| Pub. Date | : March, 2020 |
|---|---|
| Product Name | : The IUP Journal of Financial Risk Management |
| Product Type | : Article |
| Product Code | : IJFRM20320 |
| Author Name | : Renuka Sharma |
| Availability | : YES |
| Subject/Domain | : Finance Management |
| Download Format | : PDF Format |
| No. of Pages | : 27 |
For the rapid development of an economy, investment of excessive funds is important. But in today's dynamic environment, individual investor's decision making is influenced by several factors such as behavioral dispositions, where emotions play an important role in investing. Further, the investment decisions are also influenced by the risk-tolerant behavior of the investors. The present study is an attempt to know the impact of behavioral biases on the risk endurance level of investors. For the study, a sample of 600 individual investors was taken from the state of Haryana. A structured questionnaire was prepared, in which statements of behavioral biases and risk-taking ability of investors were included. The analysis was done using the technique of multiple discriminant analysis. It is concluded that behavioral biases impact the risk-taking capacity of investors, and further investors have been categorized into three groups, viz., risk intolerant investors, conservative moderate investors and rational confident investors.
In the present times, behavioral finance has become an important factor that impacts the individual investor's decision making. Many researchers have found that behavioral biases significantly influence investment decisions, and one more factor that plays an important role in investing is risk tolerance level of investors. According to Markowitz (1952), Kahneman and Tversky (1979), and Chandra (2008), investors are prudent and more inclined towards low level of risk for a given level of return. But in actuality investors behave irrationally in the market: they are overconfident about their investments; trade excessively; do not take into consideration the fundamental value; past performance of securities influence their investment decisions; buy stocks which their friends are buying; and do not sell loss-making securities. Investors are prone to various cognitive biases that lead to dissatisfaction among them. Their studies concluded that there is an association between investors' behavior and risk and that investors are prone to various behavioral biases while making investment decision. Azwadi (2011) and Hunjra et al. (2011) found the association between risk and return; the higher the risk, the higher the return and vice versa, but investors do not consider risks objectively, rather they behave irrationally while taking investment decisions. Fischer and Jordan (2006) and Rana et al. (2011) argued risk tolerance can be managed when the investors know about their risk-taking capacity. Investors who do not like to take risk, invest in less risky securities, and hence their risk tolerance level is low. Whereas investors who like to take risk, invest in risky securities and hence their risk tolerance level is also high. Researches have been conducted to examine the effects of risk tolerance in the presence of behavioral biases. The present study makes important contribution to the area of behavioral finance by investigating the association between various behavioral biases and risk tolerance level of investors that impacts the overall decision-making process of investors.