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Shrimathi Devkunvar Nanalal Bhatt Vaishnav College for Women, Affiliated to University of Madras, Chennai, India.
*Corresponding author: E-mail: khavipriya12@gmail.com;
Chapter 7
Print ISBN: 978-93-90149-61-2, eBook ISBN: 978-93-90149-07-0
A Study on Behavioral Finance to Understand the
Psychological Behavior of Individuals in Financial
and Non-financial Investment and Decision Making
Khavi Priya Bagya Lakshmi1*
DOI: 10.9734/bpi/csem/v3
ABSTRACT
Everyone earns cash intending to fulfil life goals. Cash is employed for mundane also as exotic
functions. It will be saved and invested with to finance numerous goals like education, marriage,
retirement and then on. The wants will be each immediate and within the distant future. Cash will be
attained by operating for pay, by taking risks for profit associated degree by investment and
managing it to relinquish the financial gain. Behavioral finance could be a comparatively new
paradigm of finance, that seeks to supplement the quality theories of finance by introducing
behavioral aspects to the decision making process. Early proponents of behavioral finance are
thought about by some to be visionaries. This research paper exhibits with key analysis tools like
factor analysis, binomial distribution, chi-square analysis, correlation analysis and regression analysis
with Three Hundred as the sample size and the research was conducted within the Chennai city in
India. This paper is an attempt to comprehend and distinguish the importance of psychological
behaviour of individuals towards investment and decision making.
Keywords: Behavioral finance; financial instruments; psychology; decision making.
1. BEHAVIORAL FINANCE AND HIGHER COGNITIVE PROCESS [1]
Behavioral finance is an integral part of the decision-making method as a result of it heavily
influences the investors’ performance. Investors will educate themselves regarding the assorted
biases that they're probably to exhibit and so they take steps towards avoiding it so up their
effectiveness. Some common mistakes created by investors square measure commerce early on
whereas booking profits, holding too long whereas facing losses, shopping for expensive stocks
supported market sentiments and positive analysis by all and varied.
1.1 Behavioral Biases [2]
 Overconfidence Bias
Overconfidence is explained as unwarranted religion in one’s intuitive reasoning, judgments,
and psychological feature skills. Psychologists have determined that certainty causes folks to
overestimate their information, underestimate risks, and exaggerate their ability to manage
events.
 Herding Bias
Herding in monetary markets is outlined as mutual imitation resulting in a convergence of
action. This is often the foremost common mistake wherever investors tend to follow the
investment selections taken by the bulk that's why, in monetary markets, once the simplest
time to shop or to sell is at hand, even the one that thinks he ought to take action experiences
a powerful psychological pressure refraining him to try to thus.

2. Current Strategies in Economics and Management Vol. 3
A Study on Behavioral Finance to Understand the Psychological Behavior of Individuals in Financial and Non-financial
Investment and Decision Making
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 Regret Aversion Bias
Regret aversion could be a psychological error that arises out of excessive target feelings of
regret at having created a choice, which clothed to be poor, primarily as a result of the
outcomes of the choice visibly higher for the capitalist to visualize. The foundation reason
behind this sort of error is the tendency that people hate to admit their mistakes.
 Mental Accounting Bias [3]
Mental accounting is that the set of psychological feature operations employed by people and
households to prepare, evaluate, and keep track of monetary activities. This lead to an
inclination for folks to separate their cash into separate accounts supported a range of
subjective reasons.
2. BIG FIVE FACTOR THEORY [4]
In 1981, in a conference in Capital of Hawaii, four distinguished Researchers (Lewis Goldberg, Naomi
Takamoto-Chock, Apostle Comrey and John M. Digman) reviewed the accessible personality tests of
the day and set that almost all of the tests that control any promise perceived to live a set of 5
common factors, even as Norman had discovered in 1963.
Table 1. Results of the accessible personality tests
S. No. Description Best Worst
1 Agreeableness Considerate, friendly, generous,
helpful, and willing to compromise
their interests with others
Unconcerned with others' well-
being
2 Openness to
change
Imaginative, creative people from
down-to-earth, conventional
people
Narrow, straightforward, and
obvious over the complex,
ambiguous, and subtle
3 Over extroversion enthusiastic, action-oriented and in
groups assert themselves, and
draw attention to themselves
Quiet, low-key, deliberate, and
disengaged from the social
world
4 Conscientiousness Insists to complete the work in an
organised manner
Does the work in an
unorganized manner
5 Neuroticism Relaxed and controls stress,
emotional stable
Feels anxious, insecure,
depressed, worried and angry
3. PROSPECTS THEORY [5]
The Prospect theory was originally formed by Kahneman and Tversky (1979) and later resulted in
Daniel Kahneman being awarded the honour for social science. The speculation distinguishes 2 parts
within the alternative process: the first part of the framing and also the later phase of analysis. They,
by developing the Prospect Theory, showed however folks manage risk and uncertainty. In essence,
the speculation explains the apparent irregularity in human behaviour once assessing risk below
uncertainty. It says that groups of people aren't systematically risk-averse; rather they're risk-averse
in gains however risk-takers in losses. Folks place additional weight on the outcomes that perceived
more bound than that are thought-about mere probable, a feature called the ‘certainty effect’.
People’s decisions are suffering from the ‘Framing effect’. Framing refers to the manner within which
an equivalent downside is worded in several ways in which and bestowed to call manufacturers and
also the impact deals with however framing will influence in a very manner that the classical axioms
of rational choices don’t hold.
4. REVIEW LITERATURE
 Lee et al. [6] outlined and investigated the biases investors encounter whereas taking
investment selections, these biases square measure as follows: Loss aversion, mental

