BEHAVIOURAL FINANCE – A NEW PERSPECTIVE

Behavioral theories are viewed as a relatively new phenomenon in the security markets. Therefore, examining the subject is essential in order to understand the changing world of investments . Current technology enhances fast trade between individual investors. The concept of investing is seen as trendy. Therefore, people tend to make illogical decisions not based on true knowledge or information of a certain investment object. These decisions are explained via several behavioral finance theories. The outcome of poor knowledge is that investors allow these theories to effect on their decision-making process, thus resulting in major losses. The behavioral models can affect on individuals’ decision-making whether actual investments are conducted via professionals or not. The concept of investing is extensive as it can include all the aspects of pu rchasing items expected to gain more value in the future (art, antique, securities etc.). Therefore, it has been decided to narrow down the subject to concentrate on stock trading and the impact of behavioral finance on individual portfolio investors. This research paper attempts to highlight a new perspective on the study of behavioural finance. In this study, the aim is to establish the existence of such fundamental issues, driven by various psychological biases, in the investment decision-making process. Behavioral economists firmly believe that psychological factors influence investment decisions. They argue that today’s investment decisions demand a better understanding of individual investors’ behavioral biases. However, many economists believe completely in the application of traditional theories in the decision-making process and hence do not consider the concept of irrational behavior. Behavioral finance therefore studies the influence of psychology on the behavior of portfolio investors and their consequent reactions in stock market investing. In this context, it seems relevant to check whether the behavioral factors have an influence on the decision-making process of portfolio investors. A questionnaire will be formulated and distributed among the clients of two brokerage firms in India and their investment decisions and effects of behavioral factors on it will be studied. The focus is on individual investors as they are more likely to have limited knowledge about application of traditional theories in decision-making and hence are prone to making psychological mistakes. The primary analysis would be focused on determining whether behavioral factors affect the investors’ decision to buy sell or hold stocks.