International Journal of Pure and Applied Mathematics

Volume 118 No. 18 2018, 1667-1675

ISSN: 1311-8080 (printed version); ISSN: 1314-3395 (on-line version)
url: http://www.ijpam.eu
Special Issue
ijpam.eu

Factors affecting Investment Decision making & Investment Performance

among Individual Investors in India

Mahalakshmi T.N. 1 &Anuradha N.2

1
Full Time Research Scholar, Department of Management Studies, B. S. Abdur Rahman
Crescent Institute of Science & Technology, Vandalur, Chennai. smpy.maha@gmail.com,
9940548793.

2
Assistant Professor, Department of Management Studies, B. S. Abdur Rahman Crescent
Institute of Science & Technology, Vandalur, Chennai.

Abstract:

Purpose: Investments are made to earn returns and capital appreciation to overcome
uncertainty in future. Decision making for investing involves biases which has an impact on
the performance of investments.

Objective / Methodology: The main objective of this paper is to study the impact of
psychological biases, spouse effect and level of engagement in investment decision making
and investment performance through review of literature from secondary sources like
Journals, magazines & periodicals.

Findings: The findings of the literature review indicates the mediating effect of level of
engagement and the moderating effect of spouse effect on investment decision making and
investment performance. Investment advisors must frame strategies depending on these
factors to ensure better investment decisions. This research paper is the first of its kind to
include spouse effect and level of engagement in the role of mediating and moderating effects
in decision making and investment performance.

Implications: This paper provides insights to the professionals and service providers to
substantiate effective investment strategies for the investors.

Key words: Behavioural biases, level of engagement, spouse effect, decision making and

Investment performance

Paper type: Literature review

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1. Introduction:
Traditional finance states that Humans act rational. They try to maximise utility by
selecting the best option among the available alternatives (von Neumann and Morgenstern,
1944) in times of uncertainty (Kumar & Goyal, 2015) Efficient market hypothesis states that
markets are efficient and prices reflect all the available information (Fama, 1970) But this is
in contradiction with the reality. Humans tend to behave irrational while making investment
decisions. Behavioral finance tries to find out the causes for such irrational behavior among
individuals. Behavioral finance focuses on the psychological aspects of why such irrational
behavior arises among individuals. It is assumed that psychological biases has an influence
on investment decision making which leads to less returns (Kumar & Goyal, 2015) It is also
found that lack of information and memory errors has an impact on irrational decision
making (Simon, 1956)

Empirical evidences identified various psychological biases and its impact on decision
making. But the mediating effect of level of engagement in trading activities in stock market and
the moderating effect of spouse effect in decision making has not yet been explored earlier. This
paper tries to find out the impact of the mediating and moderating effect of level of engagement
and spouse effect in relation to the psychological biases like overconfidence, familiarity and
anchoring in investment decision making and its performance.

2. Behavioural biases, Investment Decision making & Investment performance

Individuals tend to make decisions using past experience, intuition or rule of thumb to
avoid information processing, due to which they earn poor returns in the long run (Jain et al.,
2015). The individual behaviour differs over time and situation due to certain behavioural
biases (Hossain Nasrin, 2012). The influence of such biases are discussed below
(T.Karthigaipriya et al 2014).

2.1 Overconfidence

Overconfidence refers to the over estimation of one’s own ability (Hsin_Hue Chang,
2010) to achieve his /her goals by under estimating the future uncertainty. (Fabre & Francois
–Heude, 2009) Over confidence bias occurs when an individual believes that his/ her
judgment to be more reliable than others (Jain et al., 2015) Empirical evidences shows that
Generally men exhibit more confidence than women (Barber & Odean, 2001), nearly 40% of
investors exhibited overconfidence in stock markets (Allan & Evans 2005) over confident
investors over react to market information (Barber & Odean, 1999; Daniel et al., 1998) and
stick to in accurate prediction about the stock market (Tongren & Montgomery, 2004) There
exists a positive relationship between information search and overconfidence bias (Kumar &
Goyal, 2016)

2.2 Familiarity

In the absence of required information, the neural connections in the brain processes
information through shortcuts, to achieve a desired objective. Past experience is used to
process such information. It was found that individuals who buy houses compare the price of

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other houses which are familiar to them in the nearby location, to assess the risk of the
property and assess the future value of the investment. (Harrison et al., 2008)

Familiar features may undergo changes over a period of time (Niklas , 2000) Humans
tend to observe familiar events rather than unfamiliar events and assign more importance for
the happening of such events which leads to belief reversal (Fox & Levav, 2000) women
seem to display more familiarity bias in case of investments (Harrison et al., 2008)Investors
prefer to buy stocks which are familiar to them, leading to home bias (Shefrin, 2002) and
deficit diversification (Pompian, 2006) Empirical evidences project that, money managers
invest in the firms which are familiar to the investors even though it may yield less returns
(Hiraki et al., 2005)

