Journal of Business and Management Research

ISSN: 2382-5219(Print); 2467-9267(Online)

July 2022, Vol.4, No.1, pp.17-33
DOI: 10.3126/jbmr.v4i01.46680

Effect of Perceived Behavioral Factors on Investors' Investment Decisions in

Stocks: Evidence from Nepal Stock Market

Bibek Karmacharya1, Ramkrishna Chapagain1, Bharat Ram Dhungana1* & Kanhaiya Singh2
1
School of Business, Pokhara University, Pokhara, Nepal
2
GLA University, Mathura, India

Abstract
This study explores whether the perceived behavioral factors impelling specific investors' decision-
making to contribute to the Nepal Stock Exchange (NEPSE) performance. Applying structural model
analysis of the data, it shows that among the four behavioral variables, market, heuristic, and herding
factors have significant effects on investment performance. This study observes more reliance and
dependence of investors on market information and sentiments. Research findings suggest that
investors consider the fundamentals of the stock and consider the investors' behavior to get a return
from the market. The study has been confined to five metropolitan cities with 350 samples randomly
obtained in 2018 from different broking firms.
Keywords: Behavioral factors, decision-making, performance

Introduction
The financial market is the place where financial instruments are traded. The capital market facilitates
the allocation of funds between the savers and borrowers. If the capital market is efficient, it reflects
the current share price of the company somewhat based on available information, and share prices
under or over will be minimal. The equity market is where buying and selling of equity frequently
occur (Zuravicky, 2005, p.6). In an economy, the stock market plays the role of financial investment
and performs a signaling mechanism for investment decisions (Samuel, 1996, p.1).
Moreover, it acts as a catalyst for corporate governance. However, the equity market is where most
of the company's required funds are raised (Zuravicky, 2005, p.6). Individuals are concerned about
equity as the "long-term progress of wealth, dividends, and a hedge beside the inflationary loss of
acquiring power" (Teweles & Bradley, 1998, p.8). Another essential feature of the equity market is
maintaining the liquidity of an investment (Jaswani, 2008). Most people invest in stocks because they
want to be the firm's owners and get benefits either on dividend payments or capital appreciation due
to an increase in the stock price. (Croushore, 2006, p.186). Many investors also buy stocks for ultimate
control over the firms. To be a stakeholder in a firm, shareholders need to own a specific amount of
shares to be on the board of directors, be a part of the strategic decision-making team, and contribute to
the firm's growth by setting appropriate directions.
The elementary aim of NEPSE is to serve as an intermediate agency for providing marketability
and liquidity to related financial stakeholders. It is generally assumed that investors judiciously make
the most of their wealth by following elementary financial guidelines to arrive at investment decisions
* Corresponding author email: [email protected]
18 B. Karmacharya, R. Chapagain, B. R. Dhungana & K. Singh

on the basis of risk-return considerations. However, the level of risk acceptance of the investors
depends on their characteristics, attributes, and attitudes to risk. It is, therefore, necessary to explore
behavioral factors that impact the decision-making process of individual investors. Behavioral finance
can be helpful since it is based on psychological factors and influences investors' buying and selling
behavior. Many researchers consider that study of behavioral factors is an appropriate area to
understand and explain feelings and cognitive errors affecting investment decision-making.
There is generally a positive correlation between the performances of the stock market and the
economy. But this may not always hold true. Thus, investors' judgments in the stock market play a
critical role in defining the market trend and influencing the economy (Samuel, 1996). To understand
and help explain the investors' decisions, it is important to explore which behavioral factors influence
individual investors' decisions at the NEPSE and how they impact their investment performance. It will
be helpful for investors to understand common behavioral factors that justify their reactions for better
returns. Financial analysts may also use this information to understand the investors' perceptions better
and thus forecast more accurately by providing suitable recommendations. This research looks at the
value level of heuristic, prospect, market, and herding variables on individual investors' investment
decisions and performance at the NEPSE.

