Evaluation of behavioral biases affecting investment decision making of individual equity investors by fuzzy analytic hierarchy process

Abstract

Purpose

Research in the area of behavioral finance has demonstrated that investors exhibit irrational behavior while making investment decisions. Investor behavior usually deviates from logic and reason, and consequently, investors exhibit various behavioral biases which impact their investment decisions. The purpose of this paper is to rank the behavioral biases influencing the investment decision making of individual equity investors from the state of Punjab, India. This research would provide valuable insight into the different behavioral biases to investors and other participants of the capital market and help them in improving investment decisions.

Design/methodology/approach

The research is conducted on the individual equity investors of Punjab, India. Fuzzy analytic hierarchy process was applied to rank the factors influencing the decision making of individual equity investors of Punjab. The primary factors considered for the study are overconfidence bias, representative bias, anchoring bias, availability bias, regret aversion bias, loss aversion bias, mental accounting bias and herding bias.

Findings

The three most influential criteria were herding bias, loss aversion bias and overconfidence bias. The five most influential sub-criteria were “I readily sell shares that have increased in value (C61),” “News about the company (Newspapers, TV and magazines) affects my investment decision (C84),” “I invest each element of my investment portfolio separately (C71)” and “I usually hold loosing stock for long time, expecting trend reversal (C52).”

Research limitations/implications

Although sample survey conducted in the present study was based on a limited sample selected from a particular area that truly represented the total population, it is considered as the limitation of this study.

Practical implications

The outcome of this research provides investors with a better understanding of behavioral biases that influence their decision making. This study provides them a guideline on different behavioral biases that they should consider while making investment decisions.

Originality/value

The research model is based on the available literature on behavioral finance and the research results and findings would add value to the existing knowledge base.

Citation

Jain, J., Walia, N. and Gupta, S. (2020), "Evaluation of behavioral biases affecting investment decision making of individual equity investors by fuzzy analytic hierarchy process", Review of Behavioral Finance, Vol. 12 No. 3, pp. 297-314. https://doi.org/10.1108/RBF-03-2019-0044