3. Current Strategies in Economics and Management Vol. 3
A Study on Behavioral Finance to Understand the Psychological Behavior of Individuals in Financial and Non-financial
Investment and Decision Making
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accounting, Optimism, Prediction certainty, Recency, Regret Aversion, Self-attribution, and
self-control, Anchoring and adjustment, Ambiguity, Conservation, Certainty, Framing, and
Illusion of management.
 Aduda et al. [7] whereas conducting their study the primary objective of their study being to
seek out however individual investors create their investment selections and based out that,
the influence from friends; were most investors relied on recommendation from friends and
colleagues before deciding to travel for stocks and; belief regarding the market and from
recent trend in share worth movements, were clear indication of swarming behavior existing
in NSE.
 Christie and Renu [8] conducted a theoretical study and primarily explained the concept of
behavioural finance, prospect theory, and classical monetary theory and also the
inconsistency within the stock exchange from the behavioural finance side. The paper
summarized varied issues like biases that resulted in the abnormal behavior of the stock
exchange that was left unexplained by scholastic monetary theories.
5. OBJECTIVES OF THE STUDY
1. To look at the impact of demographic variables and also the investment connected variables
on the rationality
2. To analyse the temperament traits of the respondents
3. To determine the extent to which the risk profile of the investors’ is determined based on the
prospects theory
4. To know the preferred financial and non-financial instruments among the respondents
5. To find the influential factor for investment decision making
6. To understand the various behavioral biases and its effect on the investment decisions
6. RESEARCH METHODOLOGY
Descriptive research is employed to get the research results. Random sampling methodology was
adopted. Sample of Three Hundred respondents is taken for the study. The instrument used for
gathering data was questionnaire. The data so collected will be analysed using the statistical
techniques like percentage analysis, factor analysis, binomial distribution, correlation, Kendall W test,
regression and chi-square.
7. ANALYSIS AND INTERPRETATION
The most preferred instrument is bank deposits and other deposits followed by gold and other
precious metals.
Table 2. Percentage analysis – Demographic profile
Description Category Frequency Percentage
Age 20-40 205 68.33%
Gender Male 174 58.00%
Marital status Unmarried 190 63.33%
Educational qualification Under graduation 141 47.00%
Occupation Employed in private concern 113 37.67%
Experience 0-3 years 98 32.67%
Income level Less than INR 250000 per annum 71 23.67%
Table 3. Factor analysis - Big five-factor theory
KMO and Bartlett's Test
Kaiser-Meyer-Olkin Measure of Sampling Adequacy 0.675
Bartlett's Test of Sphericity Approx. Chi-Square 394.141
Degrees of freedom 45
Significance 0.001

4. Current Strategies in Economics and Management Vol. 3
A Study on Behavioral Finance to Understand the Psychological Behavior of Individuals in Financial and Non-financial
Investment and Decision Making
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Fig. 1. Percentage analysis – Demographic profile
Fig. 2. Behavioral biases
The most influential factor of behavioral bias is social influence followed by emotions and sentiments.