Literature Review and Hypothesis Development

Theoretical Review
Heuristics Variable
Heuristics are the basic rules concerned with doing things following the process of correct decision
making, especially in complex and uncertain scenarios by minimizing the complexity of a given
procedure and by using different probabilities with predicting values. This theory is suitable when time
is limited (Waweru et al., 2008) but sometimes creates biases. Heuristics incorporate
representativeness, availability bias, Gambler's fallacy overconfidence, and anchoring (Kahneman &
Tversky, 1974; Ritter, 2003; Waweru et al., 2008).
Prospect Variable
Unlike the viewpoints, Expected Utility Theory (EUT) and Prospect Theory are accepted as two
decision-making methods in the field. The Prospect Theory emphasizes the internal value system of
investors whereas EUT focuses on rational decision-making (Filbeck, Hatfield & Horvath, 2005). EUT
performs the decision-making inquiry under peril following the normative model for sound decision-
making. This theory is criticized for attracting investors to gambling and insurance. Individuals tend to
under-weigh possible results compared with sure ones. Individuals respond differently to similar
situations depending on the context of losses or gains in which they are presented (Kahneman &
Tversky, 1979). The Prospect Theory deals with the mental aspect of individual's decision-making
processes, including regret aversion, loss aversion, and mental accounting.
Market Variable
De Bondt and Thaler (1995) mention that the investors may have an extreme reaction to price changes
or news; misapplication of past trends into the future; unable to focus on fundamentals analysis on
underlying stock; prioritizing popular stocks cyclic stock price change. These market factors, in turn,
influence investors' decision-making in the stock market. Waweru et al. (2008) identify the factors of

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 Behavioral Factors on Investment Decisions in Stocks 19

the market that impact investors' decision-making which include price changes, market information,
past trends of stocks, customer preference, over-reaction to price changes, and fundamentals of
underlying stocks.
Herding Variable
Herding factors in the financial market are recognized as investors' behaviors to follow others' actions
(Luong & Ha, 2011). The investor generally prioritizes the decision made by an enormous group of
individuals during investment so that their investment price does not deviate from fundamental market
value. Therefore, many opportunities for investment based on existing information can be impacted.
Educational researchers also pay their care to herd as its effects on stock price changes can also affect
the attributes of risk and return models. This has also impacted the fundamentals of asset pricing
theories (Tan, Chiang, Mason, & Nelling, 2008).
Investment Performance
Investment performance is the return on an investment portfolio. The portfolio is said to be
outperformed if it has the highest return at a given level of risk. The conventional finance theory says
that rationality increases portfolio performance. However, recent development in financial behavior
shows that when it comes to investing, their emotional inclinations, ingrained thought patterns, and
psychological biases color how they perceive the world and make decisions (Randall, Andrei &
Robert, 1990). We have thus used satisfaction from the current return, the portfolio's excess return
compared to the market, and the past trend of return as the observed variable for measuring investment
performance. Then the structural model is run by taking investment performance as the dependent
variable and other behavioral variables (Heuristics, Prospect, Market, and Herding) as the independent
variables.
Waweru et al. (2008) suggested that Heuristics, Prospect, Market, and Herding factors significantly
impact investment performance and decision-making of investors in a stock exchange. So, the research
follows their theoretical concepts to develop the framework and test the hypotheses.
Empirical Literature
Dangol and Manandhar (2020) explored the impact of heuristics on investment decisions, taking four
heuristics, i.e., representativeness, availability, anchoring and adjustment, and overconfidence, on
investors' decision-making variables have a significant impact on Nepalese investors' investment
decisions. However, the study did not explore the impact of other behavioral factors.
Pandey, Risal, and Chauhan (2020) explored that factors of accounting information, advocate
suggestions, and personal financial needs significantly impacted the psychology of investors while
investing in the stock market in Nepal. Other factors such as word of mouth, company goodwill, and
market analysis also affect the investment decision on the stock market. However, he has not focused
on all behavioral factors influencing investment decisions and performance.
Pokharel (2020) examined that the market variables significantly impacted investment decisions,
but herding, heuristic, and prospect factors had no considerable effect. However, the research is based
on only 120 sample size across the country and has used only descriptive results to infer.
Rosdiana (2020) explored how herd behavior, financial literacy, risk aversion, and risk perception
positively impact on investment decisions. The researchers used regression analysis to identify the
results.

