Delineating investors' rationality and behavioural biases - evidence from the Indian stock market

Manika Sharma and Mohammad Firoz

International Journal of Management Practice, 2022, vol. 15, issue 1, 59-86

Abstract: The present research is conducted to determine the relationship between behavioural biases and investors' rationality in the Indian equity market. The study has followed the Mintzberg et al. (1976) decision-making model for measuring investors' rationality. Data has been collected from 400 individual investors of National Stock Exchange (NSE) and Bombay Stock Exchange (BSE) by using a structured questionnaire. An advanced approach of structural equation modelling (SEM) has been used to determine the relationship between behavioural biases and investors' rationality. The findings of the study indicate that behavioural biases are significantly related to the investor's rationality. Whereby, herding, optimism and disposition effect bias show a strong influence on the investor's rationality and affect their investment decisions. The outcomes of the present study also offer meaningful insights to the investment professionals, investors, fund administrators, regulators, and policymakers, as they will be able to develop a unique and bias-free portfolio which will reduce or eliminate the effect of behavioural biases on investor decisions. The results of this study also generate a strong need to update the existing norms and regulations related to investment in Indian stock market.

Keywords: behavioural biases; investors; stock market; decision-making; structural equation modelling; SEM; India; National Stock Exchange; NSE; Bombay Stock Exchange; BSE. (search for similar items in EconPapers)
Date: 2022
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