A

COMPREHENSIVE Project Report

On

The Impact of Behavioral Aspects on Investment Decision-making:

An Empirical Study of Gujarat

Submitted to

Institute Code: 123

Under the Guidance of

DR. Lalit H. Tank (HOD & Assistant Professor)

In partial Fulfilment of the Requirement of the award of the degree of

Master of Business Administration (MBA)

Offered By

Bhagwan Mahavir University

SURAT

Prepared by:

SHAH KESHVI ( 2205030101107 )

SOLANKI RITESH ( 2205030101121 )

MBA (Semester – 4)

Month & Year:

APRIL, 2024

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 STUDENT’S DECLARATION

I hereby declare that the COMPREHENSIVE Project Report titled “ The Impact of
Behavioral Aspects on Investment Decision-making:- An Empirical Study of Gujarat”
is a result of our own work and our Indebtedness to other work publications, references, if
any, has/have been duly acknowledged. If we are found guilty of copying from any other
report or published information and showing as our original work, or extending plagiarism
limit, we understand that we shall be liable and punishable by the university, which may
include being declared ‘Fail’ in the CP examination or any other punishment which the
university may decide.

Enrollment No: Name Signature

2205030101107 Shah keshvi

2205030101121 Solanki ritesh

Place:…………………………… Date:……………………………..

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PLAGIARISM REPORT

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 CERTIFICATE OF EXAMINER

This is to certify that this COMPREHENSIVE Project Report entitled “The Impact of
Behavioral Aspects on Investment Decision-making:- An Empirical Study of Gujarat”
is bonafide work of Shah keshvi (2205030101107) , Solanki ritesh (2205030101121),
who has carried out his/her project under my supervision. I also certify further , that to
the best of my knowledge the work reported herein does not form part of any other
project report or dissertation on the basis of which a degree or award was conferred on
an earlier occasion on this or any other candidate . I have also checked the plagiarism
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separate plagiarism report in the form of html/pdf file is enclosed with this.

RATING OF PROJECT REPORT (A/B/C/D/E):

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SIGNATURE OF THE FACULTY GUIDE/S

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Signature of principle/director with stamp of Institute

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PREFACE

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ACKNOWLEDGEMENT

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EXECUTIVE SUMMERY

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TABLE OF CONTENT

Sr. Particulars Page

No. No.
1 Introduction 10
2 Literature Review 13
3 Research Methodology
4 Data analysis & interpretation
5 Findings
6 Conclusion
7 Bibliography

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CHAPTER 1:- INTRODUCTION

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INTRODUCTION:

Behavioral finance is a comparatively recent concept that attempts to explain why individuals
make questionable financial choices by combining behavioural and cognitive psychological
theories with classical economic and financial theory. We believe that establishing clear
concepts for psychology, sociology, and finance is the first step in defining behavioural
finance. Traditional finance remains the focal point of behavioural finance research; however,
behavioural elements of psychology and sociology play an important role in this area. To
become acquainted with overall concepts of behavioural finance, a person studying
behavioural finance must have a basic understanding of psychology, sociology, and finance.

A rational investor will always behave in order to maximise his financial benefit. However,
we are not logical beings; we are human beings, and emotion is an essential part of our
humanity. Indeed, we make the majority of our life decisions based solely on our emotions.
In the financial world, investors often make decisions based on irrelevant figures and
statistics. For example, some investors might invest in a stock that has experienced a
significant drop after years of continuous growth. They assume that the price has dropped due
to short-term market fluctuations, providing an opportunity to purchase the stock for a low
price. Stocks, on the other hand, often lose value due to shifts in their underlying
fundamentals.

The perception of incompatibility between two cognitions, which can be described as any
element of awareness, including attitude, emotion, opinion, or actions, is known as cognitive
dissonance. According to the cognitive dissonance theory, opposing cognition act as a
motivating force, causing the mind to acquire or invent new thoughts or ideas, or change
existing beliefs, in order to minimise the amount of dissonance (conflict) between cognition.
Individuals seek to minimise inner tension in one of two forms, according to Festinger's
theory of cognitive dissonance:

1. He adjusts his prior beliefs, emotions, or options, and

2. He seeks to explain or rationalise his decision. This theory may be applied to stock
market investors and traders who try to rationalise conflicting practises such that they
appear to flow naturally from personal beliefs or points of view.

