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A Refereed Monthly International Journal of Management

Do Individual Equity Investors behave rationally: A Literature Review

Dr. Bhavna Sharma

Assistant Professor,

Department of Commerce,

Bhagat Phool Singh Mahila Viswavidyalya,

Khanpur Kalan, Sonipat, Haryana.

Ms. Sushila

Research Scholar,

Department of Commerce,

Bhagat Phool Singh Mahila Vishwavidyalaya,

Khanpur Kalan, Sonipat.

Abstract

Standard finance, also known as Academic Finance, Modern Portfolio Theory, etc., evolved in the 1950s and early 1960s. Under this theory, investors were considered as fully rational decision making entities. But in 1957, Herbert Simon coined the term ‘Bounded Rationality’ and stated that human being are not fully rational in their decision making rather they are bounded by their abilities and available information. In 1970s Amos Tversky and Deniel Khaneman also challenged the rationality concept in decision making under uncertainty and applied psychological biases to economic decision making. A bias is an irrational assumption or prejudice. It is a human psychological shortcoming and since investors are also human beings they can be affected by it as well. Behavioural finance is a sub-field of behavioural economics, which integrates psychology with finance. It explains how investors’ cognitive and emotional biases affect their investment decisions. In 2002, Daniel Kahneman (psychologist) was awarded the Nobel Memorial Prize in economic sciences for his research on applying psychological insights to economic decision making, particularly in the areas of judgement and decision making under uncertainty. In 2017, Richard Thalar, an American economist also won Nobel Prize in economics for his contribution in behavioural economics. Therefore, in this study, contribution of various researchers is explored regarding major behavioural biases and their impact on investment decisions of individual equity investors. On the basis of this collection and review of relevant studies, a conceptual model of behavioural biases is developed to provide future research direction.

Keywords: Behavioural finance, Behavioural biases, Investment decision

Introduction

The financial markets were not considered as appropriate markets by economists in the early periods. It was considered to be analogous to casinos where returns were determined by pure speculative activities. It was Williams (1938) who was first to challenge the casino concept, through his book entitled the theory of investment value. He was of the firm view that the price of financial asset was reflected in the intrinsic value of an asset, measured in terms of the discounted stream of future cash flow from the asset. Extending the view of Williams regarding future expectations, Markowitz (1952, 1959) included a new element of ‘risk ‘or ‘uncertainty’. Thus, the fundamental idea in Markowitz theory is the combination of risk and returns. He contended that asset selection happens in the context of a trade-offs between returns and risks. In his theory, the term ‘return’ is often equated with discounted future cash flow and ‘risk’ with uncertainty of expected outcome. This formed the basis of the ‘Modern Portfolio Theory’. Standard finance is also known as Academic Finance and Modern Portfolio Theory and evolved in the 1950s and early 1960s. Under this theory, investors were considered as fully rational decision making entities. But in 1957, Herbert Simon³⁹ coined the term ‘Bounded Rationality’ and stated that human being are not fully rational in their decision making rather they are bounded by their abilities and available information. In 1970s Amos Tversky and Deniel kahneman also challenged the rationality concept in decision making under uncertainty and applied psychological insights to economic decision making. In 1973, Daniel Kahneman and Amos Tversky explored a judgmental heuristic called availability which leads systematic biases in decision making.⁴⁴ In 1974, Daniel Kahneman and Amos Tversky discussed three biases namely representativeness, adjustment and anchoring and availability in decision making under uncertainty.⁴⁵ Prospect theory was also developed by Daniel Kahneman and Amos Tversky in 1979⁴⁶. In 2002, Daniel Kahneman (psychologist) was awarded the Nobel Memorial Prize for economic sciences for his work in applying psychological insights to economic decision making, particularly in the areas of judgement and decision making under uncertainty. Behavioural finance is a sub-field of behavioural economics which integrates psychology with finance. It also explains how investors’ cognitive and emotional biases affect their investment decisions. In the process of decision making, a number of biases arise. Michael M. Pompian (2006)³³ classified these biases into cognitive and emotional biases. Cognitive biases arise due to the errors in information processing or due to the use of heuristics while emotional biases arise due to the emotions of an individual during decision making. Major cognitive biases are conservation, confirmation, mental accounting, hindsight bias, anchoring and adjustment etc. Major emotional biases are loss-aversion, overconfidence, regret- aversion and status-quo bias etc.

Objectives

· To identify the various behavioural biases affecting investment decisions of individual equity investors.

· To develop a conceptual model of behavioural biases to provide future research direction.

Research Methodology

The present paper is a conceptual paper based on review of relevant/related studies in behavioural biases. Research papers reviewed in this study were collected from esteemed databases such as PROQUEST, Google Scholar, Emerald Insight, Science direct etc. Research studies describing impact of behavioural biases on investment decisions of individual equity investors are included in this paper.

