Evidence on rationality and behavioural biases in investment decision making

Abstract

Purpose

The purpose of this paper is to investigate the relationship between rational decision-making and behavioural biases among individual investors in India, as well as to examine the influence of demographic variables on rational decision-making process and how those differences manifest themselves in the form of behavioural biases.

Design/methodology/approach

Using a structured questionnaire, a total of 386 valid responses have been collected from May to October 2015. Statistical techniques like t-test, analysis of variance (ANOVA) and Fisher’s least significant difference (LSD) test have been used in this study. Structural equation modelling (SEM) has been used to analyse the relationship between rational decision-making and behavioural biases.

Findings

The findings show that the structural path model closely fits the sample data, indicating investors follow a rational decision-making process while investing. However, behavioural biases also arise in different stages of the decision-making process. It further explores that gender and income have a significant difference with respect to rational decision-making process. Male investors are more prone to overconfidence and herding bias in India.

Research limitations/implications

The findings of the study have significant implication for the individual investors. It is recommended that if individuals are aware about the biases, they may become alert before taking irrational investment decisions.

Originality/value

To best of the authors’ knowledge, the present study is a first of its kind to investigate the relationship between rational decision-making and behavioural biases among individual investors in India.