Ramanujan International Journal of Business and Research, 2021, 6, 37-48

doi: https://doi.org/10.51245/rijbr.v6i1.2021.244
ISSN: 2455-5959

ARTICLE

Impact of Behavioral Biases on Investment

Decisions: Moderating Effect of Preferred Sector of
Investment
Shilpi Gupta ID 1, * and Monica Shrivastava2, †
1
Amity University, Chhattisgarh and 2 Shri Shankaracharya Group of Institutions, Bhilai
* [email protected]
† [email protected]

Abstract
The study aims to recognize the behavioral biases that influence the decisions making process and investment decisions of
retail investors while investing in stocks of insurance and pharmaceutical sector stocks. The paper also aims at checking
the moderating effect of the preferred sector of investment on these relationships. The conceptual model derived from
past literature was checked for its reliability and validity, using measurement model assessment and structural model
assessment. Hypothesis or the study were tested using bootstrapping in PLS-SEM. The result of the study revealed that
heuristics and prospects have significant influence, while herd behavior has no significant influence on investor’s invest-
ment decisions while investing in insurance or pharmaceutical sector securities. The results of the moderation test infer
that the relation of heuristic and prospect with investment decision is moderated by the preferred sector of investment. A
clear picture of these biases and their influence, established by the findings of the study, would lead to a better understand-
ing of the same and help prevent investors from making erroneous decisions while investing. Investment decisions that
are sound and free from behavioral bias, would lead to better financial return, and achievement of investor’s investment
goals. The sector-wise effect of investment bias will also help the investors in taking corrective measures

Keywords: Behavioral Biases; Retail Investors; Investment Decisions; Heuristics; Prospect

1 Introduction
Economic theories have been evolving, but these theories are always influenced by the assumptions, that humans
act rationally while making decisions. What these theories fail to consider is the ever-changing behavioral aspect
of the human decision-making process. The ever-changing human psychology plays an important role in the
decision-making process. What might influence their decision-making process today may not be equally significant
tomorrow. The same is reflected in the field of finance and this is where behavioral finance theories come into play.
Studying the impact of psychology on investor’s attitudes and behavior is behavioral finance. It is based on the
belief that investment decisions of at least a substantial share of investors, if not all, are influenced by behavioral
biases, which leads to a lack of rationality behind their investment decisions (Valaskova et al., 2019; Xu, 2014).
In contrast to the conventional theories of economics, which assumed human decisions to be rational and based
on proper due diligence before investing, many researchers have indicated that actual investors behave quite dif-
ferently in practical situations. Traditional finance theories like the efficient market hypothesis believed that an

37
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investor always gathers all the necessary information and is impartial in their investment decisions. However,
psychologists and recent researchers have indicated that this is not entirely correct as there have been anomalies
noticed in the stock market. Babajide and Adetiloye (2012) and Bashir et al. (2013) studied these anomalies and con-
cluded that behavioural finance could explain these anomalies. The field of behavioural finance rose to prominence
due to the inability of traditional theories in explaining human behaviour in real situations (Sahi, 2012). Behavioral
finance is a rapidly developing area of finance that explains the psychological, conventional economic and finan-
cial theories behind an individual’s investment decisions (Birău, 2012; Mehmood and D., 2017) Behavioural finance
gives a clear idea of the different behavioural biases in the psychological aspect of financial decision-making.
Decisions made under the influence of behavioral biases are often less than optimum in earnings from investment
(Shukla et al., 2020). Behavioral biases are psychological anomalies that an investor is susceptible to while taking
investment decisions, which leads to irrational decisions and failure in achieving the investment goals (Kapoor
and Prosad, 2017). Defined behavioral biases as tools to understand the irregularities from the economic basics of
rationality while making an investment decision and referred to these biases as the reason for investors’ irrational
behavior in investment decisions hindering the growth perspective.
It is established that understanding the impact of these biases on investors’ psychology is significant even in
modern times. Focusing on these biases would help individual investors improve their performance by overcoming
and avoiding the resulting error of judgment (Shabarisha, 2015; Sahi, 2012). There has been a significant increase
in the number of investors who are more focused on a handful of investment choices and tend to ignore everything
else due to internal biases. With this increased number, understanding the mind of these investors is much more
important now, as an unexpected momentum is generated by these investors in the stock market (Wood and
Zaichkowsky, 2004).
Based on the views mentioned above the researchers had some questions in mind. What are the different be-
havioural biases that influence investment decisions? Are these biases that have been discussed over time still
existing in financial markets? Do these biases still influence retail investor’s investment decisions in financial
markets, i.e., are they still significant? The study aims to answer this by assessing and evaluating their current
significance in the financial markets and the degree to which they influence a retail investor’s investment decisions
in the target demographic. Does the preferred sector of investment moderate the relationship of these investment
biases with investment decisions? The study aims to identify if the influence of behavioural biases on invest-
ment decisions varies based on retail investor’s preferences, i.e., their preferred sector of investment in the case
of current research. As established, the degree to which these biases influence decision-making varies based on
demographic and geographic factors. This study takes into account one such factor which is the preferred sector of
investment of retail investors who’ll be a part of this study. There is a lack of sector-specific studies of behavioral
biases influence on investment decisions. This study attempts to fulfill the gap by examining the influence of be-
havioral bias on insurance and pharmaceutical sector investment decisions. With all these questions in mind, the
researchers in this study sought to recognize the existence and influence of behavioral and inner biases, on retail
investors’ investment decisions. Thus, the objective of the study was to study the influence of different behavioral
biases on the investor’s investment decision. The study also aims at assessing the moderating effect of a preferred
sector of investment on the relationship between investment biases and decisions. Following the objective of this
research, the paper has been organized into five sections. The first section discusses behavioral finance’s current
outlook, behavioral biases in the stock market and the objective of this study. The second section deals with the
conceptual model derived from studying past literature, the research question for this study and its motivation. In
the third section, measurement model assessment and structural model assessment and hypothesis testing have
been conducted, while the fourth section of the paper covers a brief discussion about the findings and the implica-
tions of the research work. The last section covers the conclusions drawn from the study and the limitations and
directions for future research.