Literature Review

Sr. No.	TOPIC	Author(s)/ Year	Place (Country)	Type of study	Data used sampling technique and sample size	Behavioural biases studied	Statistical techniques used	Findings
1.	Behavioural Biases and Investment Performance: Does Gender Matter? Evidence from Amman Stock Exchange	Alrabadi, D., Al-Abdallah,S., & Aljarayesh, N. (2018)	Jorden	Descriptive research	Random sampling 242 individual investors of Amman Stock Exchange	familiarity bias, overconfidence bias, availability bias loss aversion bias, disposition effect, herding bias, representativeness bias and confirmation bias	ordered logistic regression, Chi-square test and t-test	Findings of the study revealed the presence of all examined behavioural biases in Amman Stock Exchange. The Investment performance significantly affected by familiarity bias, availability bias, representative bias, overconfidence bias, confirmation bias disposition bias, loss aversion bias and herding bias.
2.	Impact of psychological biases and personality traits on Investors’ Trading Behaviour	Anjum, Z. et al .(2019)	Pakistan	Descriptive survey	216 investors	Loss-aversion, Overconfidence and self-control	Structure equation modelling (SEM)	Findings revealed that all the three biases have influence on trading behaviour of investors and cause them make irrational investment decisions.
3.	Impact of Financial Literacy on the Behavioural Biases of Individual Stock Investors: Evidence from Boras Istanbul	Ateş, S., Coşkun, A., Şahin, M. A., & Demircan, M. L. (2016).	Turkey	Descriptive survey method	Random sampling 596 individual stock investors	cognitive dissonance bias, representativeness bias, confirmation bias, hindsight bias, self-attribution bias, anchoring bias, conservatism bias, over optimism bias, availability bias, framing bias, , loss aversion, illusion of knowledge illusion of control and overconfidence bias	ordinal regression	Results of the study suggested that 50% of the investors have a low financial literacy level because they rely on advice from parents or friends for financial information and they have a high level of behavioural biases.
4.	Effect of Behavioural Biases on Investment Decisions of Individual Investors in Kenya	Authur, A.(2014)	Kenya	Descriptive research	snow-ball sampling technique 30 investors	Representativeness, Cognitive Dissonance Bias, Over-optimism Bias, Herd Instinct Bias, Illusion of Control Bias, Loss Aversion Bias, Hindsight Bias, Self Attribution Bias, Regret Aversion Bias	Spearman’s Rank Correlation coefficient and Regression Analysis	Major findings showed that representativeness bias, illusion of Control bias, Cognitive Dissonance bias, Herd Instinct bias and Hindsight bias significantly affect individual investor decisions.
5.	The Impact of Psychological Factors on Investors’ Decision Making in Malaysian Stock Market: A Case of Kelang Valley and Pahang	Baker & Chui Yi (2016)	Malaysia	Descriptive survey method	A combination of convenience sampling, quota sampling, and snowball sampling, 200 investors	Overconfidence, Conservation, herding and Availability bias	Multiple regression analysis	The findings showed that overconfidence, conservatism and availability bias have significant impacts on the investors’ decision making while herding behaviour has no significant impact on the investors’ decision making.
6.	How Financial Literacy and Demographical variables relates to Behavioural biases	Baker, H. K., Kumar, S., Goyal, N., & Gaur, V. (2019)	India	Descriptive survey	500 individual investors	Overconfidence, mental accounting, disposition effect, herding,	Factor analysis, ANOVA, Regression analysis	Findings showed presence of behavioural biases among individual investors in India. Financial literacy has no association with overconfidence and emotional biases, negative association with herding and disposition effect and positive correlation with mental accounting bias.
7.	Factors Influencing Indian Individual Investor Behaviour: Survey Evidence	Chandra, A., & Kumar, R (2012)	India	Descriptive survey method	355 individual investors	Overconfidence, Anchoring bias, Representativeness, Gambler’s fallacy, , Loss aversion, Regret aversion, Availability bias Mental accounting, Information through media Market share and reputation, Accounting and financial information, Personal financial needs and Recommendation from family and friends	Principal Component Analysis	The results of the principal components revealed five psychological axes that appear driving the sample Indian individual investor behaviour. These five pertinent axes on the basis of the underlying variables are named as, self-regulation, financial heuristics, prudence and precautious attitude, informational asymmetry and financial addiction.
8.	Trading Performance, Disposition Effect, Overconfidence, Representativeness Bias, and Experience of Emerging Market Investors	Chen, G., Kim, K., Nofsinger, J., & Rui, O (2007)	China	Empirical study	Secondary data from brokerage firm, 46,969 individual investor accounts and 212 institutional investor accounts are used as sample of the study	Disposition Effect, Overconfidence, Representativeness Bias	Regression analysis	The study concluded that Chinese investors have all the three behavioural biases i e disposition effect, overconfidence and representativeness bias.
9	Confirmation bias in Investments	Cheng, C. X. (2019)	U.S.A	Experimental study	125 participants divided into two groups	Confirmation bias	Z test	The results confirmed that participants have confirmation bias. They consider only that information which confirms their belief, considering that they have taken right decision.
10.	Establishing a link between risk tolerance, investor personality and behavioural finance in South Africa	Dickason, Z., & Ferreira, S. (2018)	South Africa	Descriptive survey method	Random sampling 1171 investors of a investment company of South Africa	Overconfidence, Anchoring bias, Availability bias, Loss aversion, Regret aversion, Mental accounting, self control Representativeness and Gamblers fallacy	ANOVA	The findings of the study revealed that Medium-risk tolerant investors were categorised as moderate-to-growth investors’ subject towards anchoring, regret aversion, representativeness, overconfidence, gamblers fallacy and the availability bias. Investors within this category will make investment decisions based on previous incorrect financial decisions. Investors with a low-risk tolerance level and categorised as conservative investors were subject towards the loss aversion and mental accounting bias. Investors subject towards the self-control bias were the only investors to fall in the aggressive personality category and have a high-risk tolerant level
11.	Factors Affecting Investment Decision Making: Evidence from Equity Fund angers and Individual Investors in Pakistan	Forooq, A., Afzal, M., Sohail, N., & Sajid, M. (2015)	Pakistan	Descriptive survey method	Stratified random sampling, 100 Individual investors from different cities like Islamabad, Faisalabad, Karachi and Toba Tek Singh	Heuristics and risk aversion	Correlation and regression analysis	The study concluded that Risk aversion has negative and significant impact on investment decision making whereas Use of financial tools, Heuristics and Firm level corporate governance have positive and significant Impact on investment decision making.
12.	Overconfidence, Loss Aversion and Irrational Investor Behaviour: A Conceptual Map	Igual and Santamaría (2017)	Spain	systematic review	Secondary data, 53 studies	overconfidence, loss aversion, herding and other irrational biases	Systematic Literature review	The study classify the behavioural models based on , loss aversion, overconfidence, herding and representativeness that explain the lack of correlation between risk and return in the financial markets.
