Investor Biases and Their Discriminating Power among the Risk Takers - A Case Study from Kerala

Abstract

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The studies in behavioural finance focused on psychographic and psychological factors which influence investment decisions. The current study is to identify the behavioural biases affecting the investment decision making of an investor. The study was conducted among the salaried group of Kerala who has been invested/investing in the stock market. The study focused on two dimensions (a) the behavioural characteristics of the investors (b) the discriminatory effect of behavioural biases among the risk tolerance level of the investors. Behavioural aspects were done factor analysis and extracted the five biases affecting the investment decisions. Risk tolerance was analysed by evaluating the attitude of the investors towards the risk. Exploratory factor analysis was carried out to identify the various behavioural factors affecting investment decisions. The factors analysed were further tested using discriminant analysis to evaluate the investors on risk tolerance. From the analysis, it was found that regret aversion and herd behaviour have a high influential effect on investor decision making.

Keywords: Behavioural Finance, Investment Behaviour, Overconfidence, Representative Bias, Mental Accounting, Regret Aversion, Risk, Risk Tolerance, Discriminant Analysis, Risk Attitude

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