Impact of overconfidence bias in stock trading approach: a study of high net worth individual (HNI) stock investors in India

Abstract

PurposeThe purpose of the study is to check whether Indian high net worth individual (HNI) investors are suffering from overconfidence bias in personal life and in-stock investment approach. The study is to benchmark an ideal behaviour that an investor should exhibit under the overconfidence bias.Design/methodology/approachBoth qualitative and quantitative methods were used to study the Indian HNI investors with overconfidence bias. As a first step, an exploratory study was conducted to identify the variables to define overconfidence bias. An extensive literature review along with in-depth interviews was conducted amongst investors, fund managers and the subject experts to check the content validity of the variables. The survey instrument was designed based on the objective of the study and theoretical framework. Both descriptive and inferential statistical tools such as the Z proportion test, logistic regression and structural equation model were applied to test the hypotheses.FindingsIt was found that there is a moderate impact of overconfidence bias amongst the investors both in normal life and whilst making investments in stock. This study found the influence of overconfidence bias in stock investment with respect to forecasting of the stock price movements, overtrading, overanalysis and overreaction.Research limitations/implicationsThis paper will help in understanding the Indian HNI investors’ behaviour under the impact of overconfidence bias. There is an empirical study to understand the implication of overconfidence bias on stock investors specifically for the HNI investors.Practical implicationsThis study gives an insight into the fund managers to understand the Indian HNI investment behaviour. It is also helpful for HNI investors to understand and correct their behavioural biases related to overconfidence.Social implicationsThis paper will guide investors to understand the symptoms and repercussions of overconfidence bias in stock investment. They can also realize the subtle impact of overconfidence bias in personal and professional life, thus preventing them from making losses.Originality/valueThis work is the extension of the works of Terrace Odean on behavioural finance in the Indian Stock Investors' context. The concept of overconfidence bias and its implications of finance were developed by Kahneman and Tversky, and later by other behavioural finance researchers such as Malmendier, Hirshleifer, DeBondt, Odean, Barber, Shefrin and others. This paper studies stock investing behaviour with specific reference to Indian HNI investors.

Does cognitive biased knowledge influence investor decisions? An empirical investigation using machine learning and artificial neural network

“…Experiments revealed that overconfidence acts as a mediator between representative heuristics and the investment decision; biases that were identified had a significant impact on investments made. Parhi et al (2021) researched the overconfidence bias and the impact of biases on the investments of high net-worth individuals (HNWIs). Their findings revealed that overconfidence bias had only a minor impact on investors' day-to-day lives as well as their decision-making processes.…”

Specifying and validating overconfidence bias among retail investors: a formative index

“…Investors were found to be accurate in their forecasts (Islam Khan et al, 2016;Du and Budescu, 2018). This accuracy rate and the belief system that they are better than others make the investors overconfident while trading in the stock market (Parhi and Pal, 2022). This behavioral bias in investors put a spin on rationality in investors making them influenced by these cognitive traits (Naveed and Taib, 2021).…”

“…Further studies highlighted the importance of research into diverse investor biases and documented their impact on investor behaviors (Chong et al, 2021;Gong et al, 2021;Mittal, 2022) hence offering an unconventional approach to the financial markets (Pattnaik et al, 2022;Rahman and Gan, 2020). Present unbridled conditions in financial markets indicate that overconfidence bias (OB) appears to be one of the most influential bias among various investor biases (Jain et al, 2020;Parhi and Pal, 2022;Sachdeva et al, 2022) Retail investors exhibit uncertainty about their investment decisions in the financial market, thus underreacting to the information and eventually ending up making a mountain out of a hill (Chi and Li, 2019;Wang et al, 2004). In all other investor-related biases, OB contributed to the conundrum among investors in the Indian financial market (Mushinada and Veluri, 2018).…”

“…Past literature especially probed into the behavioral biases existing among investors while the decision-making process (Parmitasari and Syariati, 2022;Sachdeva et al, 2022;S ¸enol and Onay, 2023). The retail investors' biases can be examined to understand one of the forms of market anomalies (Kim and Shamsuddin, 2023) that exist in financial markets (Parhi and Pal, 2022;Baker et al, 2019). Recent studies also corroborated the fact that behavioral biases can be influenced by self-enhancement in investors.…”

“…Present unbridled conditions in financial markets indicate that overconfidence bias (OB) appears to be one of the most influential bias among various investor biases (Jain et al. , 2020; Parhi and Pal, 2022; Sachdeva et al. , 2022) Retail investors exhibit uncertainty about their investment decisions in the financial market, thus underreacting to the information and eventually ending up making a mountain out of a hill (Chi and Li, 2019; Wang et al.…”