13.	A qualitative inquiry into the investment decision behaviour of the Malaysian stock market investors	Jaiyeoba and Haron (2016)	Malaysia	Exploratory qualitative research	Primary data	Herd behaviour	Content analysis	Findings of the study concluded that Malayian stock investors are patriotic in nature and their investment decisions are based on feelings of comfort or convention rather than quantitative analysis, they rely much on their findings while making investment decisions, they are influenced by the psychological biases
14.	Impact of Cognitive Biases on Individual Investor Behaviour: A Literature Review	K and Aggarwal (2018)	Chennai (India)	Literature Review	Secondary data	Representativeness, Anchoring, Mental Accounting, Availability, Cognitive Dissonance, Hindsight, Illusion of control, Framing, Conservation	Literature review	Based on the literature review of the cognitive biases, a conceptual model of cognitive biases was developed by the authors.
15.	Effect of Cognitive Biases on Investment Decisions among Retail Investor at the NAIROBI securities exchange.	Kamande. A.M. (2017)	Kenya	Descriptive survey	96 retail investors were selected using random sampling technique	Overconfidence, Herding, Accounting Information and Excessive Optimism	Regression Analysis	The study discovered that Overconfidence bias had the most significant impact on the retail investors’ decisions. Majority of investors overestimate their ability and believe in their knowledge and experience to manipulate the investment success.
16.	Psychological Traits and Demographic Factors do they affect Investor’s Behaviour?	Kaur, P., Virani, S., & Fazalbhay, S.(2016)	Pune (India)	Descriptive survey method	Convenience sampling method 200 salaried investors	Allusion, Self Reliance, Regretful, Reluctant, Belief, Rational choice, Constructive and Risk Aversion	Chi-square test, correlation analysis and Regression analysis	The model revealed that the psychological factors such as Allusion, Self Reliance and Risk Aversion are significantly associated with the investment decision making process. But behavioural factors such as Regretful, Reluctant, Belief, Rational choice and Constructive are not statistically significant. So it can be concluded that financial behaviour of the respondents is influenced by their psychological traits namely risk aversion, self-reliance and belief.
17.	Behavioural factors influencing investment decisions among individual investors in Nairobi Securities Exchange.	Kimeu, C., Anyango, W., & Rotich, G. (2016).	Kenya	Descriptive survey method	34 operations managers and business development managers selected from 17 investment banks of Kenya	Risk aversion, herding, prospecting and anchoring	Multiple regression analysis	The study found that the investors in their organizations invest due to herding effect, this has resulted the investment banks to experience emotional biases and congruity. Further the study recognized that prospecting influences the investment decision making in stock market, however, most of the organizations engage in advising inventors’ on the ways to invest. The study finally found that anchoring influences the investment decision in Kenyan stock market. Availability of the information about stock market investment facilitates inventors’ to reach investment decision.
18.	The Effect of Behavioural Finance Factors on Stock Investment Decisions in Kenya	Kisaka, E. (2015)	Kenya	Descriptive survey method	60 investors was selected randomly from 3 stock brokerage firms of Machakos Country	certain-return bias, loss aversion, regret aversion and random walk framing	Multiple regression analysis	The analysis evidenced that certain-return bias has a negative relationship with stock investment decisions whereas loss aversion, regret aversion and random walk framing have a positive correlation with stock investment decisions on the NSE.
19.	An Empirical research on investor biases in financial decision-making, financial risk tolerance and financial personality	Kubilay, B., & Bayrakdaroglu, A. (2016)	Turkey	Empirical study	536 individual investors	Overconfidence, Anchoring, Availability, Over-Optimism, Representativeness and Regret-Aversion	Logistic Regression Analysis	Findings showed that there is a relationship between personality traits and behavioural biases of investors.
20.	Behavioural biases in investment decision making – A systematic literature review	Kumar and Goyal (2015)	India	Systematic Literature review	Secondary data, 117 selected articles published in peer review Journals between 1980 and 2013.	Herding, Home bias, Overconfidence, Disposition effect	Systematic Literature review	The study concluded that there was limited research in developing countries (emerging markets) on behavioural biases.
21.	An Analysis of Behavioural biases in investment decision making	Madaan, G.,& Singh, S. (2019)	India	Descriptive survey	243 investors	Overconfidence, herding, anchoring and disposition effect	Regression analysis	The study revealed that herding and overconfidence bias have significant impact on investment decision making but anchoring and disposition effect have no significant impact on investment decision making of investors.
22.	Gender based study on the Implications of Behavioural Biases in Investment Decision making	Mahalakshmi T.N & Anuradha N (2018)	India	Literature review	Secondary data	mental accounting, familiarity, local/home bias, representativeness, overconfidence, over optimism, over trading, loss aversion, disposition effect, regret, anchoring & herding	Literature review	Various studies support that men are more overconfident in investing than women. That is male trade frequently than women.
23.	Behavioural Finance: A Study on Gender Based Dilemma in Making Investment Decisions.	Mahapatra and Mehta (2015)	India	Descriptive survey method	convenience and purposive sampling 64 individual households’ investors of Hyderabad-Secunderabad region	Risk appetite and anchoring bias	Chi-square test	The empirical results of the study suggested that both male and female investors are very clear and focused about their financial goals while investing and both genders get influenced by anchoring bias when they invest. But female investors are more risk averse than male investors.
24.	Impact of Cognitive Biases in Investment Decisions of Individual Investors in Stock Market	Manuel and Mathew (2017)	Kerala ( India)	Descriptive survey method	convenient sample of 62 respondents	Cognitive Dissonance Bias, Representativeness Bias, Over-optimism Bias, Illusion of Control Bias, Hindsight Bias, Self-attribution Bias, Herding Bias, Regret Aversion Bias and Loss Aversion Bias	Descriptive analysis and Correlation analysis	Findings revealed that among the cognitive biases Over-optimism and Self-attribution biases have high impact on investors’ decision making, where as Cognitive-dissonance has least impact on investors’ investment decisions. All emotional biases have very high impact on individual investors’ investment decision.
25.	Investment management and personality type	Mayfield, C., Perdue,G.,& Wooten, K(2008)	USA	Exploratory	Primary data 197 Students	Risk aversion Big five personality traits	Structural equation modelling (SEM)	The study found a relationship between big five personality traits and investment intentions of potential investors (graduate students) of USA. The findings in the present study suggested that personality influences or contributes to the intentions of investors is not without practical applications.
26.	Personality traits and Behavioural biases of Indian Investors	Mehtab, F., & Nagaraj, H. (2019)	India	Descriptive research	1000 individual investors	Overconfidence and Herding bias	Regression analysis	Findings concluded that overconfidence bias has negative relationship with introversion personality type but herding bias has negative relationship with extroversion personality type.