2 Literature review and hypothesis development

2.1 Heuristics

Behavioral biases first identified by Tversky and Kahneman (1974), are defined as the concept of heuristics, ac-
cording to which investors tend to depend on their preferences and beliefs when they are unable to deal with the
complexity of data analytics (Montier, 2002). Psychology defines heuristics as meek rules that individuals learn
based on their own experiences and use as guidelines to make decisions when trapped in multifaceted circum-
stances (Abreu, 2014). The modern definition of heuristics, states that heuristics are interpretations that force
human beings to make decisions that are manageable but based on partial or inadequate knowledge and observant
abilities. Valaskova et al. (2019) in their study, state that behavioral finance depends on the application of heuristics
and psychological annotations to describe the financial decision-making process, which previously was dependent
on mathematical models alone. Over time, heuristics have been further detailed into different types of biases
Overconfidence bias is a tendency of investors to believe that their decisions are better than others even though
their performance might be above average at best Nevins (2004); Mehmood and D. (2017). It is observed in investors,
who are egotistical, carry indefensible confidence in their usual thoughts, capacities, and decisions (Pompian and
 Shilpi Gupta and Monica Shrivastava | 39

Wood, 2006). It is the unconfirmed and silly confidence in one’s conclusion and capacities.
Anchoring is a bias that impacts individuals to reconcile on choices as indicated by a formerly given merit when
they try to settle on a decision under vulnerability. Tversky and Kahneman (1974) report the anchoring bias as a
condition in which individuals make measures by initiating from a starting value which they alter in accordance
to yield a final answer.Andersen (2010) explains anchoring as a common propensity of speculators to depend too
particularly on any data for settling on choices in monetary markets. Another heuristic, called confirmation bias,
makes individuals in common decipher and support data that affirms the individual’s prior ideas (Plous, 1993).
The next heuristic identified is the gambler’s fallacy according to which an individual carries a universal belief
that one specific result is less liable to take place if it has just happened successively earlier. In the gambler’s
fallacy, an individual misguidedly accepts that the commencement of a specific irregular incident is more averse
to happen following an incident or a progression of incidents. This line of reasoning is erroneous because past
incidents do not change the likelihood that specific incidents will happen later (Jayaraj, 2013).
As clear from the past literature, all these biases together define the heuristics that influence investors decisions
(Shiller, 1999; Shabarisha, 2015; S. and Yi, 2016). Hence researchers in this study treated heuristics as a second-
order formative construct defined by overconfidence bias, representativeness, anchoring bias, confirmation bias,
and gambler’s fallacy. Throughout the literature review, these five biases were the ones most mentioned. Based on
their frequency of occurrence, they’ve been treated as the first-order constructs that constitute the second-order
construct heuristics. Thus, the first hypothesis of this study states:

Hypothesis 2.1. Heuristics has a significant impact on the investment decisions of retail investors.

Hypothesis 2.2. Preferred sector of investment moderates the relationship between heuristics and investment decisions of
retail investors.

