International Journal of Innovative Research in Engineering & Management (IJIREM)

ISSN: 2350-0557, Volume-9, Issue-5, October 2022

https://doi.org/10.55524/ijirem.2022.9.5.13
Article ID IJIRD-1201, Pages 96-102
www.ijirem.org

A Study of the Role of Behavioural Finance in Investment

Decision Process of Individual Investors with Reference to
Behavioural Finance Theories’ Effect on Investors
Ashutosh Singh1, and Dr. S. D. Sharma2
1
Research Scholar, Department of Commerce & Management, Sai Nath University, Ranchi, Jharkhand, India
2
Professor, Department of Commerce & Management, Sai Nath University, Ranchi, Jharkhand, India
Correspondence should be addressed to Ashutosh Singh; [email protected]
Copyright © 2022 Made Ashutosh Singh et al. This is an open-access article distributed under the Creative Commons Attribution License,
which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited.

ABSTRACT- Investment decisions are always crucial. usually get attracted for short term investment options. Here
Lots of financial gains anticipations are included in again the time plays key role investors do not invest with
investment decisions. Investors make different calculation objectives or their own needs like education, property or any
before investing. Yet, the investment decisions are not fixed goal. Usually, the want to earn more on the surplus they
always based up on financial calculation only. Investors had.
become influenced by other concerns like imitation of peer
group, advise of elders etc. Studying such influencing factors
is subject matter of behavioural finance. In the present study
the researchers have focused upon the behavioural finance
theories as a determinant of the investment decisions.
Researchers have used different behavioural finance theories
to establish constructs. A questionnaire has been developed
to test the different aspects of investment decisions. The
reliability analysis (Cronbach's Alpha 0.751) of the
questionnaire has been conducted. Further the questionnaire
extracted 10 variables. These have been named as Individual
Investors’ Investment Decisions, Risk Consideration, Value
consideration, Fear of Missing Opportunity, Regret
Aversion, Psychological Influence, Cognitive Dissonance,
Emotion of Investor, Over Reactive Instinct, Under Reactive
Instinct. These variables have been tested for corelation and
further multiple corelation coefficient. R value 0.786
suggested the established variable has significant impact on
each other.

KEYWORDS- Behavioural finance, Investment

decisions, Prospect theory, Heuristic Theory, Over and under
theory, Regret theory.

I. INTRODUCTION
In early days the individuals invested in precious metal like Figure 1: Investment Avenue
sliver, and gold. But now a days there are several; investment
option in front of the people. Investment is a meticulous
process that have advantage if the investor has time. Time Most investors want to make investments that will provide
constrain is first put while selecting any investment option. them with high returns as quickly as possible while
Investor have to study the investment rules in details and minimising the risk of losing their principal. This is why
invest accordingly. Researcher has read several literature and many people are always on the lookout for top investment
articles on the investment. Researcher has found that not plans that will allow them to double their money in a matter
comprehending the investment rules properly is a major of months or years with little or no risk. Unfortunately, a
cause of the problem in front of investors. Next to this the high-return, low-risk combination in an investment product
other issue is that the investor wants quick returns. They does not exist. In reality, risk and return are inextricably

