Proposed Behavioural Model Towards Investment Decisions

This paper investigates the background regarding the factors which drives the investors for planning and taking investment decisions. The main idea of this paper is to develop proposed model towards investment decisions and its future implications. The research is based on searching keywords in database in Google Scholar and Emerald on the basis of number of publications and times cited in the respective field to measure the contributions of active researchers. The papers reviewed are mostly empirical or theoretical in nature with limited number of papers in review category, which are required to assist researchers and professionals. The proposed model used for analysis purpose is based on literatures so far reviewed and has some limitations to justify every factor and variables. Research related to factors which have association with varying time like time varying aggregate risk is to be analysed .Through the proposed model it is found that there is huge scope of research taking factors like attitude, personality, and perception as variables in the region like South-East Asian Countries.

Behavioural Finance and study of investor’s psychology has focused on the rationality of their investment planning and decisions. It was Oscar Wilde who described a cynic as one who “knows value of nothing but price of everything'1. Considering some equity research analysts and many researchers having 'bigger fool' theory of investing, which highlights that the value of asset is irrelevant as long as there are “bigger fools” to buy the asset. While this may provide basis to make some profit as there are some other theory which disingenuous enough to argue that the value is in the eyes of beholder and any price can be justified as long as there are other investors willing to pay that price2. There are many assets for which perception may be all that matter like painting or a sculpture, but a rational investor does not buy most of the assets for aesthetic or emotional purpose but financial assets are acquired for the expected cashflows from the investment.

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Modern finance assumes that markets are efficient and that agents know the probability distribution of future market risk3,4,5. Behavioural finance models are usually developed to explain investor behaviour or market inefficiency when rational models provide no sufficient explanation6. Behavioural aspects and psychology often affects the investor’s decisions which are evident from irrational decisions under the influence of overreaction, under-reaction, overconfidence, group behaviour etc7.

In recent years, many researchers in the area of finance and investment have been very active in behavioural finance, and many of their research works have been accepted in the top journals in the field of financial economics8. This shows that behavioural finance is becoming an increasingly significant area for research.

This synopsis begins the review of past and recent studies to explore the relationship of psychological factors influencing the investment decision makings with the returns through investments. The findings through literature of the study are then presented and discussed to identify any gaps. The synopsis concludes with a summary of the main area of research, their implications and future scope of research, as well as a consideration of the limitations of the study if any.

Behavioural Finance is one of the dynamic and fully developed fields which have its own principle and methodology9. Behavioural finance came in existence due to limitations of traditional theories and finance to support the investment and saving decisions10. While traditional finance formulates the investment strategy whereas behavioural finance focuses on the decision process of its execution11. Many of the key variables in behavioural models are neither observable nor measurable directly to researchers analysing data, thus most of the empirical studies in the field of behavioural finance adopt proxies in attempt to capture or measure the effect of such variables12.

Considering the limitations of modern finance regarding justification of investment strategies being followed by investors under different scenario, behavioural finance models are usually developed to explain investor behaviour or market inefficiency when rational models provide no sufficient explanation. Behavioural aspects and psychology often affects the investor’s decisions, which are evident from irrational decisions under the influence of attitude, overreaction, under-reaction, fear, overconfidence, group behaviour etc13.

Behavioural finance is one of the significant areas of research as many of the papers are new and emerging in nature and have limited review papers. With consolidation of financial market across the world the importance of behavioural finance is attracting many scholars and researchers. According to analysis during the period 1995 to 2013, in this period of 20 years, the study in the area of behavioural finance was in 124 journals and 347 articles in which 650 authors were involved14. Participation in this field is limited to from USA, Germany, Spain, England, China Israel, Australia, but there are limited scholars from south East Asia economy like India.

Factors like anxiety, interests in financial issues, decision styles, need for precautionary savings, and spending tendency as self stated attitudes and behaviours for a range of daily financial affairs15. Fund managers and financial institutions have to have in-depth study of the customers to retain them in this competitive world16.

Functioning of financial markets found to be strongly correlated with the financial behaviour of individuals which have been traditionally in experimentation phase with economics and psychology which motivates for empirical analysis and study17. To study behavioural finance Basic tools used for experiment includes direct observations, controlling variables; manipulate variables as per theoretical requirements18. In two companion review papers which highlighted the key strength of experimentation method, which provides its importance for its suitability to study behavioural finance19. This method provides flexibility to researchers to use proxy variables which is not measurable or observable directly and thus provides an important weapon to manipulate the variables as per requirement.

Major analysis of these researches are focused in countries like Japan, United States, France, United Kingdom, Switzerland etc where factors like wage income per worker, S&P composite returns, comparison of nominal investment and planned investment, retail investor portfolio, impact of diversification and the effect of behavioural factors on investment strategies are broadly covered in the papers reviewed.

It is expected that the proposed work will provide the impact of psychological factors which will attempt to explain the biases and inefficiencies present in the financial market. The proposed work plan would lead to development of investor’s psychological model which will help to identify those key factors which influence investment decisions considering the role of moderating variables like gender, age and marital status of investor.

The validation of this theoretical model with practical observations will be useful for the researchers, fund managers as well as for investors for taking informed decisions as well as scope for further study.

The findings of the work plan will help an individual to invest in those avenues and financial instruments which comfort their psychological behaviour with respect to their risk appetite to increase their investment returns.

These findings will help financial product managers/agents to reformulate their product as per the psychology of an individual, considering active or passive investment thus better investment strategies and management.

The companies can evaluate the performance of their financial product by using the outcome of the proposed model and can strategise towards continuations/ discontinuation and improvisations which will help them to enhance the marketability of their product.