A

DISSERTATION

ON
“Behavioral Finance”

SUBMITTED BY: SUBMITTED TO:

Gautmi Rathore Dr. Kirti Goyal

REG. NO. 210901081

BBA VI -D

Department of Business Administration

School of Business and Commerce
MANIPAL UNIVERSITY JAIPUR

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TABLE OF CONTENTS
S.No. Particulars Page No.

1 Introduction 6
• Background of the topic
2 Review of Literature 9-11
3 Research Methodology 13
• Research Objectives
• Scope of Study
• Research Design
• Sampling Design
4 Data Analysis and Findings 15-25
5 Discussions and Conclusion 27-28
6 References 29

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Declaration

I hereby declare that the dissertation titled “Behavioural Finance”, herewith

submitted in partial fulfilment for the award of “Bachelors of Business
Administration” Manipal University Jaipur is an authentic record of the
research work carried out by me. The matter embodied in this dissertation has
not been submitted for the award of any other degree or diploma.

Gautmi Rathore

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Acknowledgement

I would like to thank my esteemed supervisor – Dr Kirti Goyal for her

invaluable supervision, support and tutelage during the dissertation. My
gratitude extends to the Faculty of Management and Commerce for giving
this opportunity to undertake my studies at the Department of Business
Administration, Manipal University Jaipur. Additionally, all the other
faculties for their treasured support which was really influential in shaping
my experiment methods and critiquing my results. My appreciation also goes
to my family and friends for their encouragement and support all through my
studies.

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Chapter 1
INTRODUCTION TO THE TOPIC

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Finance and economics are two fields which overlap in many ways while investing. Finance
is a field of intense decision making related to investments, working capital, dividend as
well as allocation of funds whereas economics is all about making decisions like, what to
produce, how to produce and for whom the production is going to take place.
Even though these two fields answer many questions of researchers, some are still
unanswered, relating to why investors take irrational financial decisions, even though, today
there are so many instruments to mitigated the losses of investors.

Background of the study

The dynamics of investments are very well portrayed in the subjects of finance and
economics including all the rules to be applied while investing, with indicators displayed on
screen and instruments to limit investors’ losses, still investors let their emotions and mood
drive them while making investment related decisions and let them overrule the logic and
misjudge probabilities.
But the field of finance denies, or is maybe a little reluctant to accept the behavioural finance
model proposed by psychologists. But as the times are changing, this model received more
and more acceptance in the financial society.
This fact was proven by Daniel Kahneman and experimental economist Vernon Smith in the
year 2002, by winning Noble Price in economics to psychology, this being seen as the
vindication of the field of behavioural finance.

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Chapter 2
REVIEW OF LITERATURE

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What is Behavioural Finance?
It’s the area of study which sheds light on the fact that how are psychological factors and
external environment can influence the market outcomes. This is considered to be a subfield
of behavioural economics and is a very crucial part of investment decision making.
Some of the common aspects of this includes loss aversion, consensus biases and also
familiarity tendencies.

Areas where Behavioural Finance influence the most:

• Stock Market
Investors’ behaviour patterns affect the market outcomes and returns at different
angles of observation, it depends on the purpose of classification as why people make
certain choices and how they affect the markets.
• Investment Patterns
Whether it be long term investment or a short term, the psychology behind these
investments matters the most which later affect the outcome of those investments.
Its important to study those patterns of behaviour to predict their influence in the
economy.

Traditional Finance and Behavioural Finance

• Traditional Finance
➢ Assumes investors are logical thinkers, and act on the basis of given data

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➢ Investor always aiming for maximum wealth and profits
➢ Focus on the “what” of investors’ decisions
➢ Market interactions are not considered, rather individual’s rationality is
focused

• Behavioural Finance
➢ Acknowledges why investor might not act rationally always
➢ “why” is more important here
➢ Understands the underlying psychological and behavioural elements
influencing the investment decisions.

Despite all these differences, there are some of the common grounds on which both the
theories are developed such as,
✓ Both study financial markets and investment decision making
✓ Analyse these theories using mathematics models and statistics
✓ Profit maximization is the end goal of all investors
✓ Both acknowledge the fact that financial markets are complicated and unpredictable.
Types of Behavioural Finance

1. Mental Accounting: Allocation of funds for specific purposes while implying a

mental bias in their decisions. This concept was established by economist Richard
H. Thaler, according to him this concept says that every individual classify their
funds uniquely and hence the investor is prone to make irrational decisions while
investing.
2. Herd Behaviour: this is a kind of behaviour when investors mimic the investment
patterns of majority, which results in dramatic market rallies and sell offs. Some of
the economic crisis which can be a affect of herd behaviour can bubble formation,
currency crisis etc.
3. Emotional Gap: this theory suggests that our everyday moods changes and
emotions such as anxiety, excitement, fear etc, can lead the irrational decision
making while investing.
4. Anchoring: People use an ‘anchor point’ of an event or value that they know in
order to help them make decisions or estimate. These anchor points can be budget
constraints etc which affects the financial decision making.

