance theories, such as the
presence of stock market bubbles and crashes. By understanding these
anomalies, investors can potentially exploit mispricings in the market.
Investor Sentiment: Behavioral finance looks at how investor
sentiment, mood, and emotions influence market movements. By
analyzing sentiment indicators, investors can gauge market trends and
sentiment-driven price movements.
Investment Decision Making: Behavioral finance offers insights into
how investors make decisions under uncertainty. It examines factors
such as heuristics (mental shortcuts), framing (the way information is
presented), and prospect theory (how individuals perceive gains and
losses), which influence decision-making processes.
Advisory and Portfolio Management: Understanding behavioral biases
allows financial advisors and portfolio managers to provide more
tailored advice and develop strategies to mitigate the impact of
irrational behavior on investment outcomes.
Behavioral Investing Strategies: Behavioral finance has led to the
development of behavioral investing strategies that incorporate
psychological insights into investment decision-making. These
strategies aim to exploit behavioral biases for profit or mitigate their
negative effects.
In summary, behavioral finance provides a valuable framework for
understanding the psychological aspects of investment decisions,
which can lead to more informed and effective investment strategies.
By integrating behavioral insights with traditional financial analysis,
investors can improve decision-making processes and potentially
enhance long-term returns.

LIMITATIONS:
While behavioral finance offers valuable insights into the
psychological aspects of investment decisions, it also has its
limitations:

Overemphasis on Irrationality: Behavioral finance sometimes portrays

investors as consistently irrational, overlooking the fact that many
investors do behave rationally most of the time. This overemphasis on
irrationality may lead to an underestimation of the role of rational
decision-making in financial markets.
Difficulty in Predicting Behavior: Human behavior is complex and
unpredictable, making it challenging to consistently predict how
investors will behave in different market conditions. This
unpredictability can limit the practical application of behavioral
finance theories in investment decision-making.
Limited Scope of Traditional Finance: Behavioral finance often
critiques traditional finance theories for their assumptions of rationality
and efficiency. However, traditional finance theories still provide
valuable insights into market dynamics and are widely used in
investment analysis and decision-making.
Subjectivity and Bias in Research: Behavioral finance research may
suffer from subjectivity and bias, as researchers may interpret data to
fit their hypotheses or overlook alternative explanations for observed
behavior. This can undermine the reliability and validity of findings in
the field.
Inefficiency in Market Correction: While behavioral finance identifies
instances of market inefficiency caused by psychological biases, it may
not provide clear guidance on when and how markets will correct these
inefficiencies. As a result, investors may struggle to exploit such
opportunities effectively.
Limited Quantifiability: Behavioral biases are often qualitative and
difficult to quantify, making it challenging to incorporate them into
quantitative investment models. This limitation may hinder the
development of systematic investment strategies based on behavioral
insights.
Risk of Overfitting: Incorporating behavioral factors into investment
models may increase the risk of overfitting, where models perform
well on historical data but fail to generalize to new market conditions.
This risk can undermine the reliability of investment strategies based
on behavioral finance principles.
Lack of Consensus: There is still ongoing debate and lack of consensus
within the academic and practitioner communities regarding the extent
to which behavioral factors drive market behavior and influence
investment decisions. This lack of consensus can create uncertainty for
investors seeking to apply behavioral finance principles in practice.

LITERATURE REVIEW:

Nichlas Barberis (2002) In this research paper Behavioral finance

argues that some financial phenomena can plausibly be understood
using models in which some agents are not fully rational. The field has
two building blocks: limits to arbitrage, which argues that it can be
difficult for rational traders to undo the dislocations caused by less.
Manoharan Kannadhasan (2016), Human decisions are subject to
several cognitive
illusions. The likelihood of investors being prone to a specific
illusionary perception
is positively a function of multiple variables. There is suggestive
evidence that the
experience of the investor has an explanatory role in this regard with
less experienced
investors being prone to representativeness while more experienced
investors commit
gamblers fallacy.
Raul Gomez Martinez, Miguel Prado Roman and Paola Plaza
Casado (2018),
described an algorithmic trading system that issues orders to the
market, both long
and short trades, based exclusively on the measurement of investors'
mood through a
big data process. Investors' mood has predictive power over the
evolution of the
markets. The big data system of algorithmic trading is able to beat the
market offering
positive returns in both bullish and bearish contexts. The big data
trading systems
based on investors' mood meant a new approach alternative to
traditional trading
systems based on Chartism.
Magadalena Smith (2019), explored different ways how financial
institutions handle
biases. Institutions use behavioral segmentation as counter measure.
De-biasing asset
management, analytical experts and behavioral scientists inputs to
apply machine
learning algorithms to historical data to identify clusters and
investment patterns can
be a few ways of handling biases.
Philip Y.K.Cheng (2019), developed a theoretical behavioural model
to explain
investment choices in risky assets. The model formalises the concept
of integrated
risk preferences- risk preference is a continuum of risk willingness
where the choice
would be between -A) small probabilities of big losses and large
probabilities of small
gains. B) large probabilities of small losses and small probabilities of
big gains. The
model is particularly applicable to layman investors in retail financial
services.
Overcoming the limitations of having just risk aversion versus risk
seeking, the
continuum of risk willingness offers a language to communicate and
compare
85 investors' heterogeneous risk preferences which can be translated
into risky asset
allocation strategies, in simple and unambiguous terms.

Research Gap:

● Several studies have been taken up to evaluate the likely

possibility of investor psychology on behaviour of finance
professionals and also the consequent effect on markets.
● Some studies are found to have explored and examined the
relationship between investors’ risk appetite and decision
making patterns using secondary data alone.
● A few studies are conducted in countries like Malaysia and
Nairobi. But very few studies are conducted so far to interpret
 the investor sentiments in light of behavioral biases using
crucial primary data in Indian Context.

RESEARCH DESIGN:
This study examines the impact of behavioural finance on investment
decision of individual. This research is done on primary data collected
in the form of questionnaire through google forms. A total of 62
respondents were sent the questionnaire.
The respondents are mostly between the age group of 15 years to 50
years.

HYPOTHESIS:
H1 = Behavioural Finance affect investment decision of the individual.
H0 = Behavioural finance does not affect the investment decisions of
the individual.

DATA ANALYSIS:
 AGE
50
45
40
35
30
25
20
15
10
5
0
15-25 26-35 36-45 46-55 56&Ab

Fig.:1

Data collected is mostly of the age group 15 years to 25 years which is

93.9% and rest 16.1% is of age group 26 years to 35 years. Total
respondents to the questionnaire were 62 people.

GENDER
70

60

50

40

30

20

10

0
MALE FEMALE

Fig.:2

Out of the total 62 respondents to the questionnaire 57.6% were female

and 42.4% were male.
 EDUCATION
60

50

40

30

20

10

0
Master's Degree High School Bachelor's Degree PhD or Other
advanced degree

Fig.:3

Out of the total respondents most of the respondents are Master’s

degree holder and Batchelor’s degree holder.

OCCUPATION
70

60

50

40

30

20

10

0
Employed Full Employed Part Self Employed Student other
time time

Fig.:4
Most of the respondents were students and 12.5% were full time
employed.

INVESTING FROM
70

60

50

40

30

20

10

0
less than 1 year 1-5 years 6-10 years more than 10 years

Fig.:5

The data collected shows that around 66% of the respondents started
investing less than 1 year and 33% are investing in the last 5 years.

CONFIDENCE IN INVESTMENT DECISION

40

35

30

25

20

15

10

0
1 (not confident at all) 2 3 4 5 (very confident)

Fig.:6
When asked about their confidence in investment decisions only
around 3% of the respondents were very confident. And around 9% of
them were not confident at all.

If emotions play a role in your investment

decisions

80
70
60
50
40
30
20
10
0
yes no

Fig.:7
When asked if emotions impact investment decision making around
75% agreed to it and 24% disagreed. Which gives us the result that
emotions does affect investment decision making.

If ever made an investment decision based on

panic or fear

70

60

50

40

30

20

10

0
yes no

Fig.:8
Study shows that half of the respondents agreed to it that they have
made investment decisions based on fear and panic.