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linked; the higher the returns, the higher the risk, and vice been considered in their study like overconfidence, loss
versa. Before investing in any investment, you must match aversion, risk perception and herding that can influence the
your risk profile with the risks associated with the product. share market investments at Amman Stock Exchange (ASE).
There are two types of investment options in front of the The researchers have tried to know the other important
investors in modern days: factors that may have effect on the individual investments.
 Non-Financial Investments Mittal, S. K. (2019) has developed theoretical frame work of
 Financial Investments the researcher on behavioural bias in investment decisions. It
A. Non-financial investment options has been said that buyers are emotional than rational. This is
also applicable in investment decisions as the investment can
Non-financial investment, or investments in assets such as be considered as buying of financial instruments. The
buildings, machinery and equipment, and software. In early researcher has drawn the significance of behavioural finance
days people keep gold and silver as investment. It was well in the context of investment decision making.
known that these metals are precious and available in limited
quantity. After some days and years, the value of the metals Sattar, M. A., Toseef, M., & Sattar, M. F. (2020) tried to
will increase. So, people bought these metals and stored. explore how behavioural biases affect investment decision
Other major non-financial investment option is real estate. making under uncertainty. Dependent variable investment
People buy land, home and other property. As the population decision making is a composite activity, it never be made in
is growing, availability of the land is becoming low. People a vacuity by depending on personal resources. Based on this
invest in land so that after few years they could get higher study investment choices alternatives influence by human
prices for it. rational and irrational behavior, therefore, examine the
impact of behavioral finance in the decision-making process.
B. Financial Investment options Ogunlusi, O. E., & Obademi, O. (2021) studied the impact of
Financial assets can be divided into market-linked products behavioural finance on investment decision-making using a
(such as stocks and mutual fund) and fixed income products selected investment banks were investigated. The overall
(like Public Provident Fund, bank fixed deposits). empirical results provided evidence of a positive impact
The researchers have tried to explore about the financial between behavioural finance and investment decision,
decisions about mutual funds in the present study. Further the supporting previous research and contributing to
investment behaviours can be explained in the light of generalization.
behavioural finance theories. Few major theories are as Chaturvedi, A. (2022) reveals that investors invest in
follows different investment avenues for fulfilling financial, social,
 Prospect Theory and psychological need. The researchers have found that the
 Regret Theory existing literature does not have studies which are related
 Heuristic Theory with the behavioural finance theories. In modern world
 over and under reaction theory interpretation of the effect of behavioural finance theories on
The researcher has tried to know about the impact of these investment decisions can be studied.
theories on investment decisions.
III. RESEARCH METHODOLOGY
II. LITERATURE REVIEW Use Proposed work
Areiqat, A. Y., Abu-Rumman, A., Al-Alani, Y. S., & Researcher will develop questions based upon these
Alhorani, A. (2019) have tried to know that what types of theories to find that how Investment decision of an individual
variables effect the investment decisions. Few variables have can be influenced.

Figure 2: Hypothesis Model

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Researcher has selected 45 items from previous studies on named on the basis of literature review, expert opinions and
issue. The outcome of factor analysis eliminated these items research objectives. The factors are as follows
and resulted in ten components. The factors were further

Table 1: Key factors

Dependent Selected Theories-Based Independent Factors (Variables)

Factor Variables
(Variable)
Prospect Theory
Risk Consideration, Value consideration

Regret Theory
Fear of Missing Opportunity, Regret Aversion
Individual
Investors’
Psychological Influence, Cognitive Dissonance, Emotion
Investment Heuristic theory
of Investor
Decisions
Over and Under Reaction Theory Over Reactive Instinct, Under Reactive Instinct

mutual funds
A. Objectives
 There is no significant impact of Cognitive Dissonance
 To study the mutual fund as an investment tool in India, on the individual investors’ investment decisions in
behavioral finance concept and its scope in financial mutual funds
investment decision making  There is no significant impact of Emotion of Investor on
 To study barriers in investing in mutual funds in India the individual investors’ investment decisions in mutual
 To study major behavioral finance related factors that funds
persuade individuals in investing in mutual funds  There is no significant impact of over and under reaction
 To suggest measures for increasing investment in mutual theory of behavioral finance on the individual investors’
funds investment decisions in mutual fund
B. Hypothesis  There is no significant impact of Over Reactive Instinct
on the individual investors’ investment decisions in
Hypothesis allows us to structure our thinking in such a way
mutual funds
that we can safely learn the right lessons from failures. This
 There is no significant impact of Under Reactive Instinct
seems like a small price to pay for making and effort to get
on the individual investors’ investment decisions in
over any aversion we might have to adding “scientific
mutual funds
method” to our permanent vocabulary. The researchers have
Researchers have collected the data with the help of
developed following hypothesis as follows
questionnaire. The population of the present study comprised
 There is no significant impact of Risk Consideration on of all the investors in the Delhi NCR. Before administering
the individual investors’ investment decisions in mutual the questionnaire, researcher has ensured the respondent is
funds an investor. For this researcher made a small introductory
 There is no significant impact of Value consideration on conversation with respondent. It is never possible for a
the individual investors’ investment decisions in mutual researcher to approach all the respondents of a vast
funds population. For the feasibility and purpose of research a
 There is no significant impact of Fear of Missing small representative part is selected which is known as
Opportunity on the individual investors’ investment sample. Non-Probability Sampling Technique (Convenience
decisions in mutual funds Sampling) has been used for the research.
 There is no significant impact of Regret Aversion on the
individual investors’ investment decisions in mutual IV. DATA ANALYSIS AND FINDINGS
funds There is no significant impact of Risk Consideration on the
 There is no significant impact of Psychological Influence individual investors’ investment decisions in mutual funds
on the individual investors’ investment decisions in