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20 B. Karmacharya, R. Chapagain, B. R. Dhungana & K. Singh

Rasheed, Rafique, Zahid, and Akhtar (2018) find the influence of two most usually used heuristics,
namely, representative bias and availability bias, on investment decision making. The study checks
whether the locus of control interacts with the said relations through a theoretical proposal and then
verifies through empirical evidence. The study is based on quantitative research, and 227 investors
were interviewed. The structural equation modeling was applied while the communication result was
examined through simple linear regression. The study shows that heuristics factors significantly affect
rational decision-making. But, linear regression as applied here may not be appropriate for studying
psychological facts.
Another study conducted by Boda and Sunitha (2018) on factors affecting investment decisions of
retail investors measures the association between the investment decision-making process and
behavioral biases of the retail investors of Telangana state in India. It also studied the impact of
demographics on the retail investors' investment decision-making in the context of developing
economies with the potential for stock market development. The research was grounded on a
structured questionnaire. A total of 600 plus valid responses were collected from the individual
investors of Telangana state from February to May 2017. Statistical techniques like structural equation
modeling after using ANOVA and exploratory factor analysis have been used for the inference. It was
found that the structural path model in the research strictly fits the sample data; representing investors
who follow the heuristics, prospect factors, and herding factors in investment decisions to a significant
level.
Pokharel (2018) examines investors' preference in the stock market of Nepal. The reasons for the
investment in the stock market are availability of liquidity and a impressive rate of return. The key
influencing factors for the venture in NEPSE are information supplied by a stockbroker, daily
newspaper, and market sentiments. The most motivating factors prioritized by respondents are capital
gain, liquidity, dividend, and bonus shares.
Nouri, Motamedi, and Soltani (2017) revealed an Empirical Investigation of the Financial Behavior
of Investors with a Brand Approach. The study uses scheming and investigational testing models to
assess the financial behavior in the Tehran Stock Exchange considering all the individual investors.
Confirmatory factor analysis was used to test the reliability of the questionnaire, and the research
hypotheses were tested using path analysis. To define the sample size, considering an unlimited
population, the Cochran formula was used, and hereafter the sample size was firm to be 145. The study
found that psychological factors have an influence on perceived risk and returns. Financial factors had
an optimistic impact on alleged risk but no impact on alleged return. The impact of social factors on
perceived risk and perceived return was not confirmed.
Furthermore, the results showed that brand awareness has a controlling role in the association
between social factors and perceived risk and return. Perceived risk had a positive effect on attitude
towards the brand. However, the influence of alleged return on attitude towards the brand was not
significant. Lastly, the attitude towards the brand had an optimistic effect on shareholders' investment
intention.
Dasgupta (2016), in her study "A Study on the Investment Preferences in the Business Capital of
Nagaland" finds that majority of the respondents are happy with having bank deposits. It is not that the
respondents are illiterate. All are graduates and thus know that the money value of money today will
not be the same tomorrow, primarily due to inflation. Still, the inclination towards the financial market
is very low. Few or a small fraction of the respondents invested in the insurance sector and mutual
funds, and still fewer invested on shares and bonds. Investment in property though was considered to

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 Behavioral Factors on Investment Decisions in Stocks 21

be very attractive in the financial world, but not a single respondent was found to have invested in the
real estate.
Salimian and Iman (2016) examine investigating behavioral factors affecting the decisions of
potential investors. This research examined the behavioral factors affecting the decisions of potential
investors using structural equation models. The study results indicate that perceived behavioral control
of potential investors, attitudes of potential investors, and subjective norms of potential investors have
a positive and significant impact on the decisions of potential investors. A sample of 296 investors was
selected using a random sampling method. This research investigated 4 hypotheses. A questionnaire
was designated that included 5 demographic and 23 specialized questions. All four hypotheses were
confirmed. The consequences show that all four variables of behavioral attitude, subjective norm,
perceived behavioral control, and risk appetite of potential investors to significantly impact on their
investment plans.
A study was conducted by Gilan and Abbasi (2015) on the behavior of financial investors in capital
markets using structural equation modeling of the Tehran stock market. The study's objective was to
analyze the factors influencing the behavior of financial investors in financial markets. The sample size
of 239 was selected randomly. The study's outcome shows a significant relationship between the
behavior of financial investors familiar with the company and its performance, financial analysis,
psychological factors, quality and efficiency, an expected value of a stock, financial expert opinion,
historical price, and performance.
Apan and Ayvali (2015) conducted a study on Determination of Factors Affecting Individual
Investor Behaviors: A Study on Bankers. The main aim of the research was to determine the factors
that influence individual investor behavior. Both descriptive and factor analysis are used to measure
the impact of different factors on investor decision-making. The study found that six factors influenced
individual investor behavior. The result shows a statistically significant relationship between the
factors affecting individual investors' investment behaviors.
Dhungana (2013) assesses the performance of the stock market and reforms in Nepal. The study
concluded that a complete investment environment, political steadiness, steady government, and
efficient regulatory framework are the major factors that help to enhance the degree of confidence
toward the Nepalese stock market. The regulatory institution should play a critical role in reforming
the stock market by developing sound policies and appropriate mechanisms to develop an efficient
market in Nepal. The study also emphasized that the capital market should be a sustainable and
trustworthy medium for capital deployment through an institutional arrangement for conducting
continuous studies, research, investor education, public awareness, and training programs.
From the above review, it is seen that behavioral factors impact the decision-making of the
investors. While making an investment decision, investors' cognitive thought processes and emotions
affect investment decisions and the performance of their portfolio investment.