5. Current Strategies in Economics and Management Vol. 3
A Study on Behavioral Finance to Understand the Psychological Behavior of Individuals in Financial and Non-financial
Investment and Decision Making
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Table 4. Component matrix
Particulars Component
1 2 3 4
Artistic skills 0.773
Relaxed and stress free 0.718
Social outgoing 0.701
Works in an organised manner 0.547 -0.500
Reserved 0.822
Critical towards others 0.664 0.310
Fertile imagination 0.373 0.377
Gets nervous easily 0.810
Trusts people 0.361 0.645
Works in an unorganised manner 0.849
Dependent variable 1: Artistic skills and relaxed and stress-free
Dependent variable 2: Reserved and critical towards others
Dependent variable 3: Gets nervous easily and trusts people
Dependent variable 4: Works in an organised manner
Hence, the factor “works in an organised manner” was considered to be the primary factor that
influences the personality traits.
Table 5. Binomial distribution – Prospects theory
Particulars Category N Observed
Prop.
Test Prop. Exact Sig.
(one-tailed)
H0 – Accept
or reject
Alternate 1 Group 1 163 0.543 0.543 0.519 Reject
Group 2 137 0.457
Alternate 2 Group 1 203 0.677 0.677 0.473 Reject
Group 2 97 0.323
Alternate 3 Group 1 170 0.567 0.567 0.518 Reject
Group 2 130 0.433
As per the above analysis, the prospects theory alternate 1 ensures there is a significant difference
between 20% chance of winning INR 4000 and 80% chance of winning nothing with that of 25%
chance of winning INR 3000 and 75% chance of winning nothing, alternate 2 ensures there is a
significant difference between 50% chance of losing INR 1000 and 50% chance of losing nothing with
that of 100% chance of losing INR 500 and alternate 3 ensures there is a significant difference
between 10% chance of winning a one week trip to England and 90% chance of winning nothing with
that of 5% chance of winning a three week trip to England and France and 95% chance of winning
nothing.
Table 6. Correlation – Sources of information
Sources of information Decision
making
H0 – Accept
or reject
Internal source – Family, friends and colleagues Pearson correlation 0.058 Reject
Sig. (2-tailed) 0.319
External source- TV, social media, journals and
magazines, newspaper, company website,
government publication and other agencies
Pearson correlation -0.108 Reject
Sig. (2-tailed) 0.061
As per the above analysis, there is a significant association between the most preferred internal
source of information and the decisions taken based on their feedback and, there is a significant
association between the most preferred external source of information and the decisions taken based
on their feedback.

6. Current Strategies in Economics and Management Vol. 3
A Study on Behavioral Finance to Understand the Psychological Behavior of Individuals in Financial and Non-financial
Investment and Decision Making
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Table 7. Kendall's W test - Ranking the different sources of information
Sources of information Mean rank Rank
Friends and family 2.49 1
Magazines and newspaper 2.85 2
Social media 2.94 3
Government publication 3.05 4
Company website 3.67 5
The most preferred source of information is family and friends and the least preferred is from the
company website.
Table 8. Regression-Approach to decision making and the primary objective of making
investment
Model – X on Y Unstandardized
coefficients
Standardized
coefficients
T Sig. 95.0% confidence
interval for b
B Std. Error Beta Lower
bound
Upper
bound
1 (constant) 3.072 0.263 11.674 0.001 2.554 3.590
Approach -0.191 0.159 -0.070 -1.203 0.230 -0.504 0.122
A. Dependent variable: primary objective – financial security, retirement corpus, the stability of return, growth in
savings and source of income
X = 3.072-0.191Y, There is an indirect relationship as the primary objective increases as the mean of the
approaches to decision making decreases
Table 9. Statistical Results
Model- Y on X Unstandardized
coefficients
Standardized
coefficients
T Sig. 95.0% confidence
interval for b
B Std. Error Beta Lower
bound
Upper
bound
1 (constant) 1.650 0.065 25.464 0.001 1.522 1.778
Primary
objective
-0.025 0.021 -0.070 -1.203 0.230 -0.067 0.016
A. Dependent variable: an approach to decision making – personal belief and logical and methodical approach
Y = 1.650-0.025X, There is an inverse relationship as the approaches to decision making increases as the mean
of the primary objective decreases
Table 10. Chi-square test – The influence of behavioral factors over the investment decision
making
Category Value Degrees of
freedom
Significance
(2- sided)
H0 –
accept or
Reject
Loss aversion and time horizon of investing 19.765 20 0.473 Reject
Regret avoidance and percentage of savings
out of the investment
6.976 16 0.974 Reject
Mental accounting and percentage of return
expected out of the investments
5.877 12 0.922 Reject
Over confidence and the occupation of the
respondents
9.786 16 0.878 Reject
Anchoring and the educational qualification
of the respondents
22.959 20 0.291 Reject
As per the above analysis, there is significant association between after a prior loss, investor become
more risk-averse and time horizon of investing, there is significant association between avoid selling