2.2 Herd Behavior

Herding, also known as the bandwagon effect, is a bias where the investor’s decisions are highly influenced by the
decision of others in their surroundings, as they wish to appear to be one of them and be associated with them.
This leads to a deviation of asset prices from their fundamental values (Dewan and Dharni, 2019). Shukla et al.
(2020) in their study, review different kinds of literature related to herd behavior and the influence herding effect
has on investors’ decisions and witness varying behavior of herding effect from time to time and across different
nations.
Poshkwale & Mandal (2014), in their study, imply that investors exhibit herd behavior more in a bearish stock
market, and the behavior keeps on increasing with the expectation of a financial crisis. Whereas, Filip et al. (2015)
in their study found that herd behavior is prevalent in both bearish as well as the bullish market. Choi (2016)
relates herd behavior to the age factor of investors where older investors easily believe the information provided by
relatives and family and follow their advice. Chauhan et al. (2019), in their study, determine that herd behavior is
generally prevalent in large-cap stocks and absent in low-cap stocks due to lower volumes of trading in small-cap.
Garg and Gulati (2013); Satish and Padmasree (2018) in their studies contradict the previous theories and conclude
that herd behavior is not extant in investors even in crisis periods and imply that herding is not associated with
trade volumes. Ripoldi (2016) in their study examines herd behavior in different Chinese stock markets and find
that each market has its characteristics with herd behavior as herding effect is present in some market while it is
absent in others. Indars et al. (2019) directed a study in the Moscow exchange and observed no herd behavior in the
market, barring few times when investors exhibit herd behavior on bearish market days. Given the contradictory
results of herd behavior observed in past studies, the researchers in this study sought to check and validate the
current scenario of herd behavior in the target demographic. Thus, the second hypothesis of this study is:

Hypothesis 2.3. Herd behavior has a significant impact on the investment decisions of retail investors.

Hypothesis 2.4. Preferred sector of investment moderates the relationship between herd behavior and investment decision
of retail investors.

2.3 Prospect

Prospect theory explains, the decision-making approach investors elect, based on the substitutes concerning risk
when they are aware of the results (Shukla et al., 2020). Prospect theory by Kahneman & Tversky and Kahneman
(1974) is considered a hugely important concept in behavioral theories. Although many argued the importance of
prospect theory, in its initial days, against the traditional expected utility theory, economists have agreed that the
prospect theory is quite distinct and prominent in explaining the lack of rationality in human decisions. Shiller
(1999); Jayaraj (2013) in their study empirically validates the impact of a loss on human emotions, which is worse
than the impact of a gain of the same magnitude. They find that the prospect theory influences more than half of
the respondents. Prospect theory mostly deals with the risk and loss side of investment and how humans base their
decisions under their influence. Different biases studied under prospect theory are loss aversion, regret aversion,
and mental accounting.
 40 | Ramanujan International Journal of Business and Research, 2021, Vol. 6

Loss aversion, also known as the disposition effect, is an inclination in investors due to which they prefer to sell
stocks that have gained in value while holding on to stocks that have lost value (Montier, 2010). Banerji et al. (2020)
imply that investors are twice as afraid of losing their investment value against gaining from their investment.
Regret is a feeling that prevails after individuals commend errors. Financial specialists stay away from regret
by declining to sell losing stocks and ready to sell budding ones. Besides, financial specialists will in general be
progressively contrite about holding losing stocks incredibly long than selling winning ones too early (Fogel and
Berry, 2006; Lehenkari and Perttunen, 2004). Normally, individuals weigh just negatives to secure themselves
against upcoming misfortunes and ensuing unease. As a result, the possibility of regret affects their investment
decisions (Jayaraj, 2013). This habit is called regret aversion, wherein investors are more focused on protecting
themselves from losses than earning gains.
Financial specialists who show mental accounting bias will normally treat every factor of their venture portfo-
lio independently. Rather than breaking down a portfolio’s total result, they will look at each stock or resource
independently Baker et al. (2019); Sewell made clear that mental accounting is the arrangement of mental tasks
utilized by individuals and family units to sort out, assess and screen the money-related exercises and exchanges
These three biases, namely loss aversion, regret aversion, and mental accounting, together define the influence
of prospects on investors’ investment decisions (Dar and Hakeem, 2015; Shabarisha, 2015). Hence in this study,
these variables have been combined and converted into a second-order formative construct named prospect. Thus,
the third hypothesis of the study is:

Hypothesis 2.5. Prospect has a significant impact on the investment decisions of retail investors.

Hypothesis 2.6. Preferred sector of investment moderates the relationship between prospect and investment decision of retail
investors.