27.	Does Irrationality in Investment Decisions Vary with Income?	Mittal and Vyas (2009)	Indore (India)	Descriptive survey method	Primary data was collected from 428 individual investors with the help of structured questionnaire	Overconfidence, Loss /regret avoidance, self-attribution bias, framing effect, and tendency to use purchase price as reference point.	ANOVA	The findings revealed that Income was found to be a significant factor impacting the overconfidence level (tendency to overreact) and loss/regret avoidance. But income has no significant effect on self-attribution bias, framing effect, and tendency to use purchase price as reference point.
28.	Investment Decision Making and Hindsight Bias	Monti, M., & Legrenzi, P. (2009).	Germany	Experimental	Primary data	Hindsight bias	Regression analysis	Results concluded that bankers having low hindsight bias have obtained better performance; even experience cannot reduce this bias.
29	A study on investors’ personality characteristics and behavioural biases: Conservatism bias and availability bias in the Tehran Stock Exchange	Moradi, M., Mostafaei, Z., & Meshki, M. (2013)	Iran	Descriptive survey method	Primary data	Conservation bias and Availability bias	Chi-square test and phi-test	The results showed that extraversion-introversion personality type have no relationship with conservation bias but have relationship with availability bias.
30.	Impact of Behavioural Finance on investment decision making: A study of investment banks in Nigeria	Ogunlusi, O. E., & Obademi, O. (2019	Nigeria	Descriptive survey	180 investors	Heuristics and prospect variables	Correlation analysis	The study found that there is a strong negative relationship between behavioural biases and investment decision making.
31.	Impact of Select Behavioural Factors Influence on the Investment Decision Making	Padma & Rani (2018)	Andhra Pardesh (India)	Descriptive survey method	Simple random sampling 172 equity investors of Andhra Pradesh	self-efficiency, locus of control and achievement motivation	Bi-variate correlation and structure equation modelling (SEM)	The study found that the Achievement Motivation has the strong correlation with the Investors investment decision making. However, Self-efficacy and Locus of control are moderately correlated with the investment decision making. The impact has been studied with the SEM and the result indicated that the Self-efficacy influence is having the higher impact on the investors' investment decision making.
32.	The Impact of the Sunk Cost Fallacy and Other Behavioural Biases on Individual Irish Investors	Percival.S. (2016)	Ireland	Descriptive survey method	Purposive sampling technique 42 investors	sunk cost fallacy, overconfidence, Regret aversion, mental accounting and Hindsight bias	Descriptive statistics	Findings of the study revealed that sunk cost fallacy and other behavioural biases are present in Irish investors while making investment decisions in stock market.
33.	An Empirical Study of Overconfidence and Illusion of Control Biases, Impact on Investor’s Decision Making: An Evidence from ISE	Qadri and Shabbir (2014)	Pakistan	Descriptive survey method	107 investors of Islamabad Stock Exchange (ISE)	overconfidence and Illusion of control	Regression analysis	Findings revealed that (overconfidence and Illusion of control) these two biases have a lot of impact on investors’ decision making. Investors think that their knowledge, experience and wealth have a great importance on the investment decisions. Overconfidence Investors in ISE trade more rapidly due to their skill, knowledge and experience.
34.	Factors influencing investor’s decision making in Pakistan	Rasheed, M., Rafique, A., Zahid, T., & Akhtar, M. (2017)	Pakistan	Descriptive survey method	227 investors operating at Islamabad, Lahore, and Sargodha in Pakistan	Representativeness bias and Availability bias	Structural equation modelling(SEM)	The results of the study suggested that investors at the PSX are influenced by both representativeness and availability bias. The investors prefer to buy only those stocks for which more information is available to them instead of doing a complete analysis of all the available and relevant information and they invest in stocks only on the basis of the similarity of their characteristics with their expected performance.
35.	Extending the Theory of Planned Behaviour: Impact of Past Behavioural Biases on the Investment Decision of Indian Investors	Raut, R.K., Das, N &Rohit Kumar,R (2018)	India	Descriptive survey method	396 individuals of Eastern India	Theory of Planned behaviour	Structural equation modelling (SEM)	The findings of this study revealed that behavioural biases are inseparable from normal human beings’ decision making. This study indicates that attitude toward behaviour, subjective norms and perceived behavioural control are significantly associated with behavioural intentions.
36.	Investors’ Expertise, Personality Traits and Susceptibility to Behavioural Biases in the Decision Making Process	Rzeszutek, M., Szyszka, A., & Czerwonka, M. (2015)^.	Poland	Descriptive survey method	Convenience sampling 200 respondents out of them 100 retail investors of Warsaw Stock Exchange and 100 students of the Warsaw School of Economics	certainty effect, the sunk cost fallacy, and mental accounting	logistic regression analyses and Chi-square test	The study found that not only that frequent retail investors are susceptible to various behavioural biases when making decisions but also that the degree of susceptibility is stronger among students and demonstrated that susceptibility to behavioural biases depends on the level of expertise in stock market investing
37.	Individual investors and local bias	Seasholes, M. S., & Zhu, N. (2010)	U.S.A	Empirical study	Secondary data	Home bias	Regression analysis	The study found that investors purchase maximum number of stocks of those companies whose headquarter is situated locally.
38.	What factors affect behavioural biases? Evidence from Turkish individual stock investors	Tekçe, B., Yılmaz, N., & Bildik, R. (2016)	Turkey	Empirical study	Secondary data, Over 200000 investors accounts	Disposition effect, familiarity bias, representativeness bias and status quo bias	PGR-PLR analysis, Correlation analysis	Study concluded that investors do not behave rationally. Male investors have more disposition effect and familiarity bias and disposition effect increases with age. Representativeness bias has no difference on the bases of gender, age and experience.
39.	Investor Behavioural Pattern: An Empirical study of the Ghana stock market	Tetteh and Hayfron (2017)	Ghana	Descriptive survey method	convenience sampling method 250 investors	Availability, mental accounting, risk aversion, representativeness, anchoring and overconfidence	Descriptive statistics	The study reported that behavioural biases of availability, mental accounting, risk aversion, representativeness, anchoring and overconfidence prevail in various proportions among investors of Ghana. Representativeness, risk aversion and availability were the most prevalent biases in Ghanian stock market.
40.	Impact of Behavioural Biases on Investment Decision: With special Reference to Gwalior City	Vishnoi, S. (2015)	Gwalior (India)	Descriptive survey method	100 retail investors is selected from Gwalior city using purposive sampling method	Representativeness , Anchoring, Overconfidence, Gamblers Fallacy, Availability, Loss aversion, Mental accounting , Regret aversion and Self-control	Factor Analysis	Two factors were identified from all behavioural factors using factor analysis namely Heuristics and Prospect.

