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Decision Making in the Stock Market: Incorporating Psychology with Finance

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  • Chandra, Abhijeet

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

Suggested Citation

  • Chandra, Abhijeet, 2008. "Decision Making in the Stock Market: Incorporating Psychology with Finance," MPRA Paper 21288, University Library of Munich, Germany, revised 01 Nov 2008.
    • Handle: RePEc:pra:mprapa:21288
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    References listed on IDEAS

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    1. Markus Glaser & Martin Weber, 2007. "Overconfidence and trading volume," The Geneva Papers on Risk and Insurance Theory, Springer;International Association for the Study of Insurance Economics (The Geneva Association), vol. 32(1), pages 1-36, June.
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    Cited by:

    1. Bashir Ahmad Joo & Kokab Durri, 2015. "Comprehensive Review of Literature on Behavioural Finance," Indian Journal of Commerce and Management Studies, Educational Research Multimedia & Publications,India, vol. 6(2), pages 11-19, May.
    2. Anu Antony & Ansted Iype Joseph, 2017. "Influence of Behavioural Factors Affecting Investment Decision—An AHP Analysis," Metamorphosis: A Journal of Management Research, , vol. 16(2), pages 107-114, December.
    3. Khaira Rizfia Fachrudin & Khaira Amalia Fachrudin, 2016. "The Influence Of Education And Experience Toward Investment Decision With Moderated By Financial Literacy," Polish Journal of Management Studies, Czestochowa Technical University, Department of Management, vol. 14(2), pages 51-60, December.
    4. Tomola Marshal Obamuyi, 2013. "Factors Influencing Investment Decisions In Capital Market: A Study Of Individual Investors In Nigeria," Organizations and Markets in Emerging Economies, Faculty of Economics, Vilnius University, vol. 4(1).
    5. Jalilvand, Abolhassan & Noroozabad, Mojtaba Rostami & Switzer, Jeannette, 2018. "Informed and uninformed investors in Iran: Evidence from the Tehran Stock Exchange," Journal of Economics and Business, Elsevier, vol. 95(C), pages 47-58.
    6. Naveeda K. Katper & Muhammad Azam & Nazima Abdul Karim & Syeda Zinnaira Zia, 2019. "Behavioral biases and investors’ decision-making: The moderating role of socio-demographic variables," International Journal of Financial Engineering (IJFE), World Scientific Publishing Co. Pte. Ltd., vol. 6(03), pages 1-15, September.
    7. Syed Aliya Zahera & Rohit Bansal, 2018. "Do investors exhibit behavioral biases in investment decision making? A systematic review," Qualitative Research in Financial Markets, Emerald Group Publishing Limited, vol. 10(2), pages 210-251, May.
    8. Trejos, Cristian & van Deemen, Adrian & Rodríguez, Yeny E. & Gómez, Juan M., 2019. "Overconfidence and disposition effect in the stock market: A micro world based setting," Journal of Behavioral and Experimental Finance, Elsevier, vol. 21(C), pages 61-69.

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    More about this item

    Keywords

    Behavioural Finance; Asset Allocation; Cognitive Dissonance; Rationality;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G00 - Financial Economics - - General - - - General

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