We adapt our investing styles or values to sustain our financial decisions in "Financial
Cognitive Dissonance." For example, investors who used a conventional investment style
(fundamental analysis) to analyse companies based on financial criteria such as profitability
measures, especially profit/earnings ratios, began to change their minds about investing.
Many retail internet businesses were owned by private investors, and these financial controls
could not be implemented.

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Since these firms have no financial background, they have very low profits and no net losses.
Traditional investors rationalised their shift in investing style (past beliefs) in two ways: the
first is the assumption (argument) that we are now living in a "new economy" where
traditional financial laws no longer apply. The stock market usually hits its height at this
stage in the economic cycle. The second activity that illustrates cognitive dissonance is
ignoring conventional ways of investment and simply purchasing internet stocks based on
price momentum.

According to the regret theory, a person measures his or her expected reactions to future
events or circumstances. Psychologists have learned that people who make poor choices
regret them more when the decision was more unorthodox. If an investor has considered
buying a stock or mutual fund that has declined or not, actually purchasing the intended
security may cause the investor to have an emotional reaction. Investors can avoid selling
stocks that have lost value in order to avoid the regret of a poor investment decision and the
humiliation of having to report the loss.

Besides that, the investor can find it more convenient to buy the "hot or common stock of the
week." In other words, the investor is simply following "the herd." As a result, if the stock or
mutual fund loses a significant amount of value, the investor will more easily rationalise his
or her investment decision. Because a group of individual investors lost money on the same
bad investment, the investor may minimise emotional reactions or feelings. The fear of regret
in investing may either make investors risk averse or encourage them to take more risks

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Chapter-2 Literature Review

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1.(Shefrin and Statman, Ahamed Ibrahim and Tuyon) ,2017(ISSN2394-5125 role of
behavioural finance portfolio selection and investment decisions making) The researchers
want to understand the behaviour of an investor investing in an emerging market by taking
into account all possible considerations and critical issues through the prism of Behavioural
Portfolio Theory.

2. (Meir Statman, 2017) ,(ISSN2394-5125 role of behavioural finance portfolio selection

and investment decisions making)The author used behavioural portfolio theories to
understand people's desires and mental and cognitive shortcuts in his study. People are
normal; according to Behavioural Finance Theory, they construct a portfolio that includes
items other than high predicted returns and low risk, such as social standing and social
obligation, as described in Behavioural Portfolio Theory. People invest and spend according
to the behavioural life cycle hypothesis, which states that challenges such as a lack of self-
control make it difficult to find and follow the best way to save and spend.

3. (Manish Mittal Vyas, 2008)(ISSN2394-5125 role of behavioural finance portfolio

selection and investment decisions making)Investors will experience cognitive and emotional
difficulties, which will influence their investment decisions. This research clearly illustrates
how.

4. (Mugdha Shailendra Kulkarni, 2014) ,(ISSN2394-5125 role of behavioural finance

portfolio selection and investment decisions making)Investment managers should understand
the psychology of an individual who plays a significant role in stock market behaviour based
on the investor's rationality. Investors' decision-making is influenced by cognitive and
motivational factors, allowing investment managers to better understand the context of their
clients (individual investors) and thus better assist them and bring about a positive change in
their investment decision-making based on demographic factors such as age, gender, marital
status, level of satisfaction with investments, and annual income.

5. Forbes (2009), (impact of behavioural finance in investment decisions and

strategies)ISSN:2319-345behavioural finance is a science that studies how psychology
affects the financial markets. This viewpoint stresses that, rather than being objective and
wealth-maximizing, individuals are influenced by psychological factors such as cognitive
biases in their decision-making.

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6. Sultana (2010)( ISSN-2350-0530 a central point between traditional finance and
behavioural financeIndividual investors do not always rely on calculations to make
investment decisions and in some cases, irrational emotions play a significant role in the
decision-making process of investors.

7. Etzioni (2014)(ISSN-2350-0530 a central point between traditional finance and

behavioural financestated that behavioural economics aids in understanding investor
behaviour and intellectual capabilities because investors have a variety of cognitive biases
that limit their intellectual capabilities.