Identification of Behavioural Biases and Conceptual Model

Behavioural biases are those cognitive and emotional errors which deviate investors from rationality in investment decisions. Various behavioural biases are identified by researchers in previous studies conducted in different countries through various statistical techniques such as Exploratory Factor Analysis and Confirmatory Factor Analysis. It is found that big five personality traits, demographic variables, financial literacy, behavioural biases and investment decisions are related with each other. Behavioural biases of individual equity investors vary on the basis of their personality traits, their demographic profiles and their financial literacy levels which are collectively responsible for their irrational investment decisions. On the basis of review of literature on behavioural biases, a conceptual model is developed and presented below (figure 1).

FIGURE I: Conceptual Model based on Review

Demographic Variables

· Gender

· Age

· Marital Status

· Investment experience

· Education

· Occupation

· Income

Behavioural Biases

· Overconfidence

· Representativeness

· Loss-Aversion

· Cognitive Dissonance

· Availability

· Self-attribution

· Anchoring

· Mental accounting

· Hindsight

· Framing

· Conservation

· Herding bias

· Excessive Optimsm

· Endowment effect

· Disposition effect

· Sunk cost fallacy

· Gambler’s fallacy

· Status quo bias

· Home bias

Investment Decisions of Individual Equity Investors

Financial Literacy

Extraversion

Neuroticism

Conscientiousness

Agreeableness

Openness to Experience

Personality Traits

References

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Do Individual Equity Investors behave rationally: A Literature Review

Dr. Bhavna Sharma

Assistant Professor,

Department of Commerce,

Bhagat Phool Singh Mahila Viswavidyalya,

Khanpur Kalan, Sonipat, Haryana.

Ms. Sushila

Research Scholar,

Department of Commerce,

Bhagat Phool Singh Mahila Vishwavidyalaya,

Khanpur Kalan, Sonipat.

Abstract

Keywords: Behavioural finance, Behavioural biases, Investment decision

Introduction

Objectives

· To identify the various behavioural biases affecting investment decisions of individual equity investors.

· To develop a conceptual model of behavioural biases to provide future research direction.

