The Influence of Overconfidence and Loss aversion factors in Investment Decision Making: Evidence on Stock Investors in India

Abstract

The aim of this research is to investigate the influence of several prominent behavioral finance variables discussed in the financial literature, such as loss aversion and overconfidence, on the decision-making process when investing in stocks. Furthermore, the study aims to determine the relative significance of these variables. The value of this study originates from the fact that local studies focused on the subject of behavioral finance are rare and so, the researchers believe that such study will enrich awareness in this domain. The study consisted of 100 individual investors who were active in the trading halls at Indian Stock Market during the research period. The data were collected through a questionnaire prepared for the purpose of research and were analyzed by applying statistical tests (Multiple regression analysis) and by using statistical software (SPSS) after approving the reliability and validity of the questionnaire. The results showed that there was an impact of the behavioral finance on Stock market investment decision represented by two behavioral factors affecting the investment decisions of the individual investors which were: overconfidence and loss aversion, the study found that overconfidence and loss aversion biases have significant positive impact on objective of Stock market investment of individual investors. Overconfidence: R2 = 0.404, p = 0.000 and loss aversion: R2 = 0.203, p = 0.003). The research provided some recommendations for investors trading at Indian Stock Market to adopt scientific bases in making stock investment decisions, and suggested to conduct further research to study the impact of behavioral finance on the different types of risks and yields at Indian Stock Market.