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5. Self-attribution: Ranking one’s expertise higher than estimate might lead to biased
choices. This happens due to overconfidence in one’s knowledge or skills.

Biases revealed by Behavioural Finance

1. Confirmation Bias: Investors has the tendency to accept data that confirms their
already existing values and beliefs, this is known as confirmation bias. Here, the
investor intentionally looks for or interprets the information that align with their own
belief system.
2. Experimental Bias: Skewness in an investors’ perception due to recent events and
making them believe that there are chances that history might repeat in the near
future leads investor to make investment mistakes.
3. Loss Aversion: The pain borne by the investors of losing is more prominent than
the pleasure of gaining, so most investors try to prioritize avoiding losses instead of
seeking gains and therefore result in poor decision making due to excessive risk
taking.
4. Familiarity Bias: Most investors try to invest more in what they have knowledge
about, this leads to lack of diversification in portfolio and increases the risk of
bearing losses to the investor.

Previous Research

1. Nichlas Barberis – 2002

In this paper the researcher proposes an argument that some financial phenomena
can plausibly be understandable using models in which agents are not fully rational
in their decision making.
This area has two building blocks, limits to arbitrage (arguing that its difficult for
rational traders to undo the disturbances caused by irrational traders) and psychology
(deviations from rationality that can be expected to be seen)

2. BIRĂU
The article presented here is a new approach on analysing the capital markets,
behavioural finance. It defines it as the study of influence of psychological factors
on financial markets evolution.

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3. Andrea Masisni – 2012
To stimulate growth and accelerate the recovery from the recent financial crisis,
investments in renewable energy (RE) technologies are regarded with extreme
interest.

4. Mangee – 2017
At the start of this paper, the researcher provides econometric evidence on the
importance of psychology for aggregate stock price fluctuations and as we reach the
end, a measure of stock market sentiment, known as Net Psychology Index based on
stock market reports.

5. Kevin Brady – 2018

The shocks in the stock market prices are not caused by publicly available
information, if this information is not available to the investors, what other
information is used by them to set their prices? The researcher finds that investors
rely on reference points and personal information signals.

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Chapter 3

RESEARCH METHODOLOGY

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RESEARCH OBJECTIVES
Primary Objective
• Analysing the impact and relevance of behavioural finance in investment related
decision making
Secondary Objectives
• Analyse and observe factors affecting investors’ decision making
• Study behaviour and psychology of the investors
• Analyse what are people preferences towards investment

SCOPE OF STUDY
• The scope is limited to the population of Jaipur
• All age group inclusive research
• Analysis is limited to only few theories
RESEARCH DESIGN
The design followed in the research id descriptive in nature as the population’ point
of view of investing is being studied.

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SOURCES OF DATA COLLECTION
Primary Data: Primary method of data collection in the research is questionnaire and
observation method.
Secondary Data:
• Internet
• Books
• Articles
• Newspapers
SAMPLING DESIGN

Population: Jaipur Population

Frame of sample: People who Invest
Sampling Method: Convenience Sampling
Sampling size: 15 people

Chapter 4
DATA ANALYSIS AND FINDINGS

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Age Group % Profession % Qualification %

18-25 60 STUDENT 66.7 UG 60

25-35 26.7 WORKING 26.7 PG 26.7

35-50 13.3 FREELANCER 6.7 PhD 13,3

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As per the findings most of the people involved in the research are of age group 18-25 i.e.,
60% and the remaining 25-35 (26.7%) and 35-50 (13.3%).

As per the analysis most of or population are student i.e.,66.7% and the rest are either
working investors or freelancers.

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As per the findings, majority of our population are under graduate students i.e.,60% and
the remaining are Post Graduates and PhD Scholars.