Theoretical Framework and Hypotheses Development

In this paper, we aim to identify the impact of behavioral factors such as Heuristic, Prospect,
Herding, and Market on investment decisions of Nepalese investors using the Structural Equation
Modeling. Based on the above theoretical and empirical literature, the following theoretical framework

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22 B. Karmacharya, R. Chapagain, B. R. Dhungana & K. Singh

has been developed to measure the perceived behavioral factors affecting investment decisions at
Nepal Stock Exchange.

Heuristic variables:
Representativeness,
overconfidence, anchoring,
gambler’s fallacy, availability
bias

Prospect variables:
Loss aversion, regret aversion, Behavioral
mental accounting Factors
Investment
Performance
of
Market variables:
Individual
Price changes, market
Investment Investors
information, past trends of
Decisions
stocks, fundamentals of
underlying
stocks, customer reference,
Over-reaction to price changes.

Herding variables:
Impacts of other investors'
decisions (buying, selling, choice
of trading stocks, the volume of
trading stocks, speed of herding)

Figure 1: Theoretical Framework of Behavioral Factors Influencing Individual Investor's Decision

Making and Performance
(Source: Thesis Luong and Ha (2011) entitled behavioral factor affecting individual investors
decision making and performance: A survey at the ho chi Minh stock exchange)
The following hypotheses have been developed based on the above theoretical framework:
H1: The Heuristics variable has an optimistic effect on investment performance.
H2: The prospect variable has an optimistic effect on investment performance.
H3: The market variable has an optimistic effect on investment performance.
H4: The Herding variable has an optimistic effect on investment performance.

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 Behavioral Factors on Investment Decisions in Stocks 23

Methods
This study uses a quantitative approach to research, and therefore research design involves a social
survey for obtaining the quantitative data. The study area is confined to five metropolitan cities
(Pokhara, Birgunj, Kathmandu, Bharatpur, and Lalitpur) of Nepal. The structured questionnaires have
been administered to the investors from randomly selected brokerage houses to collect the primary
data. The privacy of surveys allows respondents to answer with more truthful and valid answers and
avoids the possible selection bias. . The margin of is expected to be less than 5 percent in the used
sample size of 384.
The response rate was 90 percent and 350 respondents were selected representing different
brokerage houses. The study variables consist of five key aspects of investment decision: Heuristics,
Prospect, Market, Herding, and Investment Performance to understand the financial behavior of
individual investors in the sample. The questionnaire was developed using various past theories that
supported our theoretical model. Besides, the 6-point Likert measurements removed the neutral
opinions, which increased the measurements' accuracy. Besides, collected data was processed and
analyzed to explore the factors affecting investors' decisions and their correlations with investment
performance and satisfaction. Thus, data validity was obtained throughout this study. Internal
reliability of the scales was assessed using Cronbach's Alpha to estimate the reliability of participants'
responses in the measurement. The statistical techniques used are Descriptive, Confirmatory Factor
Analysis, and Structural Equation Modeling (SEM).
Data Analysis
This section consists of descriptive analysis, confirmatory factor analysis, structural equation
modeling, major finding, and result and discussion.
Descriptive Analysis
The descriptive analysis of demographic and socio-economic variables has been presented:
Table 1:
Descriptive Analysis
Demographic indicators Frequency(n) Percent
Gender
Male 289 82.57
Female 61 17.43
Marital Status
Married 259 74.00
Unmarried 91 26.00