7. Current Strategies in Economics and Management Vol. 3
A Study on Behavioral Finance to Understand the Psychological Behavior of Individuals in Financial and Non-financial
Investment and Decision Making
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investments that have decreased in value and readily sell investments that have an increase in value
and percentage of savings out of the income, there is significant association between the investor
tends to treat each element of investment portfolio separately and percentage of return expected from
the investment, there is significant association between belief that the skills and knowledge are
adequate that can helps to outperform the market and occupation of the respondents and there is
significant association between forecast changes in prices in the future based on the recent prices
and educational qualification of the respondents.
8. CONCLUSION
As per the research findings, conscientiousness plays a key role in influencing investor decision
making and the investors’ are dynamic to the changes in the investment and portfolio market. A small
degree of change in the probability will have a high impact on investment decision making as the
investors’ risk preference is highly risk-averse. The reflexive and reflective approaches to decision
making will influence behavioral biases. The investor’s behavior is predominantly based on the risk
and return-trade off which impacts the psychology of the investor decision making.
Results show that respondents might not essentially build choices on the premise of a rational
analysis of all the information. By desegregating behavioral finance and investment management,
Personal Benchmark allows advisors to form for investors the purchasing power that finances the
lifestyles or experiences investors be after to form for them. Framing investment methods through the
prism of one’s personal goals manage the frequently counterproductive behavioral biases that throw
investors off course. Utilizing a personal benchmark does everything from serving one to manage
behavioral irrationalities to protecting one against some return-damning flows of efficient market
theory.
COMPETING INTERESTS
Author has declared that no competing interests exist.
REFERENCES
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1998;53(6):1839–1885.
Available:https://www.jstor.org/stable/117455
3. Sussman AB, Zhang Y. Perspectives on mental accounting: An exploration of budgeting and
investing. Wiley Invited Review- Financial Planning. 2018;1(1-2).
Available:https://doi.org/10.1002/cfp2.1011
4. The Big Five Personality Test; 2019.
Available:https://www.truity.com/test/big-five-personality-test
5. Kahneman D, Tversky A. Prospect theory: An analysis of decision under risk.
ECONOMETRICA - Journal of Econometric Society. 1979;47(2):263–291.
Available:https://www.jstor.org/stable/1914185.
6. Lee K, Miller S, Velasquez N, Wann C. The effect of investor bias and gender on portfolio
performance and risk. The International Journal of Business and Finance Research. 2013;7(1).
7. Ouma C. (n.d.). Aduda et al.; 2014.
Available:https://www.academia.edu/7954196/Aduda_et_al._2014
8. Indian finance articles.

8. Current Strategies in Economics and Management Vol. 3
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Investment and Decision Making
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Biography of author(s)
Khavi Priya Bagya Lakshmi
Shrimathi Devkunvar Nanalal Bhatt Vaishnav College for Women, Affiliated to University of Madras, Chennai, India.
She is a unique author by nature having many accomplishments to her list. She hails from a commerce background making her
one of the youngest budding author cum researcher of her domain in the country. She currently pursues ACCA, UK along with
a Master’s degree in Accounting and Finance from Shrimathi Devkunvar Nanalal Bhatt Vaishnav College for Women, affiliated
to University of Madras, Chennai, India. She is passionate about Law, Taxes, and Governance. Her write-ups include various
journals and articles published with ISSN and ISBN. Her curiosity in researches made her a default option for her college for
inter-college paper presentations, conference, seminars and demonstrations. “Constraints faced by SME in raising funds for
financing”, “A study on the usage of tax saving instruments among individual assessees” and “Forensic accounting in
prevention of fraud” are a few of many worthy pieces of research of her to mention. She has a wide and long vision of
educating herself by continuous learning and to others by sharing what is learned. She is commonly known as ‘libree’ (ack.
Library bee) by her friends as she loves spending most of her time with books. Her passion doesn’t stop with academics as she
strives to pioneer in management skills, leadership skills, communication, and interpersonal skills. She served as the College
Union Secretary for the academic year 2017-18. She is an aspiring Scuba diver. She has received Gold Medal from the Late
Former Chief Minister of Tamil Nadu Miss J. Jayalalithaa on her 60th
Birthday Swimming Competition in the year 2008. She has
been also awarded as the Out-going Swimmer of the School in the year 2015. She has performed the most popular art form
called Bharathanatiyam in various Temples in Tamil Nadu. She is very devoted towards art and other forms of paintings.
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