Are individual investors irrational or adaptive to market dynamics?

Venkata Narasimha Chary Mushinada

Journal of Behavioral and Experimental Finance, 2020, vol. 25, issue C

Abstract: Using detailed survey data of 384 Indian investors, the study examines whether self-attribution bias and overconfidence bias exist in Indian stock market and also whether individual investors are adaptable to market dynamics or not. We find evidence for the existence of cognitive biases alongside rationality and the investors tendency to adapt to the changing environment once experience losses or uncertain events. This shall move the markets towards a new equilibrium in long run according to adaptive market hypothesis. However, the investors sometimes display an apparently irrational behaviour during this process. This study provides empirical evidence, at an individual investor level, for simultaneous existence of investors’ rationality and cognitive biases thereby making investors adapt to the changing environment.

Keywords: Bounded rationality; Behavioural finance; Self-attribution bias; Overconfidence bias; Structural Equation Modelling; Adaptive market hypothesis (search for similar items in EconPapers)
Date: 2020
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Persistent link: https://EconPapers.repec.org/RePEc:eee:beexfi:v:25:y:2020:i:c:s2214635019300991

DOI: 10.1016/j.jbef.2019.100243

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