2.4 Preferred Sector of Investment

In a financial market, the choice of securities to invest in is not limited to one or two sectors. In fact, there are
multiple sectors or preferences available to any investor to choose from. Investors may prefer one sector over the
other based on their past experience, internal perception, or fundamental analysis. An individual who prefers one
sector over another may tend to be partial towards its preference when it comes to investment. Certainly, this could
lead to ignoring some good choices of investments. Thus, identifying the influence of their sectoral preference on
their investment decision is also an important aspect that has been covered in this study’s proposed research model
as a moderating variable.
In India, there are several insurance companies listed in exchanges. It includes both Government and Private
Insurance Organizations. Some of the top insurance stocks listed in Indian exchanges are HDFC Life Insurance,
ICICI Prudential Life Insurance, SBI Life Insurance, General Insurance Corporation of India (GIC), ICICI Lombard
General Insurance, etc. Indian stock exchanges have both general and life insurance companies listed on them.
The highest market cap of one insurance company listed in stock exchanges is as high as 1.15 lakh crore (www.
moneycontrol.com/stocks/marketinfo), implying insurance sector securities to be a sizeable chunk of investment in
India.
The other sector of investment considered as a sampling unit for this study is the pharmaceutical sector. There
are more than 100 pharmaceutical companies listed in Indian stock exchanges. Some of the big companies, accord-
ing to their market cap, listed are Sun Pharma, Dr. Reddy’s Lab, Divis Lab, Cipla, Aurobindo Pharma, etc. The
market cap of the largest pharmaceutical company listed on the Indian stock exchange, i.e., Sun Pharma is 1.16
lakh crore followed by Dr. Reddys Lab in second place with a market cap of 83,990 crores (www.moneycontrol.com/
stocks/marketinfo). The pharmaceutical sector also has penny stock with a market cap of 1-2 crore only. Given the
huge number of pharma companies listed with market caps of many being quite high and their sheer volume of
trade, the pharma industry is a major chunk of investment for retail or individual investors.

3 Research Methodology
The survey instrument, i.e., the questionnaire used for the study, consisted of 37 items adopted from existing
literature of behavioural biases as depicted in Table 1. These items measured the level of different behavioural
biases related to investment decisions. The response to the items was recorded on a seven-point Likert scale.
The questionnaire was divided into two sections. The first section of the questionnaire had questions related to
the respondent’s demographics, while the second part of the questionnaire had items that measured the level of
different behavioural biases in the respondent.
The target population of the study was investors, who are active investors of either insurance sector stocks or
pharmaceutical sector stocks. Data was collected from investors of Chhattisgarh, India, for one and a half months.
The data were collected through a mail survey and personal interview. Purposive sampling was employed, and
a total of 384 responses were collected. In the initial phase of the study, the sample size was determined using
G-Power 3.1 software. With nine independent variables, an expected effect size (f 2 ) value of at least 0.05, and
 Shilpi Gupta and Monica Shrivastava | 41

Table 1. Papers Reviewed for Item Generation

S. No. Factor Reference

Odean (1998), Scheinkman et al. (2003), Glaser et al. (2007), Jayaraj (2013),
Overconfidence
1 Shabarisha (2015), Bakar & Yi (2016), Hassan et al. (2016),
Bias
Shukla et al. (2020)

Ritter (2003), Shefrin (2007), Jayaraj (2013), Shabarisha (2015),

2 Representativeness Hassan et al., Pompian and Wood (2006), Banerji et al. (2020), (2020),
Shukla et al. (2020)

Gambler’s Shiller (1999), Jayaraj (2013) , Shabarisha (2015),

3
Fallacy Banerji et al.,

Tversky and Kahneman (1974), Kaustia et al., (2008), Jayaraj (2013),

Anchoring
4 Shabarisha (2015) , Bakar & Yi (2016), Banerji et al., (2020),
Bias
Shukla et al. (2020)

Confirmation Jayaraj (2013), Shabarisha (2015), Banerji et al.,

5
Bias Shukla et al. (2020),

Loss Shiller (1999), Hwang et al., (2010), Jayaraj (2013), Shabarisha (2015),
6
Aversion Banerji et al. (2020), Shukla et al. (2020)

Regret Shiller (1999) , Jayaraj (2013), Sahi (2012), Shabarisha (2015),

7
Aversion Banerji et al., (2020)

Mental Shiller (1999), Barber and Odean (2013), Jayaraj (2013), Shabarisha (2015),
8
Accounting Shukla et al. (2020)

Herd Garg and Gulati (2013), Poshakwale and Mandal (2014), Ripoldi (2015), Choi (2016),
9
Behaviour Hassan et al., (2016), Banerji et al., (2020),Shukla et al. (2020)

Investment Shiller (1999) , Sahi (2012), Bakar & Yi (2016), Banerji et al., (2020),
10
Decision Shukla et al. (2020)

statistical power of 95 percent, it was determined that a sample size of a minimum of 262 observations should
be sufficient for the study Faul et al. (2007, 2009). After checking the completeness of data, 323 usable responses
were retained, which satisfied the criteria of having at least 262 respondents.

