Decision Making in the Stock Market: Incorporating Psychology with Finance

Abhijeet Chandra

MPRA Paper from University Library of Munich, Germany

Abstract: The decision-making by individual investors is usually based on their age, education, income, investment portfolio, and other demographic factors. The impact of behavioural aspect of investing is, however, often ignored. The objective of this paper is to explore the impact of behavioural factors and investor’s psychology on their decision-making, and to examine the relationship between investor’s attitude towards risk and behavioural decision-making. The research uses the literature relevant to behavioural decision-making and investor’s psychology. The research is based on the secondary data relating to investments, finance, and economics available on the Internet, previous publications of the author, and some other publications as well. The information is then integrated in order to understand the interrelationships of investor’s perception of risk, behavioural factors, and decision-making in the Indian context. Through this research, the author finds that unlike the classical finance theory suggests, individual investors do not always make rational investment decisions. Their investment decision-making is influenced, to a great extent, by behavioural factors like greed and fear, cognitive dissonance, heuristics, mental accounting, and anchoring. These behavioural factors must be taken into account as risk factors while making investment decisions. Investment advisors and finance professionals must incorporate behavioural issues as risk factors in order to formulate effective investment strategies for individual investors. With an objective to create investor’s confidence in the Stock market, behavioural issues are the newest of the things which must be considered while formulating investment strategies. This research will help investment advisors and finance professionals judge investor’s attitude towards risk in a better way, thus leading to better investment decision-making

Keywords: Behavioural Finance; Asset Allocation; Cognitive Dissonance; Rationality (search for similar items in EconPapers)
JEL-codes: G00 G11 (search for similar items in EconPapers)
Date: 2008-10-01, Revised 2008-11-01
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (8)

Published in Conference Proceedings: FFMI 2008 IIT Kharagpur (2008): pp. 461-483

Downloads: (external link)
https://mpra.ub.uni-muenchen.de/21288/1/MPRA_paper_21288.pdf original version (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:21288

Access Statistics for this paper

More papers in MPRA Paper from University Library of Munich, Germany Ludwigstraße 33, D-80539 Munich, Germany. Contact information at EDIRC.
Bibliographic data for series maintained by Joachim Winter ().