As per the findings,

• 1- Strongly Agrees (53.3)

• 2- Agree (33.3)

• 3- Neutral (6.7)

• 4- Disagree (NA)

• 5- Strongly Disagree (6.7%)

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As per the findings,

• 1- Strongly Agrees (13.3%)

• 2- Agree (20%)

• 3- Neutral (33.3%)

• 4- Disagree (26.7%)

• 5- Strongly Disagree (6.7%)

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As per the findings

• 1- Strongly Agrees (40%)

• 2- Agree (40%)

• 3- Neutral (13.3%)

• 4- Disagree (0%)

• 5- Strongly Disagree (6.7%)

As per the findings

• 1- Strongly Agrees (20%)

• 2- Agree (20%)

• 3- Neutral (40%)

• 4- Disagree (13.3%)

• 5- Strongly Disagree (6.7%)

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As per the findings

• 1- Strongly Agrees (26.7%)

• 2- Agree (40%)

• 3- Neutral (26.7%)

• 4- Disagree (0%)

• 5- Strongly Disagree (6.7%)

As per the findings

• 1- Strongly Agrees (20%)

• 2- Agree (46.7%)

• 3- Neutral (26.7%)

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• 4- Disagree (0%)

• 5- Strongly Disagree (6.7%)

As per the findings

• 1- Strongly Agrees (13.3%)

• 2- Agree (53.3%)

• 3- Neutral (26.7%)

• 4- Disagree (0%)

• 5- Strongly Disagree (6.7%)

As per the findings

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• 1- Strongly Agrees (13.3%)

• 2- Agree (26.7%)

• 3- Neutral (20%)

• 4- Disagree (26.7%)

• 5- Strongly Disagree (13.3%)

As per the findings all investors involved in the study take advice from friends and family
in consideration while making an investment.

As per the findings of the study conducted, 93.3% of the investors involved in the study
agrees that external factors like mood, confidence, income etc affect investment decision
making.

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As per the findings, 80% of the investors’ investment decision affected by daily news updates
and the rest 20% rely on other sources for updates.

As per the findings, majority of our investors think retirement plans is an essential part of
investment decision making (93.3%) and the rest 6.7% investors do not.

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As per the findings of the study, 93.3% of the population involved in the research consider
fixed deposit and insurance is important while investment planning, and rest 6.7% don’t.

As per the findings of the study, yes, majority of the investors think investments should
be stable (93.3%), rest seems to think otherwise.

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As per the findings of the study, majority of the investors involved in the study responded
yes, investments should offer higher returns, rest 6.7% do not think it’s an important
aspect of investment.

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Chapter 5
DISCUSSION AND CONCLUSION

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SUMMERIZATION AND DISCUSSIONS

As we have seen in the research conducted above, it is well established that yes, behaviour
does affect the investment decision of the investor in one way or another.

For instance, a person who have seen a lot financial crisis in the life before due to this
these investments in markets, will always see this field with a view of negativity, and
there will be no changes in his views till he studies these concepts in a proper manner and
practice with great caution as well as attention. These kinds of thoughts and beliefs
surround our environment and our heads every day, and to overcome them, one must gain
full knowledge of the subject and then decide whether its fruitful or not.

Out of the total Indian population i.e., 141.72 Cr, 135.3Cr (as per the reports of 2021) of
our population is engaged in investment, and great increase of interest has been seen in
the youth of our country from 2018, as shown below;

YEAR 18-35 (in%) 36 & ABOVE (in%)

2017 66 34

2018 70 30

2019 69 31

2020 70 30

As presented above the, the interest of youth has been continuously increasing since the
last 4 years, this is an indication that people are gaining knowledge about the markets and
investments. But to invest in a right way, is the most essential part of investing.

And not letting external factors cloud our judgement is also important, so even though its
vague that behavioural finance is good for our financial health or not, its apparent that it
does cloud our judgement in more than one ways.

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CONCLUSION
This theory of Behavioural Finance provides us with fresh insights and perspective,
answering why investors act irrationally and make decisions defying the traditional
economic rules and principles. And a combination of these principles of finance and
psychology, this theory provides a glimpse of the cognitive and emotional biases that
influence the investors’ behaviour.

These biases and their effect on investors’ decision, is something which is crucial to
understand for professionals aiming to provide effective guidance to investors, and by
acknowledging these biases, professional can make better and more accurate decisio ns
and provide the investor with rational choices to ultimately improve their financial
outcomes.

In conclusion to this topic, Behavioural Finance is comprehensive layout to understand

investors’ investment patterns and their investment behaviour. Understanding this is a
crucial and very important aspect, which should be acknowledges by all the brokers ,
investment advisors and other professionals so that better decisions can be made and
investors don’t let external factors, like emotion, mood, past experience etc cloud their
judgement. Therefore, thorough knowledge about the subject plays an important role in
investments because, “when it comes to investing, nothing will pay off more that
educating yourself”.

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REFERENCES

Articles and Books

Previous Researches

https://www.investopedia.com/terms/b/behavioralfinance.asp

https://www.tandfonline.com/doi/full/10.1080/14697688.2020.1809697

https://www.linkedin.com/pulse/differences-similarities-between-
traditional-finance-behavioral

https://www.ijnrd.org/papers/IJNRD1907016.pdf

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