Financial Risk Management
The Influence of Heuristics on the Investment Decisions of Investors

Article Details
Pub. Date : June, 2021
Product Name : The IUP Journal of Financial Risk Management
Product Type : Article
Product Code : IJFRM20621
Author Name : Sreelakshmi Pradeepkumar
Availability : YES
Subject/Domain : Finance Management
Download Format : PDF Format
No. of Pages : 21

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Abstract

In the current capitalist world, several theoretical and conceptual studies have established that man is effortlessly irrational in nature at the time of making investment decisions. Behavioral finance concentrates on how psychological effects can affect market outcomes. Thus, this concept is gaining more significance as it helps in elucidating the difference between the actual behavior and the expectations of a resourceful and rational investor behavior. Therefore, it is important to understand the behavior due to the uncertainty in the Indian economy. The present study examines the significance of behavioral finance in filling the gap between the actual decisions and influencing variables by comparing the different heuristics prevailing in India (Bengaluru city) with the help of various types of investors. Moderating effects are used, and technical anomalies are examined based on different heuristic concepts like anchoring and adjustment, herd mentality, overconfidence, outcome bias and self-control bias. The type of investors chosen for this study are conservative, moderate, aggressive, and retired investors. India is chosen as it is a developing country and the economy is prone to misfortunes arising out of the impacts, that is, volatility in the stock market and mispricing of the securities. A statistical study is carried out to evaluate the impact of heuristics on investment decision making and the results show that there is a significant difference between some of the heuristics adopted and the various types of investors' decision making.


Introduction

Behavioral finance is a sub-classification of behavioral economics that was introduced in the 1980s when faults started appearing in what was then considered the Efficient Market Hypothesis (Terin, 2019). Behavior involves emotions, characters, psychology, and sociology, and finance has figures, calculations, statistics, and balance sheets. The behavioral finance model is based on the inefficiency of markets and irrationality of humans. It helps us understand that both our mind and heart are separate for making choices or decisions. Here, the risk is subjective, and the risk-taking capacity differs from person to person and is difficult to be measured. It states that decisions are inconsistent as there are many aspects that affect the decision making of the investors. The investors' personality and psychology do matter for making appropriate decisions (Rashmeet, 2020). The investors are said to be normal, and not


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