8. Raza(2014) (ISSN2394-5125 role of behavioural finance portfolio selection and investment

decisions making)used a case study and descriptive analysis approach to explain how investors'
perceptions have a direct and important effect on financial decision making.

9. (Hellmann, 2016) (ISSN2394-5125 role of behavioural finance portfolio selection and

investment decisions making)On the one hand, behavioural finance is a relatively modern
research field focused on behavioural and cognitive psychological theories, whereas
traditional economics and finance are on the other. It is up to the latter to justify why certain
people make unreasonable financial decisions.

10. (Shafi, 2014) (ISSN2394-5125 role of behavioural finance portfolio selection and
investment decisions making)In his research, the author discussed how behavioural bias can
be classified and how it is influenced by investor behaviour, which is divided into four
categories: psychological, demographic, social, and economic. Overconfidence, disposition
influence, herd behaviour, gambler's fallacy, and hand fallacy on investor behaviour in
investment activity aid understanding of how to make wise investment decisions.

11. (Meir Statman,2015) (ISSN2394-5125 role of behavioural finance portfolio selection

and investment decisions making)Behavioral finance incorporates information and people's
wants, as well as their cognitive and emotional shortcuts and mistakes, to provide an alternate
foundation block for each of the foundation blocks of traditional finance. People are average,
according to behavioural finance; people build portfolios according to BPT, where people's
wants go beyond high expected returns and low risk, such as social responsibility and social
status. People save and spend money according to the behavioural life cycle theory, which
describes how impediments such as a lack of self-control make it difficult to obey and find
the best way to save and spend money. Markets are not efficient in the sense that their costs
match their worth, but they are efficient in that they are difficult to beat. Anticipated returns

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of investments are accounted for by behavioural asset pricing theory, where disparities in
expected returns are calculated by factors other than risk, such as social obligation and social
standing.

12. (Dr.S.Suryamoorthy,B.Narayan and M.Arivuazhagan, 2012),The author used

methods such as correlation and chi-square to better understand the different investment
options available in the stock market. Female investors in India are more risk averse,
according to the findings of the report. The percentage of income invested by investors is
determined by their annual earnings. The risk tolerance level of investors declines as they get
older. Gold is more appealing to women investors than other investment choices, according
to the report. Investors' decisions should be made on their own initiative. Most investors tend
to put their money in gold, mutual funds, banks, and life insurance because they believe the
risk and return are lower than other investment options.

13. (D .Harikanth and B. Pragathi, 2017)(ISSN2394-5125 role of behavioural finance

portfolio selection and investment decisions making)As per the study, income and occupation
play a significant role in the selection of investment avenues and the risk associated with
them by both male and female investors. Investors' portfolio selection is influenced by their
age, gender, educational qualifications, geographic horizon, risk tolerance capability, and risk
bearing capacity.

14. (Waweru et al.2008)(ISSN 2422-8397 an empirical analysis on behavioural pattern of

indian retail equity investors)Price changes, demand information, past stock patterns,
consumer preference, over and under reaction to price changes, and fundamentals of
underlying stocks are some of the wide market variables that have an effect on investors'
decision making, according to their research. Along with these market factors, the current
study takes into account market index results, the ruling party's dominance in the region, and
its government policies.

15. (Jaya M Prosad 2014) Herding behaviour was studied on a macro level in stock market
behaviour and on a micro level in individual investor behaviour. The study's findings
revealed that while herding does not occur in the Indian stock market, it does exist among
individual investors, especially elderly investors, and the current study backs up these
findings.

16. Simon Gervais (2009) (ISSN 2231-5985 internationaljournal of research in finance and
marketing)conducted a literature review on the impact of behavioural differences on capital

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budgeting in his book "Behavioural Finance; Capital Budgeting and Other Investment
Decisions." A broad body of psychological literature is cited in this paper to show that people
are overconfident and positive. According to the literature, biassed managers over-invest their
firms' cash flows, implement too many mergers, launch more firms and new ventures, and
appear to stick with ineffective investment strategies for longer. The above is some of the
behavioural finance literature that illustrates how human irrational behaviour affects
investment decisions.