If ever made an investment decision based on

overconfidence or greed

70

60

50

40

30

20

10

0
yes no

Fig.:9

Around 48.5% of the respondents made investment decisions based on

overconfidence and greed but 51% disagreed to this.

How often the value of investment is

checked
35

30

25

20

15

10

0
Multiple Daily Weekly Monthly Quarterly Yearly Rarely/
times per Never
day

Fig.:10
It is observed that most of the respondents check value of their
investments daily, 27% check weekly and 18% check monthly and
only 9% never check or rarely check.

If they follow the crowd when making in-

vestment decisions

70

60

50

40

30

20

10

0
yes no

Fig.:11

It is observed that half of the respondents follow the crowd when

making investment decisions.

If they ever regretted an investment decision

70

60

50

40

30

20

10

0
YES NO

Fig.:12
 Around 60% of the respondents regretted on their investment
decisions whereas 40% did not.

If they seek advice from financial profes-

sionals when making investment decisions
45
40
35
30
25
20
15
10
5
0
Yes, regularly Occasionally Rarely Never

Fig.:13
45% of respondents seek advice from financial professionals
occasionally, 27% regularly, 21% rarely seek advice and only 7%
never seek advice.

How important it is to understand behavioral

finance in making successful investment de-
cisions
50
45
40
35
30
25
20
15
10
5
0
Not important Somewhat Moderately Very important Extremely
at all important important important

Fig.:14
It is observed that 42% of the respondents agreed to the fact that
behavioral finance is very important in making successful investments
decisions. 21% think that it is extremely important, 24% think it is
somewhat important, 9% think it is moderately important and very few
respondents, that is just 4% think that it is not important at all.

If they actively try to mitigate the effects of be-

havioral biases in investment decision-making
process

90
80
70
60
50
40
30
20
10
0
yes no

Fig.:15
85% of the respondents try to mitigate the effects of behavioral biases
in the investment decision making process and 15% do not.
RESULTS AND FINDINGS
We have used regression analysis to investigate the relationship
between Various aspects of the data

A. Impact of Gender on Emotional Decision Making of Investment

The R-squared value is very low (0.000214531), indicating that only a

very small proportion of the variation in emotional decision making of
investment is explained by gender.

Both the coefficient for gender (X Variable 1) and the p-value are high,
suggesting that gender does not have a significant impact on emotional
decision making of investment in this model.
B. Relationship between Time Since a Candidate is Investing and
the Confidence Level of an Individual in Investment Decisions

The R-squared value is 0.153949284, indicating that around 15.4% of

the variation in confidence level of an individual in investment
decisions is explained by the time since a candidate is investing.

The coefficient for time since a candidate is investing is -0.947603122,

and the p-value is significant (0.001609818), suggesting that there is a
significant negative relationship between the two variables. This means
that as the time since a candidate is investing increases, the confidence
level of an individual in investment decisions decreases.
C. Relation between the Time Period an Individual is Investing
and Overconfidence He Deals With

The R-squared value is very low (0.007970602), indicating that only a

very small proportion of the variation in overconfidence observed is
explained by the time period an individual is investing.

Both the coefficient for the time period and the p-value are high,
suggesting that there is no significant relationship between the time
period an individual is investing and the overconfidence he deals with
in this model.
D. Impact of Period Since an Individual is Investing and How
Often He Checks the Investment

The R-squared value is very low (0.005887923), indicating that only a

very small proportion of the variation in the frequency of checking
investments is explained by the period since an individual is investing.

Both the coefficient for the period since an individual is investing and
the p-value are high, suggesting that there is no significant relationship
between the two variables in this model.
E. Relation Between if an Individual Follows Crowd for Decision
Making and Does He Regret His Decision

The R-squared value is 0.11596786, indicating that around 11.6% of

the variation in regretting a decision is explained by whether an
individual follows the crowd for decision making.