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24 B. Karmacharya, R. Chapagain, B. R. Dhungana & K. Singh

Demographic indicators Frequency(n) Percent

Age
18-25 Years 64 18.29
26-35 Years 125 35.71
36-45 Years 86 24.57
46-55 Years 57 16.29
Over 55 Years 18 5.14
Education
Under SEE 4 1.14
SLC 24 6.86
Plus Two 60 17.14
Bachelor 160 45.71
Master 102 29.14
Working experience
Below 5 Years 198 56.57
5 to 10 Years 83 23.71
Above 10 Years 69 19.71
Monthly income
Below Rs 10000 26 7.43
Rs 10001- Rs 20000 98 28.00
Rs 20001- Rs 30000 89 25.43
Rs 30001- Rs 40000 45 12.86
Rs 40001- Rs 50000 46 13.14
Above Rs 50000 46 13.14
Duration of investment
Below 1 Year 81 23.14
1-3 Years 142 40.57
3-5 Years 53 15.14
5-10 Years 58 16.57
Above 10 Years 16 4.57

Table 1 indicates that majority of the respondents (83 percent) are male, and only 17 percent of the
respondents are female. 125 respondents belong to the age group between 26-35 years and only 18
respondents are over 55 years. It indicates that the majority of the young respondents are investing
more in the stock market. Table 1 shows that 259 (74 percent) respondents are married and 91 (26
percent) unmarried. This indicates that married respondents have intent to invest in the stock market,
also thus the risk appetite.

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 Behavioral Factors on Investment Decisions in Stocks 25

From Table 1, we can find that 160 (46 percent) respondents have studied bachelor level, followed
by 102 (29 percent) respondents had masters' degrees. It indicates that most investors have a higher
level of education which is critical as they may be assumed to have better knowledge related to the
capital market. It is evident that most of the respondents (56 percent) are investing for less than 5
years, followed by between 5 to 10 years (24 percent) and above 10 years (20 percent). This indicates
that most investors have just started their career as investors and are actively involved in the stock
market.
Most of the respondents (28 percent) have a monthly income of Rs. 10,000 to 20,000 followed by
Rs. 20,000 and 30,000. This indicates that most investors have reasonable income to reinvest in the
capital market for additional gains. It is obvious from the table that the maximum duration of
investment is 1 to 3 years (40 percent) followed by below 1 year (23 percent). It indicates that most
investors have just started investing in the capital market.
Confirmatory Factor Analysis
Confirmatory factor analysis (CFA) is a statistical technique used to verify the factor structure of a set
of observed variables. CFA allows the researcher to test the hypothesis whether a relationship exists
between observed variables and their underlying latent constructs. This study uses knowledge of the
theory, empirical research, or both, postulates the relationship pattern a priori, and then tests the
hypothesis statistically.
Table 2:
Confirmatory Factor Analysis
Constructing Variable Factor Cronbach's
Measuring Scales
Factor name Loading Alpha
You can generally anticipate the end of good
0.373***
or poor market returns at the Nepal Stock X1
Exchange.
You forecast the changes in stock prices in
X2 0.397***
the future based on the recent stock prices.
You rely on your previous experiences in the
X3 0.575***
market for your next investment
Heuristics You believe that your skills and 0.648
knowledge of the stock market can help X4 0.66***
you to outperform the market
You use trend commentary of some
representative stocks to make investment X5 0.549***
decisions for all stocks you invest in.
You buy 'hot' stocks and avoid those that
X6 0.374***
have performed poorly in the past.

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26 B. Karmacharya, R. Chapagain, B. R. Dhungana & K. Singh