Table 2: Correlations
individual investors’ investment
Risk Consideration
decisions
Pearson Correlation 1 .440**
Risk Consideration Sig. (2-tailed) .000
N 500 500
Pearson Correlation .440** 1
individual investors’ investment
Sig. (2-tailed) .000
decisions
N 500 500

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Correlation table shows that there is significant correlation So, it could be said that, there is a significant impact of risk
between factors at the 0.01 level (2-tailed). Hypothesized consideration on the individual investors’ investment
correlation was at 0.05 level, which will also be significant. decisions in mutual funds
The correlation value is positive and above 0.400 which is There is no significant impact of Value consideration on the
considered as moderate correlation. individual investors’ investment decisions in mutual funds

Table 3: Correlations
Individual
Investors’
Value consideration
Investment
Decisions
Pearson Correlation 1 .491**
Value consideration Sig. (2-tailed) .000
N 500 500
Pearson Correlation .491** 1
Individual Investors’
Sig. (2-tailed) .000
Investment Decisions
N 500 500

Correlation table shows that there is significant correlation there is a significant impact of value consideration the
between factors at the 0.01 level (2-tailed). Hypothesized individual investors’ investment decisions in mutual funds
correlation was at 0.05 level, which will also be significant. 3- There is no significant impact of Fear of Missing
The correlation value is positive and above 0.400 which is Opportunity on the individual investors’ investment
considered as moderate correlation. So, it could be said that, decisions in mutual funds

Table 4: Correlations
Fear of Missing Individual Investors’
Opportunity Investment Decisions
Pearson Correlation 1 .422**
Fear of Missing
Sig. (2-tailed) .000
Opportunity
N 500 500
Pearson Correlation .422** 1
individual investors’
Sig. (2-tailed) .000
investment decisions
N 500 500

Correlation table shows that there is significant correlation So, it could be said that, there is a significant impact of Fear
between factors at the 0.01 level (2-tailed). Hypothesized of Missing Opportunity on the individual investors’
correlation was at 0.05 level, which will also be significant. investment decisions in mutual funds
The correlation value is positive and above 0.400 which is 4- There is no significant impact of Regret Aversion on the
considered as moderate correlation. individual investors’ investment decisions in mutual funds

Table 5: Correlations
Individual
Investors’
Regret Aversion
Investment
Decisions
Pearson Correlation 1 .398**
Regret Aversion Sig. (2-tailed) .000
N 500 500
Pearson Correlation .398** 1
individual investors’
Sig. (2-tailed) .000
investment decisions
N 500 500

Correlation table shows that there is significant correlation So, it could be said that, there is significant impact of Regret
between factors at the 0.01 level (2-tailed). Hypothesized Aversion on the individual investors’ investment decisions in
correlation was at 0.05 level, which will also be significant. mutual funds
The correlation value is positive and almost above 0.400 5- There is no significant impact of Psychological Influence
which is considered as moderate correlation. on the individual investors’ investment decisions in mutual
funds

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Table 6: Correlations
Individual
Psychological Investors’
Influence Investment
Decisions
Pearson Correlation 1 .601**
Psychological
Sig. (2-tailed) .000
Influence
N 500 500
Pearson Correlation .601** 1
individual investors’
Sig. (2-tailed) .000
investment decisions
N 500 500

