TITLE:
Impact of Psychological Traits on Rationality of Individual Investors
AUTHORS:
Bashir Ahmad Joo, Kokab Durri
KEYWORDS:
Psychological Traits, Rationality, Faith, Heuristics, Overconfidence, Optimism, Pessimism
JOURNAL NAME:
Theoretical Economics Letters,
Vol.8 No.11,
July
31,
2018
ABSTRACT: Over the years it has been noted that investors
suffer from number of biases that affect their rationality while they take
investment decisions and as such it is must for stakeholders to have an idea of
these biases. Thus the objective of this paper is to explore the factors which
affect the investors’ rational behavior in the stock market decisions. The
authors have designed well-structured questionnaire to empirically investigate
the presence of psychological traits in the individual investors’ financial
decisions. Deduction approach of research has been used in present study
because the main objective of the study is to identify the psychological traits
that influence the decision making of individual investors, which are already
out there, without inferring and building theory. Based on the data collected
from 303 respondents and by applying Exploratory Factor Analysis (EFA), the
study could identify the five main psychological traits including the newly
identified bias i.e. “faith” that
have substantial influence on the rationality of investors. Further, the
results of regression analysis reveal that faith, heuristics, confirmation,
pessimism, over-confidence and optimism and herd behavior are statistically
significant psychological traits and all these variables collectively explain
the 35 per cent variation in rational behaviour of investors. Finally, this
study asserts that there is an urgent need to have the unified theory of
behavioural finance and standard finance, the emphasis of which should be in
identifying portfolio anomalies that can be explained by various psychological
traits in individual investors for bringing greater efficiency in our stock
markets.