17. (Cary & Javier et al, 2008), Investing is clearly risky, and people are often forced to make
decisions based on insufficient knowledge. Risk assessment is determined by the amount of
knowledge an investor has about different stocks on the stock market. Individuals' perceptions of
uncertainty influence their consumption, spending, and investment decisions.

18. Lin (2011) ( ISSN-2350-0530 a central point between traditional finance and behavioural
finance)attempted to determine the relationship between rational decision making and
behavioural biases and concluded that the major steps in the decision making process are
identifying investment demand, searching for information, and evaluating alternatives, and
that both stages of demand identification and evaluating alternatives are significantly and
positively associated with ove. Furthermore, both overconfidence biases and the temperament
effect are explicitly and simultaneously linked to the stage of assessing alternatives.

19. Sewell (2007), "Behavioral finance is the study of the impact of psychology on the
behaviour of financial professionals and the resulting effect on markets." The fathers of
behavioural finance are Daniel Kahneman and Amos Tversky, who were early pioneers of
behavioural finance by incorporating behavioural considerations into investment decisions.

20. Chaudhary (2013) investigated how behavioural finance can help investors understand
why they make irrational financial decisions. The research shows how feelings and cognitive
mistakes affect investor decision- making. Anchoring, overconfidence, herd activity, over and
under reaction, and loss aversions are among the factors that contributed to behavioural
finance, according to the report.

21. Chandra (2008) investigated the influence of behavioural influences and investor
psychology on investment decision-making. The study was focused on secondary
information. According to the findings, retail investors do not always make sound decisions.
Many behavioural factors affect investment decisions, including greed and fear, cognitive
dissonance, mental accounting, heuristics, and anchoring, to name a few. The study

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emphasises the importance of considering these behavioural variables when making an
investment decision.

22. (Agrawal, 2012), observes that behavioural prejudices have had and will continue to have
an effect on investor judgement. Though it is impossible for an investor to fully eradicate
them, it is critical to avoid particular behavioural prejudices in specific circumstances.

23. (Mangee, 2017) The relevance of psychological factors for aggregate stock price
volatility is examined using econometric evidence in this paper. To that end, the Net
Psychology Index (NPI), based on Bloomberg data, has been developed as a novel measure
of stock market sentiment. 24. Tavakoli (2011) Studied the various factors that influence an
investor's decision. He looked at the 13 variables to see whether they are taken into account
by investors and if they affect their decisions. He discovered that financial statements,
consulting with others, second-hand knowledge tools, financial ratios, the firm's credibility,
and the profitability variable are all more influential. The dividend is the most critical sub
variable of profitability.

25. Jay R. Ritter (2003) provides a reasonable overview of behavioural finance. According
to the author, behavioural finance involves research that abandons the conventional
assumptions of rational investors in efficient markets maximising expected utility. The article
mentions two building blocks in behavioural finance: cognitive science (i.e., how people
think) and arbitrage limits (i.e., when markets will be inefficient).

26.The Wall Street Journal (2009) This is where behavioural finance enters the picture. The
majority of investors are sensible and not crazy. Yet, according to behavioural finance, we're
also average, with overflowing brains and emotions. As a consequence, we can be normal
smart at times and normal dumb at other times.

27. Zaidi and Tauni (2012), there is a positive relationship between overconfidence and
agreeableness, extroversion and consciousness, and a negative relationship between
overconfidence and neuroticism. According to the findings, investment experience and
overconfidence bias are related.

28. Ngacha, S. W. (2019) There was a strong positive association between overconfidence
and investment decision-making, according to the report.

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29. Bikas et al. (2013) explained that Behavioral finance is focused on recognizing and
describing the impact of psychological factors on financial investment activities, as well as
recognising and describing the influence of emotional factors on significant shifts in financial
markets. It also focuses on limited human rationality and describes the effect of psychological
factors on financial investment activities.

30. Statman, M. (2014) explained that Behavioral finance goes beyond asset pricing,
portfolios, and business performance to broaden the scope of finance. It explores managers'
and investors' actions in both direct and indirect ways, using questionnaires, tests, and the fiel
to evaluate wants, mistakes, expectations, and behaviour.

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