Constructing Variable Factor Cronbach's

Measuring Scales
Factor name Loading Alpha
You tend to treat each element of your
X8 0.574***
investment portfolio separately.
You ignore the connection between different
X9 0.492***
investment possibilities.
You feel more sorrow about holding losing
stocks too long than about selling winning X10 0.61***
stocks too soon.
Prospect 0.76
You avoid selling shares that have decreased
in value and readily sell shares that have X11 0.623***
increased in value
After a prior loss, you become more risk-
X12 0.626***
averse.
After a prior gain, you are more risk-seeking
X13 0.605***
than usual.
Overreaction to price changes X14 0.468***
Customer preference X15 0.537***
Fundamental of underlying stocks X16 0.307***
Market 0.388
Past trends of the stock X17 0.337***
Market information X18 0.563***
Price change X19 0.475***
You usually react quickly to the changes of
other investors' decisions and follow their X20 0.321***
reactions to the stock market.
Other investors' decisions of buying and
selling stocks have an impact on your X21 0.762***
investment decisions.
Herding 0.619
Other investors' decisions of the stock
volume have an impact on your investment X22 0.577***
decisions.
Other investors' decisions of choosing stock
types have an impact on your investment X23 0.496***
decisions
Note: Chi-square =232.642 (Degrees of freedom =203, p = .075)
CMIN/DF=1.146, GFI=0.945, AGFI=0.931, CFI=0.969, RMSEA=0.020, PCFI=0.852, TLI=
0.965 ***p<0.001

From Table 2, it uses the measurement model to identify potential fits among the latent variable.
Unless it shows proper fit, we cannot further progress to path analysis showing the relationship
between the independent and dependent variables.

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 Behavioral Factors on Investment Decisions in Stocks 27

Figure 2: CFA of Behavioral Factors

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28 B. Karmacharya, R. Chapagain, B. R. Dhungana & K. Singh

The study conducts a confirmatory factor analysis (CFA) which shows an acceptable model fit
based on absolute fit indices (GFI, AGFI, χ2, and RMSEA). The goodness of fit indices (GFI and
AGFI) values are 0.945 and 0.931, respectively, which are above the cut-off value of 0.9, indicating a
reasonable fit of a hypothesized model for given sample. However, GFI and AGFI values are affected
by sample size and can be larger for models that are poorly specified, and as such, their use as fit
indices is rather limited. Hence, the model fit is reexamined by employing additional fit indices. The
normal chi-square (χ2) - (χ2 to degrees of freedom, χ2=232.642, d.f. = 203) is 1.146, which is below the
acceptable cut-off value of 3.0. However, the chi-square value increases with sample size and some
observed variables, introducing bias in the model. Hence, alternative model fit indices have been
examined. The root mean square error of approximation (RMSEA) is 0.02, lower than 0.08, indicating
a good fit. The incremental fit indices CFI (comparative fit index) and TLI (Tucker Lewis Index) are
0.969 and 0.965, respectively. The values of more than 0.9 are indicators of adequate model fit. To
summarize, the results suggest that the measurement model has a good fit.
The Structural Model
The structural model focuses on the relationship between the independent and dependent variables and
the magnitude of the relationship as per the theoretical framework used in this study. It is hypothesized
that Heuristics, Prospect, Market, and Herding are proportioned to investment performance at NEPSE.
The results of the SEM path analysis are shown in Table 2. The study evaluates the hypothesized
causal relationship as per the theoretical model. The latent construct investment performance is
endogenous as the variable is explained in the model by exogenous variables. The latent constructs of
Heuristics, Prospect, Market, and Herding are exogenous constructs as other variables in the model do
not explain them. The structural model examines the hypotheses as mentioned in the theoretical
framework and hypotheses.
Table 3:
SEM Path Analysis
Structural Path Estimate SRW
Investment Performance Heuristics 0.552*** 0.465
(0.160)
Investment Performance Prospect -0.062 -0.076
(0.093)
Investment Performance Market 0.234 0.273
(0.072)
Investment Performance Herding 0.576*** 0.442
(0.175)
Note: Squared Multiple Correlation Investment Performance (γ2 =0.493)
Model Fit Measures Chi-square = 346.91 (df=271, prob. = 0.001)

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 Behavioral Factors on Investment Decisions in Stocks 29

Figure 3: SEM Path Analysis

The path analysis results show the overall fit measures as discussed in the preceding section, which
defines how the structural or path model fits the data. Analysis of path model outputs reveal chi-square
value [(χ2 (271) = 346.91, p<0.001), GFI=0.929, AGFI=0.915, CFI=0.93, TLI=0.922, RMSEA=0.028]
yielded to some extent a reasonable fit to data. The χ2 is significant (p<0.001), indicative of a poor fit.
However, the normal chi-square (χ2 /df) is 1.280, lower than the cut-off value of 3, implying a
satisfactory model fit. Additionally, the RMSEA value of 0.028 is close to an acceptable limit of 0.08.
Similarly, the incremental fit indices CFI and TLI values are generally cited near the cut-off value of
0.9; hence, the results indicate a mediocre model fit. Therefore, the model is deemed to be fit enough
to proceed with inferences and analysis thereof.