4 Data Analysis

Table 2 presents the demographic profile of the respondents. It is evident from the table that any type of bias
arising due to a large number of respondents from a single category was avoided across all the demographics. Out
of the 323 respondents, 46 percent were male, and 54 percent were female investors. 53 percent preferred to invest
in insurance sector stock while the other 47 percent preferred investing in pharmaceutical companies listed on the
stock exchange. Thirty-one percent of the respondents were from 36-45 age groups, while 26 percent, 29 percent,
and 14 percent were from 26-35, 46-55, and above 55 age groups.

4.1 Measurement Model Assessment

The model consisted of both first and second-order constructs, where the first-order constructs were reflective in
nature, and the second-order constructs were formative. In the first part of data analysis, the first-order constructs
were checked for their reliability and validity. PLS-SEM was employed using Smart PLS 3.3.2 (Ringle et al., 2015)
following the two-stage systematic procedure prescribed by Anderson and Gerbing (1988).
The first step in the measurement model assessment was to check the convergent validity and composite reliabil-
ity of the model. Table 3 shows the values of factor loadings, composite reliability (CR), average variance extracted
(AVE), Cronbach’s alpha, and Dillion-Goldstein’s rho (rho_A). The factor loading of all items except HRDB1 and
RGAV1 was above 0.7. HRDB1 and RGAV1 were retained even though their loadings were less than 0.7 because the
AVE and CR values of both the constructs, herd behaviour, and regret aversion, were sufficient to fulfil the criteria
suggested by Hair et al., (2017) for measurement model assessment. CR and rho_A values of the constructs were
more than the threshold value of 0.7; internal reliability was achieved in the model. Another reliability measure
is Cronbach’s alpha value, where a value of more than 0.7 represents excellent reliability. From the results of the
measurement model assessment, all the constructs’ alpha values were above the threshold value of 0.7, and hence,
reliability criteria were satisfied. AVE values of more than 0.5indicated the convergent validity of the constructs.
 42 | Ramanujan International Journal of Business and Research, 2021, Vol. 6

Table 2. Respondents Profile

Demographic Variable Category Frequency Percentage

26-35 84 26%
36-45 100 31%
Age
46-55 94 29%
Above 55 45 14%

Male 149 46%

Gender
Female 174 54%

Preferred sector Insurance Sector 171 53%

of investment Pharmaceutical Sector 152 47%

Figure 1. Conceptual Model

Looking at the results in Table 3, it can be concluded that convergent validity was achieved for the constructs in
this study
After assessing the convergent validity of the constructs, next step was to check the discriminant validity, for
which two criteria are suggested, namely, Fornell-Larcker criterion and heterotrait – monotrait ratio of correlations
(HTMT). According to the first criteria for discriminant validity, (Fornell and Larcker, 1981) the square root of a
construct’s AVE value should be higher than the correlation coefficient, of that construct, with other constructs
in the model. The discriminant validity assessment results shown in Table 4 show that discriminant validity was
achieved, as the criteria suggested by Fornell & Larcker (1981) were satisfied for all the constructs.
Researchers in past literatures have implied that HTMT approach by Henseler et al. (2015) for assessing discriminant
validity is better compared to Fornell-Larcker criterion, as HTMT approach is proven to achieve better sensitivity
and specificity rate Xia and Cheng (2017); Rasoolimanesh et al. (2019). According to HTMT criterion, all the calcu-
lated values of construct should be less than 0.9 to achieve discriminant validity Henseler et al. (2015); Voorhees
et al. (2016). Seeing the HTMT results in Table 5 shows that all the values satisfy the criteria for achieving discrim-
inant validity. The model has displayed enough reliability and validity from the overall results of measurement
model assessment.

4.2 Structural Model Assessment

In the first step of structural model assessment and hypothesis testing, collinearity issue was checked using the
variance inflation factor (VIF). The calculated VIF values for all the constructs lied in the range of 1.184-2.50.
According to the criteria suggested by Diamantopoulos and Siguaw (2006) the values should be less than 3.33, and
according to the criteria suggested by Hair et al., (2017), the VIF values should be less than 5. Calculated values of
VIF prove that no collinearity issue existed in the model as all the values were less than 3.33. Also as suggested by
Kock (2015), the VIF values below 3.3 prove that model is free from the common method bias.
Then, the hypotheses were tested using a bootstrapping technique with a subsample size of 5000. Bootstrapping
 Shilpi Gupta and Monica Shrivastava | 43

