Effect of Behavioral Biases on Investment Decisions of Equity Investors in India A Multidimensional Investigation

Abstract

The major backbone of every economy is financial system and it plays an important role in newlinethe economic development of the nation. This relationship between development of newlineeconomy and that of the financial system is studied by many research scholars. Investment newlinefunction is the most important pillar of the well-developed and flourished financial system. newlineInvestment guaranties channelization of money in a suitable direction which results in newlinegood and heavy returns to the investors. Investing is considered as a psychological process newlinewhich reflects way of thinking of an investor while making decisions in the stock newlinemarket. Differentiation between rational investors from irrational ones can be done on the newlinebasis of thinking pattern as every investor has different pattern of thinking. Because of newlinethis various descriptive and normative investing decision theories have been developed by newlinethe researchers to help us know the behavior of investors at the time of their investment newlinedecision making. newlineSo when we discuss investing, there are two contradictory models to explain the behavior newlineof investors. One that portrays investors to be completely rational while taking their newlineinvestment decisions in the stock market is known as Traditional Finance or EMH newline(Efficient Market Hypothesis).Eugene Fama and Markowitz are the major contributors newlineof this model. The main hypothesis of EMH model is presence of efficient market, newlineinformation access to all, fundamental analysis, etc. Second model is Behavioural newlineFinance, which explain that investors do not act rationally always while newlinemaking investment decisions. Daniel Kahneman and Amos Tversky, Shefrin, etc. are the newlinemajor contributors in this field. So the major difference is: EMH explains what should be newlineand BF explains what it is . To add to all of this, it is a well-known fact that there are lots newlineof factors that affect the behaviour of an investor which leads to a conjuncture where newlinebehavioral biases arises, so we need to recognize and study the psychology of investors newlineand should try to find new way