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30 B. Karmacharya, R. Chapagain, B. R. Dhungana & K. Singh

Results
The study shows that most investors were male between the ages of 26 and 45. This is likely due to
males have more access to share markets and are more risk takers than females. Most of the stock
market investors have university-level education and one to three years of experience in the stock
market. Hence, investors are educated and have sufficient knowledge required to invest in the capital
market. The structural equation model results show that the prospect variable has a negative but
insignificant impact on investment performance. This indicates that investors in Nepal do not judge
loss and gain differently in making investment decision; and believe in their perception while making
their investment decisions. The market variable has a positive and significant impact on investment
performance. Thus, it is accepted that Nepalese investor could be depending more on market-related
factors while making their investment decision.
Similarly, the herding variable has positive effect on investment decisions. Nepalese investors
follow heavily on others' advice and suggestions without proper market analysis while making
investment decision. Among the latent constructs' relationship, Heuristics and Investment performance
have the highest value followed by Herding and Market variables. The Prospect variable does not have
significant impact on investment performance. Only 49.3 percent of variation in investment
performance is explained by heuristics, prospect, market, and herding variables.

Discussion
The results are consistent with other previous researches. Researchers, Baker, Kumar, Goyal, and Gaur
(2019), Metawa, Hassan, Metawa, and Safa (2019), and Nogc (2014) explored on the behavioral
factors that influence individual investors' decision-making. Investor sentiment, overreaction,
underreaction, overconfidence, and herd behavior are found to significantly affect investment
decisions. The path analysis is used for testing the hypothesized relationship of the constructs as shown
in Figure 3. In hypothesis H1, heuristics has a positive effect on investment performance, i.e., investors
follow the rule of thumbs while investing in shares listed in NEPSE. In H 2, the hypothesis that the
prospect variable has a positive effect on investment performance is rejected, indicating that investors
in Nepal are not far-sighted and believe in their perception while making their investment decision. As
stated by H3, the market variable has positive and significant impact on investment performance.
Thus, it may be argued that Nepalese investors still depend on market-related factors in investment
decisions. Similarly, H4 hypothesis that an increase in the herding variable has a positive effect on
investment decisions is supported by the estimates. Therefore, Nepalese investors rely heavily on
others' advice and suggestions and follow them without proper market analysis in investment decision.

Implications
This study was based on primary survey of stock market investors in NEPSE from five metropolitan
cities of Nepal to identify the behavioral factors’ impact on investment decision. The results indicate
that Heuristic, Herding, and Market factors significantly impact investment performance implying that
Nepalese investors follow the rule of thumb for investment decision. Furthermore, herding has a
positive effect on investment performance meaning that Nepalese investors invested mostly based on
the advise and suggestion of others’. Furthermore, market factors have significant impact on
investment performance implying price changes on market, past trend, market information have impact

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 Behavioral Factors on Investment Decisions in Stocks 31

on investment decision. Further, it has been shown that most of the participants in the stock market are
males in the age group of 26-45 years.
The study has some implications. The first one is Nepalese academic institutions mostly use
traditional finance concepts in their curriculum. But, the concepts of conventional finance theories are
insufficient to understand the stock market’s performance. So, it is suggested to incorporate behavioral
finance theories into their curriculum. Second, investors in the stock market who understand other
investors’ behavior may reap a good return from the market.
Furthermore, it is suggested that the regulatory authority should create more awareness among
investors in terms of both economic and behavioral aspects to help make a rational investment decision
in the stock market.

Limitation and Directions for Future Research

As the respondents were chosen from companies having limited securities, generalization for the whole
population would be inaccurate. The research uses a limited sample size of 350. A larger sample size is
suggested for future research to reflect on the realistic situation of the Nepalese stock market.
Similarly, the study area for this research encompasses only five metropolitan cities; research can be
conducted by including major cities of Nepal. Additional behavioral and economic variables can be
included in future research to identify the impact of other variables on decision-making. Besides, it
would be better to conduct focus group discussions with investors, brokers, and stock market experts to
make the study more insightful.

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