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The IUP Journal of Applied Finance

Impact of Behavioral Biases on Fundamental Analysis Factors of Investment Decision: A Study on Retail Investors in Assam

Article Details

Pub. Date	: Jan, 2024
Product Name	: The IUP Journal of Applied Finance
Product Type	: Article
Product Code	: IJAF040124
Author Name	: Dhruva Jyoti Sharma and Nripendra Narayan Sarma
Availability	: YES
Subject/Domain	: Finance
Download Format	: PDF Format
No. of Pages	: 22

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Abstract

This paper examines the impact of behavioral biases on fundamental analysis factors of investment decision of retail investors in Guwahati, Assam, India. The tested independent variables are anchoring, cognitive dissonance, confirmation and hindsight, Gambler's fallacy, herding, mental accounting, loss aversion bias, regret aversion bias, and overconfidence bias, and the dependent variable is fundamental analysis factors of investment decision making. Multinomial logistic regression is used to find out the impact of these biases on investment decision. The results reveal that herding bias and overconfidence bias impact investment decision. Overconfidence bias impacts investment decision of investors, which is based on company history, revenue growth, debt-to-equity ratio, and PE value.

Introduction

Since the 1950s, traditional financial models have dominated the field of finance. Traditional finance is based on the assumption that individuals are rational. The premise of investors' rationality, which results in the efficient operation of bond and stock markets, serves as the basis for traditional financial theories.

Standard finance is a paradigm of finance based on the concepts of Miller and Modigliani, the capital asset pricing model (CAPM) developed by Sharpe, Scholes, Linter, and Black and Merton, and Markowitz's Portfolio principles (Statman, 1999). Standard finance presupposes that participants in investment market make decisions in an effort to maximize their own self-interest. This presumption serves as the foundation for the concept of market rationality. Traditional finance theory, according to Jensen and Merckling (1994), is centered on the concept of "rational man", a person who is significantly distinct from the individual.