Correlation table shows that there is significant correlation Individual

Investors’ Pearson Correlation .622** 1
between factors at the 0.01 level (2-tailed). Hypothesized
correlation was at 0.05 level, which will also be significant. Investment
Decisions Sig. (2-tailed) .000
The correlation value is positive and above 0.400 which is
N 500 500
considered as moderate correlation. So, it could be said that,
there is a significant impact of Psychological Influence on
the individual investors’ investment decisions in mutual Correlation table shows that there is significant correlation
funds between factors at the 0.01 level (2-tailed). Hypothesized
6- There is no significant impact of Cognitive Dissonance on correlation was at 0.05 level, which will also be significant.
the individual investors’ investment decisions in mutual The correlation value is positive and above 0.400 which is
funds considered as moderate correlation.
So, it could be said that, there is a significant impact of
Emotion of Investor on the individual investors’ investment
Table 7: Correlations decisions in mutual funds
8- There is no significant impact of Over Reactive Instinct on
Individual the individual investors’ investment decisions in mutual
Cognitive Investors’
funds
Dissonance Investment
Decisions
Table 9: Correlations
Pearson
1 .611**
Correlation Individual
Cognitive Over
Investors’
Dissonance Sig. (2-tailed) .000 Reactive
Investment
Instinct
N 500 500 Decisions
Pearson .531**
Individual .611** 1 Over Pearson Correlation 1
Correlation
Investors’ Reactive
Sig. (2-tailed) .000
Investment Sig. (2-tailed) .000 Instinct
Decisions N 500 500
N 500 500
Individual Pearson Correlation .531** 1
Investors’
Correlation table shows that there is significant correlation Investment Sig. (2-tailed) .000
between factors at the 0.01 level (2-tailed). Hypothesized Decisions N 500 500
correlation was at 0.05 level, which will also be significant.
The correlation value is positive and above 0.400 which is Correlation table shows that there is significant correlation
considered as moderate correlation. So, it could be said that, between factors at the 0.01 level (2-tailed). Hypothesized
there is a significant impact of Cognitive Dissonance on the correlation was at 0.05 level, which will also be significant.
individual investors’ investment decisions in mutual funds The correlation value is positive and above 0.400 which is
7- There is no significant impact of Emotion of Investor on considered as moderate correlation. So, it could be said that,
the individual investors’ investment decisions in mutual there is significant impact of Over Reactive Instinct on the
funds individual investors’ investment decisions in mutual funds
9- There is no significant impact of Under Reactive Instinct
Table 8: Correlations on the individual investors’ investment decisions in mutual
funds
Individual
Emotion Investors’
of Investor Investment Table 10: Correlations
Decisions
Individual
Under
Pearson Correlation 1 .622** Investors’
Reactive
Emotion of Investment
Instinct
Investor Sig. (2-tailed) .000 Decisions
N 500 500
Pearson Correlation 1 .522**

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Under Sig. (2-tailed) .000 relationship of arrogance predisposition, confidence

Reactive inclination, and attitude impact with venture direction, in any
Instinct N 500 500
case, it debilitates the relationship of crowding impact with
individual Pearson Correlation .522** 1 speculation independent direction. Moreover, our
investors’ discoveries try not to help the directing job of locus of control
investment Sig. (2-tailed) .000 in the connection between home predisposition also,
decisions N 500 500 speculation direction. Moreover, the discoveries propose that
risk discernment debilitates the relationship of
Correlation table shows that there is significant correlation presumptuousness inclination, and idealism predisposition
between factors at the 0.01 level (2-tailed). Hypothesized with speculation choice making, at the same time, it fortifies
correlation was at 0.05 level, which will also be significant. the relationship of crowding impact, and home inclination
The correlation value is positive and above 0.400 which is with venture direction. In conclusion, we archived the
considered as moderate correlation. So, it could be said that, interceding job of hazard resilience in the connection
there is significant impact of Under Reactive Instinct on the between conduct predispositions and venture navigation.
individual investors’ investment decisions in mutual funds The various works have been carried out on mutual funds
Multiple correlation coefficient R and Model summary over a period of 25 years. One is logically led to believe that
a lot of research suggested that investment has not been
Table 11: Model Summary always a ration decision. It is influenced by different non-
financial factors. The research broadened the scope of
Adjusted Std. Error behavioural finance in modern world.
Model R R Square R of the Present research is an effort to include different theories to
Square Estimate club together to understand the effective model of investors
1 786a .618 .611 1.85974
investment decision process. The researcher has tried to
a. Predictors: (Constant), Risk Consideration, Value provide solutions to businesses those try influence the
consideration, Fear of Missing Opportunity, Regret Aversion, investors. If those business can influence the above said
Psychological Influence, Cognitive Dissonance, Emotion of factors, they may be able to influence investors to invest in
Investor, Over Reactive Instinct, Under Reactive Instinct their instrument or portfolio.

The regression model summary shows that the nine REFERENCES

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