Table 3. Measurement Model Assessment Results

Loading/ Cronbach’s
Construct Items Type CR rho A AVE
Weight Alpha
ANBS1 0.945
ANBS ANBS2 Reflective 0.871 0.918 0.866 0.868 0.79
ANBS3 0.847
CNFB1 0.833
CNFB CNFB2 Reflective 0.763 0.851 0.736 0.74 0.655
CNFB3 0.831
GAMF1 0.841
GAMF2 0.900
GAMF Reflective 0.927 0.894 0.898 0.761
GAMF3 0.818
GAMF4 0.925
HRDB1 0.632
HRDB2 0.817
HRDB Reflective 0.83 0.726 0.738 0.551
HRDB3 0.735
HRDB4 0.773
INVD1 0.826
INVD2 0.856
INVD Reflective 0.896 0.846 0.847 0.684
INVD3 0.782
INVD4 0.842
LSAV1 0.732
LSAV LSAV2 Reflective 0.873 0.872 0.779 0.8 0.696
LSAV3 0.888
MACC1 0.867
MACC MACC2 Reflective 0.766 0.874 0.783 0.795 0.698
MACC3 0.869
OVRB1 0.805
OVRB2 0.895
OVRB Reflective 0.928 0.896 0.9 0.763
OVRB3 0.879
OVRB4 0.910
RGAV1 0.554
RGAV2 0.853
RGAV Reflective 0.856 0.773 0.812 0.604
RGAV3 0.883
RGAV4 0.775
REP1 0.849
REP2 0.853
REP Reflective 0.926 0.893 0.895 0.757
REP3 0.851
REP4 0.924
OVRB 0.149
REP 0.376
HRISTC GAMF Composite 0.296 NA NA NA NA
ANBS 0.254
CNFB 0.244
LSAV 0.390
PRSPCT RGAV Formative 0.493 NA NA NA NA
MACC 0.328
ANBS: Anchoring Bias; CNFB: Confirmation Bias; GAMF: Gambler’s Fallacy; HRDB: Herd Behavior; INVD:
Investment Decision; LSAV: Loss Aversion; MACC: Mental Accounting; OVRB: Overconfidence Bias; RGAV:
Regret Aversion; REP: Representativeness;

results displayed that, heuristics and prospect had a positive significant impact on investor’s investment decisions
with (β = 0.517, t = 8.797) and (β = 0.309, t = 5.131) respectively. Following these outcomes, hypotheses H1 and H3
were supported. It was observed that herd behaviour with (β = 0.015, t = 0.301) did not impact investment decisions,
and hence hypothesis H2 was not supported.
 44 | Ramanujan International Journal of Business and Research, 2021, Vol. 6

Table 4. Discriminant Validity Assessment (Fornell-Larcker Criterion)

ANBS CNFB GAMF HRDB INVD LSAV MACC OVRB RGAV REP

ANBS 0.889

CNFB 0.618 0.809

GAMF 0.313 0.467 0.872

HRDB 0.297 0.607 0.468 0.742

INVD 0.567 0.705 0.446 0.471 0.827

LSAV 0.413 0.616 0.403 0.389 0.583 0.834

MACC 0.444 0.507 0.302 0.473 0.459 0.412 0.836

OVRB 0.393 0.267 0.122 0.201 0.148 0.217 0.2 0.873

RGAV 0.517 0.677 0.44 0.454 0.675 0.624 0.467 0.204 0.777

REP 0.52 0.654 0.585 0.472 0.651 0.559 0.357 0.214 0.641 0.87
ANBS: Anchoring Bias; CNFB: Confirmation Bias; GAMF: Gambler’s Fallacy; HRDB: Herd Behavior; INVD: Investment
Decision; LSAV: Loss Aversion; MACC: Mental Accounting; OVRB: Overconfidence Bias; RGAV: Regret Aversion; REP:
Representativeness;

Table 5. Discriminant Validity Assessment (HTMT Criterion)

ANBS CNFB GAMF HRDB INVD LSAV MACC OVRB RGAV REP

ANBS

CNFB 0.773

GAMF 0.354 0.573

HRDB 0.367 0.829 0.572

INVD 0.661 0.88 0.506 0.589

LSAV 0.496 0.806 0.473 0.525 0.71

MACC 0.544 0.665 0.363 0.624 0.561 0.517

OVRB 0.448 0.319 0.128 0.24 0.175 0.251 0.234

RGAV 0.615 0.879 0.53 0.596 0.82 0.795 0.566 0.237

REP 0.591 0.806 0.651 0.581 0.745 0.668 0.426 0.232 0.768
ANBS: Anchoring Bias; CNFB: Confirmation Bias; GAMF: Gambler’s Fallacy; HRDB: Herd Behavior; INVD: Investment
Decision; LSAV: Loss Aversion; MACC: Mental Accounting; OVRB: Overconfidence Bias; RGAV: Regret Aversion; REP:
Representativeness;

After the hypothesis testing, the value of the coefficient of determination (adjusted R square) was evaluated. The
calculated adjusted R square value of 0.621 was above 0.26, which inferred substantial predictive precision of the
model Cohen (1988). The effect size (f 2 ) of the constructs was examined using criteria suggested by Cohen (1988),
according to which value of more than 0.35 inferred colossal effect size, the value between 0.15-0.35 inferred
moderate effect size and values less than 0.15 inferred minor effect size..

