Individual investor biases: a segmentation analysis

Abstract

Purpose

Indian investors have been exposed to a plethora of investment opportunities in the past decade and a half, after the liberalization process which commenced in 1991. Over the years, the increased competition has brought a wind of change, not just in the economic environment within the country, but also a radical change in the choices and preferences of the financial consumers. In the endeavor to provide more personalized advice to the financial consumers, financial service providers need more insights into the minds of the consumers. However, little work has been done to understand the Indian individual investor. The purpose of this paper is to study the Individual investor in India: to segment the investor into distinct behavioural groups based on their biases; to understand the investment preferences and profile of the identified segments; and to understand the implications for financial services providers.

Design/methodology/approach

Exploratory research, using In‐depth interviews, was undertaken to explore the manifestations of the biases among the individual investors. The initial inventory of 97 items pertaining to biases was assessed for content and face validity and subject to pilot test and subsequent rounds of modification. The final data were collected on a sample of 377 respondents, using a questionnaire that captured eight biases: Reliance on experts; Overconfidence bias; Self‐control bias; Categorisation tendency; Budgeting tendency; Adaptive tendency; Socially responsible investing bias; and Spouse effect. The segments of investor biases were identified using cluster analysis.

Findings

A cluster analysis of data, collected from individual investors was conducted in India (n=377), yielded four main segments of individual investors biases, which have been termed as the Novice Learner, the Competent Confirmer, the Cautious Anticipator and the Efficient Planner. This typology has predictive validity with regard to financial satisfaction and perceived financial market knowledge.

Practical implications

The paper presents a very important practical tool which can help financial service providers define their target audience more sharply and understand how people in these segments differ, behaviorally. Better understanding of investor's perceptions would help in designing more attractive financial products and development of marketing strategies that would impact the customer's financial satisfaction levels and create trust and customer loyalty.

Originality/value

This paper is a first of its kind to empirically identify the segments of biased behavior among investors and contributes to furthering the understanding on investor behavior.

Citation

Kalra Sahi, S. and Pratap Arora, A. (2012), "Individual investor biases: a segmentation analysis", Qualitative Research in Financial Markets, Vol. 4 No. 1, pp. 6-25. https://doi.org/10.1108/17554171211213522