Delving into the investment psyche: investigating the determinants influencing individual investors’ decision-making

Rajesh Raut, Harsha Thorve, Amruta Deshpande and Natasha Kaul

Abstract

Behavioral finance combines the psychological aspects of human behavior with traditional finance concepts. This study’s objective is to identify determinants influencing the investment decisions of an individual investor. The study is based on the five cognitive biases that impact investment decisions. Adopting a quantitative and descriptive research approach, the study uses data from 400 investors to identify the variables that significantly impact investment decisions. Factor analysis is used to determine the influential critical factors. Five cognitive biases are measured using 12 different variables. The results indicate that herding, overconfidence and mental accounting are the main cognitive biases that significantly impact investment decision-making. Investor overconfidence is the most critical of these parameters, which together effectively govern investment decisions. The paper provides portfolio managers with a helpful tool for understanding the different ways in which investors behave, and for improving the quality of advice for their investors. It also provides guidelines to investors on the critical biases that hinder investment growth, and how to identify these weaknesses and avoid them. Financial services providers will also find their improved knowledge of their clients helpful when designing products.