Table 6. Hypothesis Testing Results

Relationship Std. β t-value Confidence Interval Effect Size (f 2 ) Supported

H1 Heuristics à Investment Decision 0.517 8.797 [0.394,0.624] 0.255 Yes

H2 Herd Behaviour à Investment Decision 0.015 0.301 [-0.083,0.109] 0.001 No

H3 Prospectà Investment Decision 0.309 5.131 [0.192,0.425] 0.100 Yes

With reference to investment decision, heuristics (f 2 = 0.255) had medium effect and prospect (f 2 = 0.100) had
minor effect. Herd behaviour had a negligible effect on investment decisions, as proven by the results of bootstrap-
ping. The standard root means square residual value (SRMR) for the model was 0.07, less than the recommended
maximum threshold of 0.08 (Hu and Bentler, 1999), which showed an acceptable model fit.
In the last step of the analysis, predictive relevance was calculated using the blindfolding technique, with an
omission distance of seven. The results were assessed using Stone-Geisser’s Q2 value (Garg and Gulati, 2013;
 Shilpi Gupta and Monica Shrivastava | 45

Figure 2. Structural Model with Second-Order

OVRB: Overconfidence Bias; REP: Representativeness; ANBS: Anchoring Bias; GAMF: Gambler’s Fallacy; CNFB: Confirmation Bias; LSAV: Loss Aversion; RGAV: Regret Aversion;
MACC: Mental Accounting;

Geisser, 1974; Stone, 1974). The calculated Q2 value for investment decisions was 0.412, which was significantly
more than zero. Hence it was established that the model had satisfactory predictive relevance.

4.3 Moderating Role of Preferred Sector of investment:

The moderating effect of the preferred sector of investment was assessed using multi-group analysis (MGA) using
Smart PLS 3.2.2 software. The proposed research model tries to test the moderating effect of the preferred sector of
investment on the relationship between heuristic, prospects, and herd behaviour on investment decisions of retail
investors. The respondent profile data reveal that out of 323 respondents, 171 preferred investing in the Insurance
sector while the remaining 141investors preferred to invest in the pharmaceutical sector. The R2 value reported for
investors of the insurance sector is 0.628 and that of the pharmaceutical sector is 0.630. The result represented in
Table 7 confirms that the preferred sector of investment does moderate the relationship of heuristic and prospect
with the investment decision of retail investors. However, the relationship between herd behaviour and investment
decision is not moderated by the preferred sector of investment. The investors of the pharma sector (β = 0.552)
were more prone to heuristics bias as compared to the investor of the insurance sector (β = 0.478). The investor
of the pharma and insurance sector are equally affected by the prospect bias as reported by their beta values, i.e.,
β = 0.305 for pharma and β = 0.310 for insurance.

Table 7. Moderating Effect of Preferred Sector of investment – MGA

Path Coefficients Path Coefficients Path Coefficients Path Coefficients
STDEV STDEV t-Value t-Value p-Value p-Value
Original Original Mean Mean
(INSURANCE) (PHARMA) (INSURANCE) (PHARMA) (INSURANCE) (PHARMA)
(INSURANCE) (PHARMA) (INSURANCE) (PHARMA)

Herd Behaviour ->

0.073 -0.026 0.072 -0.021 0.071 0.069 1.031 0.374 0.302 0.709
Investment Decision

Heuristics ->
0.478 0.552 0.482 0.556 0.100 0.062 4.806 8.861 0.000 0.000
Investment Decision

Prospects ->
0.310 0.305 0.316 0.310 0.095 0.071 3.276 4.294 0.001 0.000
Investment Decision

5 Discussions & Implications

The study commenced with a brief review of past literature on behavioral biases and their impact on retail investor’s
investment decisions in insurance and pharmaceutical sector securities. A second-order model was developed based
on the literature review, and the model was assessed for its reliability and validity. The results of the study offered
conclusions about the influence of heuristics, prospect, and herding effect on retail investor’s investment decisions.
The first category of bias being tested was heuristics, which was conceptualized as a second-order construct.
In this study, heuristics were defined by overconfidence bias, confirmation bias, anchoring bias, gambler’s fallacy,
and representativeness bias. The results indicated that heuristics bias significantly influenced the retail investor’s
investment decisions in pharmaceutical and insurance stocks. The studies of Sahi (2012), supported the existence of
these biases (Shukla et al., 2020) . The results indicating a strong influence of heuristics on investment decisions
 46 | Ramanujan International Journal of Business and Research, 2021, Vol. 6