Research Methodology

Literature Review

Sr. No.	TOPIC	Author(s)/ Year	Place (Country)	Type of study	Data used sampling technique and sample size	Behavioural biases studied	Statistical techniques used	Findings
1.	Behavioural Biases and Investment Performance: Does Gender Matter? Evidence from Amman Stock Exchange	Alrabadi, D., Al-Abdallah,S., & Aljarayesh, N. (2018)	Jorden	Descriptive research	Random sampling 242 individual investors of Amman Stock Exchange	familiarity bias, overconfidence bias, availability bias loss aversion bias, disposition effect, herding bias, representativeness bias and confirmation bias	ordered logistic regression, Chi-square test and t-test	Findings of the study revealed the presence of all examined behavioural biases in Amman Stock Exchange. The Investment performance significantly affected by familiarity bias, availability bias, representative bias, overconfidence bias, confirmation bias disposition bias, loss aversion bias and herding bias.
2.	Impact of psychological biases and personality traits on Investors’ Trading Behaviour	Anjum, Z. et al .(2019)	Pakistan	Descriptive survey	216 investors	Loss-aversion, Overconfidence and self-control	Structure equation modelling (SEM)	Findings revealed that all the three biases have influence on trading behaviour of investors and cause them make irrational investment decisions.
3.	Impact of Financial Literacy on the Behavioural Biases of Individual Stock Investors: Evidence from Boras Istanbul	Ateş, S., Coşkun, A., Şahin, M. A., & Demircan, M. L. (2016).	Turkey	Descriptive survey method	Random sampling 596 individual stock investors	cognitive dissonance bias, representativeness bias, confirmation bias, hindsight bias, self-attribution bias, anchoring bias, conservatism bias, over optimism bias, availability bias, framing bias, , loss aversion, illusion of knowledge illusion of control and overconfidence bias	ordinal regression	Results of the study suggested that 50% of the investors have a low financial literacy level because they rely on advice from parents or friends for financial information and they have a high level of behavioural biases.
4.	Effect of Behavioural Biases on Investment Decisions of Individual Investors in Kenya	Authur, A.(2014)	Kenya	Descriptive research	snow-ball sampling technique 30 investors	Representativeness, Cognitive Dissonance Bias, Over-optimism Bias, Herd Instinct Bias, Illusion of Control Bias, Loss Aversion Bias, Hindsight Bias, Self Attribution Bias, Regret Aversion Bias	Spearman’s Rank Correlation coefficient and Regression Analysis	Major findings showed that representativeness bias, illusion of Control bias, Cognitive Dissonance bias, Herd Instinct bias and Hindsight bias significantly affect individual investor decisions.
5.	The Impact of Psychological Factors on Investors’ Decision Making in Malaysian Stock Market: A Case of Kelang Valley and Pahang	Baker & Chui Yi (2016)	Malaysia	Descriptive survey method	A combination of convenience sampling, quota sampling, and snowball sampling, 200 investors	Overconfidence, Conservation, herding and Availability bias	Multiple regression analysis	The findings showed that overconfidence, conservatism and availability bias have significant impacts on the investors’ decision making while herding behaviour has no significant impact on the investors’ decision making.
6.	How Financial Literacy and Demographical variables relates to Behavioural biases	Baker, H. K., Kumar, S., Goyal, N., & Gaur, V. (2019)	India	Descriptive survey	500 individual investors	Overconfidence, mental accounting, disposition effect, herding,	Factor analysis, ANOVA, Regression analysis	Findings showed presence of behavioural biases among individual investors in India. Financial literacy has no association with overconfidence and emotional biases, negative association with herding and disposition effect and positive correlation with mental accounting bias.
7.	Factors Influencing Indian Individual Investor Behaviour: Survey Evidence	Chandra, A., & Kumar, R (2012)	India	Descriptive survey method	355 individual investors	Overconfidence, Anchoring bias, Representativeness, Gambler’s fallacy, , Loss aversion, Regret aversion, Availability bias Mental accounting, Information through media Market share and reputation, Accounting and financial information, Personal financial needs and Recommendation from family and friends	Principal Component Analysis	The results of the principal components revealed five psychological axes that appear driving the sample Indian individual investor behaviour. These five pertinent axes on the basis of the underlying variables are named as, self-regulation, financial heuristics, prudence and precautious attitude, informational asymmetry and financial addiction.
8.	Trading Performance, Disposition Effect, Overconfidence, Representativeness Bias, and Experience of Emerging Market Investors	Chen, G., Kim, K., Nofsinger, J., & Rui, O (2007)	China	Empirical study	Secondary data from brokerage firm, 46,969 individual investor accounts and 212 institutional investor accounts are used as sample of the study	Disposition Effect, Overconfidence, Representativeness Bias	Regression analysis	The study concluded that Chinese investors have all the three behavioural biases i e disposition effect, overconfidence and representativeness bias.
9	Confirmation bias in Investments	Cheng, C. X. (2019)	U.S.A	Experimental study	125 participants divided into two groups	Confirmation bias	Z test	The results confirmed that participants have confirmation bias. They consider only that information which confirms their belief, considering that they have taken right decision.
10.	Establishing a link between risk tolerance, investor personality and behavioural finance in South Africa	Dickason, Z., & Ferreira, S. (2018)	South Africa	Descriptive survey method	Random sampling 1171 investors of a investment company of South Africa	Overconfidence, Anchoring bias, Availability bias, Loss aversion, Regret aversion, Mental accounting, self control Representativeness and Gamblers fallacy	ANOVA	The findings of the study revealed that Medium-risk tolerant investors were categorised as moderate-to-growth investors’ subject towards anchoring, regret aversion, representativeness, overconfidence, gamblers fallacy and the availability bias. Investors within this category will make investment decisions based on previous incorrect financial decisions. Investors with a low-risk tolerance level and categorised as conservative investors were subject towards the loss aversion and mental accounting bias. Investors subject towards the self-control bias were the only investors to fall in the aggressive personality category and have a high-risk tolerant level
11.	Factors Affecting Investment Decision Making: Evidence from Equity Fund angers and Individual Investors in Pakistan	Forooq, A., Afzal, M., Sohail, N., & Sajid, M. (2015)	Pakistan	Descriptive survey method	Stratified random sampling, 100 Individual investors from different cities like Islamabad, Faisalabad, Karachi and Toba Tek Singh	Heuristics and risk aversion	Correlation and regression analysis	The study concluded that Risk aversion has negative and significant impact on investment decision making whereas Use of financial tools, Heuristics and Firm level corporate governance have positive and significant Impact on investment decision making.
12.	Overconfidence, Loss Aversion and Irrational Investor Behaviour: A Conceptual Map	Igual and Santamaría (2017)	Spain	systematic review	Secondary data, 53 studies	overconfidence, loss aversion, herding and other irrational biases	Systematic Literature review	The study classify the behavioural models based on , loss aversion, overconfidence, herding and representativeness that explain the lack of correlation between risk and return in the financial markets.