The coefficient for following the crowd is 0.340540541, and the p-

value is significant (0.006762572), suggesting that there is a significant
positive relationship between the two variables. This means that
individuals who follow the crowd for decision making are more likely
to regret their decisions.
F. Relation Between the Confidence Level of an Individual While
Taking an Investment Decision After Seeking Professional's
Advice

The R-squared value is very low (0.003472135), indicating that only a

very small proportion of the variation in confidence level while taking
an investment decision is explained by seeking professional's advice.

Both the coefficient for seeking professional's advice and the p-value
are high, suggesting that seeking professional's advice does not have a
significant impact on the confidence level of an individual while taking
an investment decision in this model.
Conclusion:

The aim of this research was to study the impact of behavioral finance
on investment decisions. Research could prove that behavioral aspects
such as fear, greed, panic affects investment decision of individuals.
Emotions do affect investment decisions to some extent. It can be
observed that around 63% of the respondents believe that behavioral
finance is important for investment decisions. From the research, it was
also concluded that individuals who were more likely to indulge into
risky behavior such as trying adventure sports or over speeding were
more likely to take risks with financial investments. A difference in
choices between females and males was also observed in terms of their
ability and willingness to take financial risks. It was found that females
are less likely to take these kind of risks in comparison to males.
Overall from the paper, we were able to understand that young
undergraduates are more risk averse when it comes to making financial
investments taking into consideration their limited financial position.
The confidence level analysis helped us understand that individuals
were fairly confident when it came to facing risk in general
circumstances. However, they seemed to less confident when it came
to investing their personal finances. In order to be effective investors,
individual’s need to take into account psychological factors such as
overconfidence bias and risk aversion and ensure that these biases do
not become a hindrance to their rational decision making.
Also, the correlation between experience, education and behavioral
factors allowed to see which of the individual behavioral factors had
strong ties to the millennial’s investors. Overconfidence, gambler’s
fallacy, optimism, illusion of control and past trend of stock stood out
as it had the most impact. This explains that these same sets are
rampant with millennial investors in Nigeria. Overconfidence was
particularly seen as the number one underlying factor that boosts the
presence of the other factors mentioned.
References:
1) The research paper of Dr. Vinay Kandpal and Mr. Rajat
Mehrotra on “ROLE OF BEHAVIORAL FINANCE IN
INVESTMENT DECISION-A study of investment behavior in
India”
2) The research paper of Kanan Budhiraja, Dr. T. V. Raman, Dr.
Gurendra Nath Bhardwaj on “IMPACT OF BEHAVIORAL
FINANCE IN INVESTMENT DECISION MAKING”
3) Birau, Felicia Ramona. 2012. “The impact of behavioral
finance on stock markets.” University of Craiova.
4) Chaudhary, A. K. (2013). Impact of behavioral finance in
investment decisions and strategies – a fresh approach .
International Journal of Management Research and Business
Strategy
5) Kahneman, D., & Tversky, A. (1979, March). Prospect Theory:
An Analysis of Decision under Risk. Econometrics, 47(2), 263-
291.
6) Wamae, J.N. (2013) ‘Behavioral factors influencing investment
decision in stock market: A survey of investment banks in
Kenya’, International Journal of Social Sciences and
Entrepreneurship, 1(6), pp.68- 83.
7) Jhansi Rani Boda and Dr. G. Sunitha “INVESTOR’S
PSYCHOLOGY IN INVESTMENT DECISION MAKING: A
BEHAVIORAL FINANCE APPROACH”.
Appendices
Q.1) What is your age?
Q.2) What is your Gender?
Q.3) What is your Educational Background?
Q.4) How long have you been investing?
Q.5) How confident are you in your investment decision?
Q.6) Do you believe your emotions play a role in your investment
decisions?
Q.7) Have you ever made an investment decision based on panic or
fear?
Q.8) Have you ever made an investment decision based on
overconfidence or greed?
Q.9) How often do you check the value of your investments?
Q.10) Do you tend to follow the crowd when making investment
decisions?
Q.11) Have you ever regretted an investment decision you made?
Q.12) Do you seek advice from financial professional when making
investment decisions?
Q.13) How important do you think understanding behaviroal finance is
in making successful investment decisions?
Q.14) Do you actively try to mitigate the effects of behavioral biases in
your investment decision-making process?