were in line with studies conducted by Chen et al. (2007); Boda et al. (2016) who in their study concluded that
heuristics have a significant impact on investor’s investment decisions and it often led investors to make trading
mistakes. Under the influence of heuristics biases, investors often believe in their decision more than others,
focusing on their recent experiences ignoring the past returns. They tend to rely significantly on a particular piece
of information regardless of its reliability and affirm their stance based on their existing knowledge. The need
is for these investors to understand the errors that could results due to these notions that they carry. A clear
understanding of heuristics would, in general, help them make better informed and less erroneous decisions.
The second category of bias that significantly influenced the retail investor’s investment decisions was prospect
bias. As per the prospect theory, investors often look to avert risk and regret, due to investment decisions as much
as possible when they are aware of the expected return; they can achieve from different substitutes of investment
choices. While investing, individuals weigh in both the outcomes of an investment viz—possible losses and gains.
Investors are often inclined towards avoiding loss more than they are towards earning better gains. The results
of this study demonstrate that prospect constructs still influence investor’s decision-making process, though not
as significantly as heuristics. These results are supported by previous studies conducted Oechssler et al. (2009),
conforming to the prospect theory. Taking note of this prospect, investors could focus on both the gain and loss
aspects of investment equally instead of focussing on just the probability of loss. A decision free from this bias
should lead to an optimal investment decision.
The last bias assessed in this study was herd behaviour, also known as the bandwagon effect. Under the influence
of this bias, investors rely on their friends, family, and peer’s investment decisions even though they may lack
credibility. This study indicated that herd behaviour does not influence the investment decision of retail investors,
trading in the stock of insurance and pharmaceutical stocks. Researchers in the past have observed different results
between the relationship of herding and investment decisions. Some researchers supported the influence of herd
behaviour on investment decisions in a bearish or bullish market, influenced by the age of investors and value of
the stock (Filip et al., 2015; Choi, 2016; Chauhan et al., 2019). While other researchers have denied the existence
of such influence regardless of the demographic, value of the stock, and market trend Garg and Gulati (2013);
Indars et al. (2019). Moderation results draw a clear picture confirming that investors behave differently when
investing in different sectors of investment. For some sectors, investors may be more prone to heuristics while
some may be more influenced by the prospect. Thus, taking note of this is equally significant as focussing on the
bias itself is. The results of this study add to this discussion, evidently supporting the absence of herd behaviour
amongst insurance and pharmaceutical stock investors of Chhattisgarh even though the relation between herding
and investment decision, to an extent, may exist in investors of other sectors or demographics.
This research has several implications that could be drawn for academicians as well as retail investors and
investment managers. For academicians, the survey instrument, i.e., the questionnaire used in the current research
works can also be employed in other demographics or geographies to study the influence of these vital biases
in the same. The study and model developed in it can be used for teaching the positioning of these biases in
today’s market. The results of this study would help expand the understanding of behavioural biases and their
influence on investment decision-making and help explain how the biases generated based on external prospects
like aversion and internal preferences like heuristics could influence investment decisions. The model developed
in this study could also be used to analyse the influence of behavioural biases on investment decisions of investors
whose preferred sector of investment is other than pharmaceutical or insurance.
For retail investors and investment managers, the research findings give a clear picture of the current state of
heuristics, prospect, and herd behaviour in insurance and pharmaceutical sector investment. Consequently, a clear
picture of these biases and their influence would lead to a better understanding of the same and prevent investors
from making erroneous decisions. Behavioural biases are accountable for numerous irregularities in stock markets.
Thus, it is quite substantial to realize the stimulus of these partialities on investment decisions. The results of this
study would help realize these partialities. A strong understanding of these biases and their influence on investment
decisions could help financial planners and advisors to provide optimized and adequate investment advice. It would
help financial planners and advisors understand how their client’s investment decisions are driven.

6 CONCLUSION
This research tried to identify the different biases that influence retail investor’s decisions to invest in securities of
insurance and pharmaceutical companies. To study this subject, a second-order model was developed based on the
three primary areas of behavioural biases, namely heuristics, prospect, and herding. The model was assessed and
validated in two stages, measurement model assessment and structural model assessment. The main objective of
the study was to identify whether these biases are still existent in the retail investor’s psychology before investing
in insurance and pharmaceutical company stocks. It was determined that heuristics and prospect bias have a
massive impact on investor’s decisions, with heuristics influencing the decisions more than prospects. Results also
indicated an absence of herd behaviour’s influence on investment decisions amongst investors of the insurance and
pharmaceutical sector. This study contributed to the existing literature by looking into the current state of these
biases in the financial market and drawing conclusions for a better understanding of investor behavior in insurance
and pharmaceutical sector stocks. The study had some limitations of its own. The first being that, it only considered
 Shilpi Gupta and Monica Shrivastava | 47

active investors of insurance and pharmaceutical securities and it was limited to investors of Chhattisgarh, India.
Future research can be conducted to identify the current state of these biases in a different demographic and sectors
other than the insurance and pharmaceutical sectors.

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