Impact of overconfidence bias in stock trading approach: a study of high net worth individual (HNI) stock investors in India

Abstract

Purpose

The purpose of the study is to check whether Indian high net worth individual (HNI) investors are suffering from overconfidence bias in personal life and in-stock investment approach. The study is to benchmark an ideal behaviour that an investor should exhibit under the overconfidence bias.

Design/methodology/approach

Both qualitative and quantitative methods were used to study the Indian HNI investors with overconfidence bias. As a first step, an exploratory study was conducted to identify the variables to define overconfidence bias. An extensive literature review along with in-depth interviews was conducted amongst investors, fund managers and the subject experts to check the content validity of the variables. The survey instrument was designed based on the objective of the study and theoretical framework. Both descriptive and inferential statistical tools such as the Z proportion test, logistic regression and structural equation model were applied to test the hypotheses.

Findings

It was found that there is a moderate impact of overconfidence bias amongst the investors both in normal life and whilst making investments in stock. This study found the influence of overconfidence bias in stock investment with respect to forecasting of the stock price movements, overtrading, overanalysis and overreaction.

Research limitations/implications

This paper will help in understanding the Indian HNI investors’ behaviour under the impact of overconfidence bias. There is an empirical study to understand the implication of overconfidence bias on stock investors specifically for the HNI investors.

Practical implications

This study gives an insight into the fund managers to understand the Indian HNI investment behaviour. It is also helpful for HNI investors to understand and correct their behavioural biases related to overconfidence.

Social implications

This paper will guide investors to understand the symptoms and repercussions of overconfidence bias in stock investment. They can also realize the subtle impact of overconfidence bias in personal and professional life, thus preventing them from making losses.

Originality/value

This work is the extension of the works of Terrace Odean on behavioural finance in the Indian Stock Investors' context. The concept of overconfidence bias and its implications of finance were developed by Kahneman and Tversky, and later by other behavioural finance researchers such as Malmendier, Hirshleifer, DeBondt, Odean, Barber, Shefrin and others. This paper studies stock investing behaviour with specific reference to Indian HNI investors.

Citation

Parhi, S.P. and Pal, M.K. (2022), "Impact of overconfidence bias in stock trading approach: a study of high net worth individual (HNI) stock investors in India", Benchmarking: An International Journal, Vol. 29 No. 3, pp. 817-834. https://doi.org/10.1108/BIJ-07-2020-0389