13.	A qualitative inquiry into the investment decision behaviour of the Malaysian stock market investors	Jaiyeoba and Haron (2016)	Malaysia	Exploratory qualitative research	Primary data	Herd behaviour	Content analysis	Findings of the study concluded that Malayian stock investors are patriotic in nature and their investment decisions are based on feelings of comfort or convention rather than quantitative analysis, they rely much on their findings while making investment decisions, they are influenced by the psychological biases
14.	Impact of Cognitive Biases on Individual Investor Behaviour: A Literature Review	K and Aggarwal (2018)	Chennai (India)	Literature Review	Secondary data	Representativeness, Anchoring, Mental Accounting, Availability, Cognitive Dissonance, Hindsight, Illusion of control, Framing, Conservation	Literature review	Based on the literature review of the cognitive biases, a conceptual model of cognitive biases was developed by the authors.
15.	Effect of Cognitive Biases on Investment Decisions among Retail Investor at the NAIROBI securities exchange.	Kamande. A.M. (2017)	Kenya	Descriptive survey	96 retail investors were selected using random sampling technique	Overconfidence, Herding, Accounting Information and Excessive Optimism	Regression Analysis	The study discovered that Overconfidence bias had the most significant impact on the retail investors’ decisions. Majority of investors overestimate their ability and believe in their knowledge and experience to manipulate the investment success.
16.	Psychological Traits and Demographic Factors do they affect Investor’s Behaviour?	Kaur, P., Virani, S., & Fazalbhay, S.(2016)	Pune (India)	Descriptive survey method	Convenience sampling method 200 salaried investors	Allusion, Self Reliance, Regretful, Reluctant, Belief, Rational choice, Constructive and Risk Aversion	Chi-square test, correlation analysis and Regression analysis	The model revealed that the psychological factors such as Allusion, Self Reliance and Risk Aversion are significantly associated with the investment decision making process. But behavioural factors such as Regretful, Reluctant, Belief, Rational choice and Constructive are not statistically significant. So it can be concluded that financial behaviour of the respondents is influenced by their psychological traits namely risk aversion, self-reliance and belief.
17.	Behavioural factors influencing investment decisions among individual investors in Nairobi Securities Exchange.	Kimeu, C., Anyango, W., & Rotich, G. (2016).	Kenya	Descriptive survey method	34 operations managers and business development managers selected from 17 investment banks of Kenya	Risk aversion, herding, prospecting and anchoring	Multiple regression analysis	The study found that the investors in their organizations invest due to herding effect, this has resulted the investment banks to experience emotional biases and congruity. Further the study recognized that prospecting influences the investment decision making in stock market, however, most of the organizations engage in advising inventors’ on the ways to invest. The study finally found that anchoring influences the investment decision in Kenyan stock market. Availability of the information about stock market investment facilitates inventors’ to reach investment decision.
18.	The Effect of Behavioural Finance Factors on Stock Investment Decisions in Kenya	Kisaka, E. (2015)	Kenya	Descriptive survey method	60 investors was selected randomly from 3 stock brokerage firms of Machakos Country	certain-return bias, loss aversion, regret aversion and random walk framing	Multiple regression analysis	The analysis evidenced that certain-return bias has a negative relationship with stock investment decisions whereas loss aversion, regret aversion and random walk framing have a positive correlation with stock investment decisions on the NSE.
19.	An Empirical research on investor biases in financial decision-making, financial risk tolerance and financial personality	Kubilay, B., & Bayrakdaroglu, A. (2016)	Turkey	Empirical study	536 individual investors	Overconfidence, Anchoring, Availability, Over-Optimism, Representativeness and Regret-Aversion	Logistic Regression Analysis	Findings showed that there is a relationship between personality traits and behavioural biases of investors.
20.	Behavioural biases in investment decision making – A systematic literature review	Kumar and Goyal (2015)	India	Systematic Literature review	Secondary data, 117 selected articles published in peer review Journals between 1980 and 2013.	Herding, Home bias, Overconfidence, Disposition effect	Systematic Literature review	The study concluded that there was limited research in developing countries (emerging markets) on behavioural biases.
21.	An Analysis of Behavioural biases in investment decision making	Madaan, G.,& Singh, S. (2019)	India	Descriptive survey	243 investors	Overconfidence, herding, anchoring and disposition effect	Regression analysis	The study revealed that herding and overconfidence bias have significant impact on investment decision making but anchoring and disposition effect have no significant impact on investment decision making of investors.
22.	Gender based study on the Implications of Behavioural Biases in Investment Decision making	Mahalakshmi T.N & Anuradha N (2018)	India	Literature review	Secondary data	mental accounting, familiarity, local/home bias, representativeness, overconfidence, over optimism, over trading, loss aversion, disposition effect, regret, anchoring & herding	Literature review	Various studies support that men are more overconfident in investing than women. That is male trade frequently than women.
23.	Behavioural Finance: A Study on Gender Based Dilemma in Making Investment Decisions.	Mahapatra and Mehta (2015)	India	Descriptive survey method	convenience and purposive sampling 64 individual households’ investors of Hyderabad-Secunderabad region	Risk appetite and anchoring bias	Chi-square test	The empirical results of the study suggested that both male and female investors are very clear and focused about their financial goals while investing and both genders get influenced by anchoring bias when they invest. But female investors are more risk averse than male investors.
24.	Impact of Cognitive Biases in Investment Decisions of Individual Investors in Stock Market	Manuel and Mathew (2017)	Kerala ( India)	Descriptive survey method	convenient sample of 62 respondents	Cognitive Dissonance Bias, Representativeness Bias, Over-optimism Bias, Illusion of Control Bias, Hindsight Bias, Self-attribution Bias, Herding Bias, Regret Aversion Bias and Loss Aversion Bias	Descriptive analysis and Correlation analysis	Findings revealed that among the cognitive biases Over-optimism and Self-attribution biases have high impact on investors’ decision making, where as Cognitive-dissonance has least impact on investors’ investment decisions. All emotional biases have very high impact on individual investors’ investment decision.
25.	Investment management and personality type	Mayfield, C., Perdue,G.,& Wooten, K(2008)	USA	Exploratory	Primary data 197 Students	Risk aversion Big five personality traits	Structural equation modelling (SEM)	The study found a relationship between big five personality traits and investment intentions of potential investors (graduate students) of USA. The findings in the present study suggested that personality influences or contributes to the intentions of investors is not without practical applications.
26.	Personality traits and Behavioural biases of Indian Investors	Mehtab, F., & Nagaraj, H. (2019)	India	Descriptive research	1000 individual investors	Overconfidence and Herding bias	Regression analysis	Findings concluded that overconfidence bias has negative relationship with introversion personality type but herding bias has negative relationship with extroversion personality type.
