International journal of Contemporary Business Studies

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International Journal of Contemporary Business Studies Vol: 3, No: 6. June, 2012 ISSN 2156-7506 Available online at http://www.akpinsight.webs.com Regret theory According to Investopedia “simply regret theory deals with the emotional reaction people experience after realizing they've made an error in judgment. Faced with the prospect of selling a stock, investors become emotionally affected by the price at which they purchased the stock. So, they avoid selling it as a way to avoid the regret of having made a bad investment, as well as the embarrassment of reporting a loss.” Overconfidence Overconfidence defines as “an overestimation of the probabilities for a set of events by Mahajan, J. (1992). Operationally, it is reflected by comparing whether the specific probability assigned is greater than the portion that is correct for all assessments assigned that given probability.” J. Michailova (2010) tests the overconfidence bias among the gender with the help of questionnaire of 50 questions. She concludes that there is no significant difference among expressed overconfidence by both the genders and they did not appear to be associated with overconfidence. Conservatism Conservative is simply means traditional. Conservatism as psychological attitude means human being has some excess attachment to the things which they have already with them. And something new offer to them then they are not ready to accept that new thing or slowly and gradually they are accept that new thing. Edward (1962) explains conservatism bias. It means “Investors are too slow (too conservative) in updating their beliefs in response to recent evidence. This means that they might initially under react to news about a firm, so that prices will fully reflect new information only gradually. Such a bias would give rise to momentum in stock market returns.” Financial Cognitive Dissonance As individuals, we attempt to reduce our inner conflict (decrease our dissonance) in one of two ways: 1) we change our past values, feelings, or opinions, or, 2 we attempt to justify or rationalize our choice. This theory may apply to investors or traders in the stock market who attempt to rationalize contradictory behaviors, so that they seem to follow naturally from personal values or viewpoints. Goetzmann and Peles (1993) explain the cognitive dissonance. According to them, an individual try to reduce his/her inner conflict by changing their past values, feelings or opinion or he/she attempt to justify his/her choices. Prospect theory Prospect theory deals with the idea that people do not always behave rationally. This theory holds that there are constant biases motivated by psychological factors that influence people‟s choices under conditions of uncertainty. Prospect theory considers preferences as a function of “decision weights,” and it assumes that these weights do not always match with probabilities. Specifically, prospect theory suggests that decision weights tend to overweigh small probabilities and under-weigh moderate and high probabilities. Kahneman and Smit (2002) had used insights from cognitive psychology regarding the mental processes of answering questions, forming judgments, and making choices, to help us better understand how people make economic decisions. The explained heuristics and biases, prospect theory, decision making differences according to economy and psychology. Schwarz (1998) conclude that if investors faced with the possibility of losing money they often take a riskier decisions aimed at loss aversion. So, investors‟ prospects changed according to the probabilities of being in profit or loss. OBJECTIVE OF THE STUDY The primary objective of the study was to understand the behavior of investors with the help of different behavioral finance theories. The theoretical concept of different behavior finance theories like overconfidence, disposition effect, conservatism, cognitive dissonance, rationality and regret theory were used to understand the investors‟ behavior. Copyright © 2012. Academy of Knowledge Process 30
International Journal of Contemporary Business Studies Vol: 3, No: 6. June, 2012 ISSN 2156-7506 Available online at http://www.akpinsight.webs.com HYPOTHESIS 1) H o = 60% investors are Rational. 2) H o = 60% investors are Over Confident. 3) H o = 60% investors are affected by Disposition Effect. 4) H o = 60% investors are conservative. 5) H o = 60% investors are affected by Cognitive Dissonance. 6) H o = 60% investors are Regret Investors. The behavior can‟t be 100% same for all situations and for all human being. So for hypothesis testing, 60% was taken as a benchmark for getting inventors‟ behavior. The alternative hypothesis for all H o was “less than 60%.” DATA AND METHODOLOGY Sampling unit For the survey respondent must be the person who invests in the Stock Market. Convenient sampling method is used for data collection. The questionnaires were filled out through personnel meeting with the investors. The respondents were survey outside the broking houses at respective cities. Sample Size The pilot study was conducted by surveying 20 investors. The human behaviour can not predict accurately. So, the confidence level was taken 93%. At 93% confidence, the sample size was derived at 124. For reducing error and safer side the sample size was increased to 150. Total 150 questionnaires were distributed in Anand, Petlad and Khambhat (50 in each) out of which 130 generated valid responses. 50, 46 and 34 questionnaire received from Anand, Petlad and Khambhat respectively. The sample was drawn as per convenience. The visitors and investors approached outside the brokerage house. The collected data were analyzed with the help of Minitab 16. Questionnaire Design The questionnaire (Annexure No. 1) was formed with 15 questions. Each question starts with a particular scenario or situation that may happen in the stock market. Then the respondents were offered a set of responses, which generally observed at a time of decision making. The questions were arranged in the following sequence to get proper understanding of investors‟ behavior and response. Question Number Behavioral Theory 1, 10 and 11 Rationality 2, 9 and 12 Over confidence 3, 8 and 13 Disposition Effect 4 and 14 Conservatism 7 Cognitive Dissonance. 5, 6 and 15 Regret Theory Copyright © 2012. Academy of Knowledge Process 31
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