Indian Behavioral Finance: Review of Empirical Evidence

Indian Behavioral Finance: Review of Empirical Evidence

Vikas Pujara (Manav Rachna International Institute of Research and Studies, Faridabad, India) and Bhavesh P. Joshi (Manav Rachna International Institute of Research and Studies, Faridabad, India)
Copyright: © 2020 |Pages: 14
DOI: 10.4018/IJABE.2020070104
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Abstract

Behavioral finance is a relatively new field of study that combines cognitive psychology and thoughts of leaders in economics, finance, and behavioral psychology to explore the driving forces behind the financial decisions that people make. Making a decision is a complex procedure that embraces cognitive and psychological biases. The paper attempts to explore and document the literature available to review the biases in an Indian context, highlighting specific and variable factors that impact, such as personality traits, and plausibly explain the difference in the behavior from a traditional behavioral finance model. The review of literature suggests that behavioral finance in an Indian context has a pattern, which can be followed to interpret and understand the psychology of Indian investors. A conceptual framework is proposed that considers various factors that can enable understanding Indian behavioral finance. In particular, the impact of personality and financial determinants appear to be imperative to studying behavioral bias in the Indian context.
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Introduction

Investment is the sacrifice of the present asset(s) to use that saved money with an expectation of earning higher returns in the future (Graham & Dodd 2002). The expectation of an investment is called a return. Higher returns are proportional to risk taken in an investment. The investors have a strategy or a plan to invest based on certain demographic and physiological factors. Investors rely on the availability of information to take a relevant decision on investing. The human mind has a limitation in assimilating the information often referred to as 'bounded Rationality' (Barber 2009).

The modern financial theory is based on the concept of homo economics, adopted from neoclassical economics. This ideal, self-interested, and perfectly rational agent maximizes his utility by choosing at each point in time the best options available. This perfect rationality, combined with the efficient markets hypothesis, was assumed by when he developed his portfolio selection theory, which is considered the starting point of modern finance theories. The market efficiency concept was formally set out by and modern financial theories are founded on the assumptions of rational investors and efficient markets.

In contrast, the agent of behavioral finance is not perfectly rational, but a normal human (Bailey, 2011) who acts and takes decisions under the influence of emotions and cognitive errors. The confirmation of such evidence emerged from, from which interdisciplinary elements (in particular from psychology) began to be incorporated into behavioral theories of finance, in attempts to understand the process of decision-making under risk.

Factors affecting Investment Behavior are:

  • Demographic Factors

  • Psychological Factors

  • Financial determinants

  • Investment Pattern

  • Personality

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