Elucidating investors rationality and behavioural biases in Indian stock market

Abstract

Purpose The purpose of this paper is to empirically test the relationship between investors’ rationality and behavioural biases like self-attribution, overconfidence. Design/methodology/approach The study applies structural equation modelling to understand whether individual investors, besides being rational, are subjected to self-attribution bias and overconfidence bias. Findings The study shows the empirical evidence in the support of behavioural biases like self-attribution and overconfidence existing besides investors’ rationality. Moreover, there is a statistically significant positive covariance found between self-attribution and overconfidence, implying that an increase/decrease in self-attribution results in the increase/decrease in overconfidence and vice versa. It is also observed that the personal characteristics of an investor such as gender, age, occupation, annual income and their trading experience have an impact on behavioural biases. Research limitations/implications The study focused on rational decision making, self-attribution and overconfidence biases using primary data. Further studies can be encouraged to test the existence of behavioural biases based on both market level and individual account data simultaneously. Practical implications Insights from the study suggest that the investors should perform a post-analysis of each investment, so that they become aware of past behavioural mistakes and stop continuing the same. This might help investors to minimise the negative impact of self-attribution and overconfidence on their expected utility. Originality/value To the best of the authors’ knowledge, this is the first study to examine the relationship among investors’ rationality, self-attribution and overconfidence in the Indian context using a comprehensive survey.

Behavioral Biases and the Rationality in Stock Market Investments; Evidence from Sri Lanka

“…Representative bias and loss aversion bias has no influence on the investment decisions of investors. Similar to the finding that Sri Lankan stock market investors are overconfident, other emerging countries like Pakistan (Rehan & Umer, 2017), India (Mushinada & Veluri, 2019;Prosad et al, 2017) and Jordan (Alrabadi et al, 2018) shows the same result. Herding bias is also observed in other emerging countries such as India (Mandal, 2011) and Jordan (Alrabadi et al, 2018), similar to Sri Lanka.…”

“…Most of the evidence on overconfidence bias is concentrated in developed countries like the USA (Kumar & Goyal, 2015). Overconfidence bias is found to influence investment decision making in some emerging countries like Pakistan (Rehan & Umer, 2017), India (Mushinada & Veluri, 2019;, and Jordan (Alrabadi et al, 2018). It is likely that Sri Lanka being an emerging economy, overconfidence bias influences investment decision making of stock market investors at the Colombo Stock Exchange.…”

How do investors behave in the context of a market crash? Evidence from India

“…Niemczak and Smith (2013) study 11 Middle Eastern stock markets and show that most markets experience successive periods of efficiency and inefficiency, which is consistent with the AMH. Mushinada and Veluri (2019) and Mushinada (2020) provide empirical evidence, at an individual investor level, for simultaneous existence of rationality and cognitive biases thereby conforming AMH in Indian stock market. Hull and McGroarty (2014) using the Hurst–Mandelbrot–Wallis rescaled range test as a measure of market efficiency on 22 emerging markets and show strong evidence in favour of the AMH.…”

Pengaruh Self-Attribution Bias, Mental Accounting, dan Familiarity Bias terhadap Pengambilan Keputusan Investasi

“…Self-attribution bias mengacu pada perilaku investor yang ketika mengalami keuntungan cenderung mengakui bahwa keberhasilan tersebut berasal dari kemampuan dan pengetahuan mereka. Sebaliknya, ketika mengalami kerugian, investor cenderung menyalahkan orang lain atau beranggapan bahwa kegagalan yang terjadi merupakan kesalahan faktor eksternal yang berada di luar kendali mereka (Mushinada dan Veluri, 2019). Deaves dkk.…”