Exploring the Impact of Cognitive Biases on StockInvestment Choices: A Scale DevelopmentPerspective

A cognitive bias arises when an individual’s decision-making is affected by inherent human inclinations or tendencies that are difficult to identify. Numerous studies indicate that more than 75% of our choices are shaped by these biases. This implies that nearly everyone is affected by them, although the degree of influence can differ from person to person. In India, the capital market dynamics are being increasingly influenced by retail investors. The quantum of dematerialized (demat) accounts has exceeded 185 million, with retail investors adding around 250,000 million each month. Although various researches show that approximately 80% of Indian investors possess a graduate degree, emphasizing the growing trend of advanced academic qualifications in the investment community. Indian investors, similar to investors around the world, display various cognitive biases that affect their financial choices, frequently resulting in less than ideal investment results. This research focuses on developing a reliable and credible scale for measuring the impact of four cognitive biases (automation bias, status quo bias, hindsight bias and confirmation bias) on the decisions pertaining to stock purchase by the retail investors of northern India. The authors have found that there is a non-availability of a consistent and valid scale to estimate the implication of the four cognitive biases mentioned above on the north Indian investors. An aggregate of 506 valid responses were collected from the investors by the authors and analyzed through an exploratory factor analysis using a principal component analysis and varimax rotation. The results were concluded as the emergence and development of a new scale for measuring the impact of cognitive biases that can be utilized by researchers intending to explore the field in future, targeting respondents from other parts of the world.