2.3 Anchoring

In the process of decision making humans tend to rely on the first hand information,
which is arrived either from family or any other recommended source (Mahapatra & Mehta,
2015) rather than new information. In case of stock investments, it is the behaviour of the
individual, who recalls the price of the share when they engaged in investing for the first time
rather than the value of the share after some time (Simon brown, 2015). Investors are
influenced by anchoring bias while estimating the profitability of the firm (Cen et al., 2013)

Individuals waver processing more information as it involves complex process (Chandra,

2002, Jain et al., 2015) and stick to the past information (Hoguet, 2005; Talha et al., 2015)
about the investments by ignoring new information , leading to forecasting errors (Campbell
& Sharpe, 2009 ; Jain et al., 2015) Empirical evidence elucidates that Anchoring bias leads to
judgment errors with a possibility of reduction in gains (Lowies G.A. (2014) Both men and
women are influenced by anchoring bias (Mahapatra & Mehta, 2015)

3. Level of engagement and Investment performance

Individuals include pension funds, gold, real estate & mutual funds in their investment to
escape from risk and losses. The current trend involves investment in equities by the common
households. Nearly 47% of the equities are held by the households. It was found that, those
who trade frequently earn very less returns compared to the investors who trade very less
(Chatham: Newstex, 2016)

The level of return in stocks, depends on the level of engagement by an investor.

Individuals influenced by overconfidence tend to involve in active trading which leads to less
returns (Barber & Odean, 2000) Increase in the volume of trading in the stock market is the
reflection of the overtrading by an investor (Odean, 1999) Hence the level of engagement
creates a mediating effect in the investment performance.

4. Spouse effect and investment Decision

Marriage has an impact on financial decision as it involves pooling of wealth from

two families, increase in the salaried income and influence of decision making due to
dependability & responsibility of the family. An increase in the value of wealth leads to the

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International Journal of Pure and Applied Mathematics Special Issue

decrease in risk aversion, which influences an individual to hold risky assets in their portfolio
(Nancy et al., 2003) Traditionally, women were dominated by their husbands in all aspects of
their life including savings and investment decisions. In the modern era, where women are
highly educated and earn more income, tend to influence men in savings and investment
decisions. (Meier et al., 1999) The influence of men in joint decisions is more, but the
influence gradually decreases in the presence of women during implementation (Palma et al.,
2011)

The higher the expertise in the field of investments increases the dominance of the
spouse effect in decision making (Meier et al., 1999) Investments are made to acquire
benefit in the future. Hence people invest in retirement plans & utilise the retirement
funds to invest in stocks to lead a better life and earn income after retirement (Sung &
Hanna, 1998)

Individuals prefer less risk when it comes to investing in stocks. Married couples
who are working compensates the decrease in the investment return through their
partner’s income. It was found that married couples invest similarly in 401 (k) plans and
there exists a significant correlation among husbands and wives who are involved in
401(k) plans and in the process of asset allocation. (Uccello, 2000) Married couples who
are employed doesn’t show any significant difference in the process of decision making
by investing their funds in retirement plans as well as use their retirement funds in stock
investments (Sung & Hanna, 1998) When a married women invest her funds in the
retirement plan, the male counterpart also makes an identical decision. Whereas when the
female partner decides to invests the retirement funds in stocks, her spouse also invests in
stocks. It was found that spouse effect has an impact on the investment decision making
among married couples (Sung & Hanna, 1998; Uccello, 2000; Nancy et al., 2003)

5. Conceptual Framework:

Based on the review of literature, a conceptual model is proposed as shown:

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6. Discussion & Conclusion

It is assumed that people are rational and they try to maximise their utility by choosing
the best alternative among the available options. But the irrational behaviour of individuals
lead to the existence of Behavioural Finance which focuses on investigating the reasons for
such irrational behaviour among individuals. Empirical evidences show that emotions and
insights which are referred as behavioural biases has an influence on investment decision
making.

Behavioural factors such as overconfidence, familiarity and Anchoring bias influences the
decision making of an individual. Besides these, an individual is also influenced by external
factors such as level of engagement and spouse effect, which has not been explored earlier.
This paper tries to find out the impact of behaviroal factors and the level of engagement and
spouse effect in investment decision making and performance. In the process of literature
review, it was found that level of engagement has a mediating effect on investment
performance and spouse effect has a moderating effect on investment decision making. The
findings of the study would be useful to investors, and investment professionals to construct
an effective investment portfolio to achieve the investment objective.

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