27.	Does Irrationality in Investment Decisions Vary with Income?	Mittal and Vyas (2009)	Indore (India)	Descriptive survey method	Primary data was collected from 428 individual investors with the help of structured questionnaire	Overconfidence, Loss /regret avoidance, self-attribution bias, framing effect, and tendency to use purchase price as reference point.	ANOVA	The findings revealed that Income was found to be a significant factor impacting the overconfidence level (tendency to overreact) and loss/regret avoidance. But income has no significant effect on self-attribution bias, framing effect, and tendency to use purchase price as reference point.
28.	Investment Decision Making and Hindsight Bias	Monti, M., & Legrenzi, P. (2009).	Germany	Experimental	Primary data	Hindsight bias	Regression analysis	Results concluded that bankers having low hindsight bias have obtained better performance; even experience cannot reduce this bias.
29	A study on investors’ personality characteristics and behavioural biases: Conservatism bias and availability bias in the Tehran Stock Exchange	Moradi, M., Mostafaei, Z., & Meshki, M. (2013)	Iran	Descriptive survey method	Primary data	Conservation bias and Availability bias	Chi-square test and phi-test	The results showed that extraversion-introversion personality type have no relationship with conservation bias but have relationship with availability bias.
30.	Impact of Behavioural Finance on investment decision making: A study of investment banks in Nigeria	Ogunlusi, O. E., & Obademi, O. (2019	Nigeria	Descriptive survey	180 investors	Heuristics and prospect variables	Correlation analysis	The study found that there is a strong negative relationship between behavioural biases and investment decision making.
31.	Impact of Select Behavioural Factors Influence on the Investment Decision Making	Padma & Rani (2018)	Andhra Pardesh (India)	Descriptive survey method	Simple random sampling 172 equity investors of Andhra Pradesh	self-efficiency, locus of control and achievement motivation	Bi-variate correlation and structure equation modelling (SEM)	The study found that the Achievement Motivation has the strong correlation with the Investors investment decision making. However, Self-efficacy and Locus of control are moderately correlated with the investment decision making. The impact has been studied with the SEM and the result indicated that the Self-efficacy influence is having the higher impact on the investors' investment decision making.
32.	The Impact of the Sunk Cost Fallacy and Other Behavioural Biases on Individual Irish Investors	Percival.S. (2016)	Ireland	Descriptive survey method	Purposive sampling technique 42 investors	sunk cost fallacy, overconfidence, Regret aversion, mental accounting and Hindsight bias	Descriptive statistics	Findings of the study revealed that sunk cost fallacy and other behavioural biases are present in Irish investors while making investment decisions in stock market.
33.	An Empirical Study of Overconfidence and Illusion of Control Biases, Impact on Investor’s Decision Making: An Evidence from ISE	Qadri and Shabbir (2014)	Pakistan	Descriptive survey method	107 investors of Islamabad Stock Exchange (ISE)	overconfidence and Illusion of control	Regression analysis	Findings revealed that (overconfidence and Illusion of control) these two biases have a lot of impact on investors’ decision making. Investors think that their knowledge, experience and wealth have a great importance on the investment decisions. Overconfidence Investors in ISE trade more rapidly due to their skill, knowledge and experience.
34.	Factors influencing investor’s decision making in Pakistan	Rasheed, M., Rafique, A., Zahid, T., & Akhtar, M. (2017)	Pakistan	Descriptive survey method	227 investors operating at Islamabad, Lahore, and Sargodha in Pakistan	Representativeness bias and Availability bias	Structural equation modelling(SEM)	The results of the study suggested that investors at the PSX are influenced by both representativeness and availability bias. The investors prefer to buy only those stocks for which more information is available to them instead of doing a complete analysis of all the available and relevant information and they invest in stocks only on the basis of the similarity of their characteristics with their expected performance.
35.	Extending the Theory of Planned Behaviour: Impact of Past Behavioural Biases on the Investment Decision of Indian Investors	Raut, R.K., Das, N &Rohit Kumar,R (2018)	India	Descriptive survey method	396 individuals of Eastern India	Theory of Planned behaviour	Structural equation modelling (SEM)	The findings of this study revealed that behavioural biases are inseparable from normal human beings’ decision making. This study indicates that attitude toward behaviour, subjective norms and perceived behavioural control are significantly associated with behavioural intentions.
36.	Investors’ Expertise, Personality Traits and Susceptibility to Behavioural Biases in the Decision Making Process	Rzeszutek, M., Szyszka, A., & Czerwonka, M. (2015)^.	Poland	Descriptive survey method	Convenience sampling 200 respondents out of them 100 retail investors of Warsaw Stock Exchange and 100 students of the Warsaw School of Economics	certainty effect, the sunk cost fallacy, and mental accounting	logistic regression analyses and Chi-square test	The study found that not only that frequent retail investors are susceptible to various behavioural biases when making decisions but also that the degree of susceptibility is stronger among students and demonstrated that susceptibility to behavioural biases depends on the level of expertise in stock market investing
37.	Individual investors and local bias	Seasholes, M. S., & Zhu, N. (2010)	U.S.A	Empirical study	Secondary data	Home bias	Regression analysis	The study found that investors purchase maximum number of stocks of those companies whose headquarter is situated locally.
38.	What factors affect behavioural biases? Evidence from Turkish individual stock investors	Tekçe, B., Yılmaz, N., & Bildik, R. (2016)	Turkey	Empirical study	Secondary data, Over 200000 investors accounts	Disposition effect, familiarity bias, representativeness bias and status quo bias	PGR-PLR analysis, Correlation analysis	Study concluded that investors do not behave rationally. Male investors have more disposition effect and familiarity bias and disposition effect increases with age. Representativeness bias has no difference on the bases of gender, age and experience.
39.	Investor Behavioural Pattern: An Empirical study of the Ghana stock market	Tetteh and Hayfron (2017)	Ghana	Descriptive survey method	convenience sampling method 250 investors	Availability, mental accounting, risk aversion, representativeness, anchoring and overconfidence	Descriptive statistics	The study reported that behavioural biases of availability, mental accounting, risk aversion, representativeness, anchoring and overconfidence prevail in various proportions among investors of Ghana. Representativeness, risk aversion and availability were the most prevalent biases in Ghanian stock market.
40.	Impact of Behavioural Biases on Investment Decision: With special Reference to Gwalior City	Vishnoi, S. (2015)	Gwalior (India)	Descriptive survey method	100 retail investors is selected from Gwalior city using purposive sampling method	Representativeness , Anchoring, Overconfidence, Gamblers Fallacy, Availability, Loss aversion, Mental accounting , Regret aversion and Self-control	Factor Analysis	Two factors were identified from all behavioural factors using factor analysis namely Heuristics and Prospect.