A study on behavioral biases and it's impact on financial risk tolerance among investors of Uttar Pradesh.
Creators: name: , Sushma
Publisher: name: Zenodo
Year: 2021
Subjects: subject: Behavioral biases
subject: Psychology
subject: FOS: Psychology
subject: Investment

description: Investment decision these days play a crucial role in planning different life long events <br> as well as financial contingencies. In Indian Investors, where an individual needs to <br> allocate funds on yearly basis in accordance with different governmental policies, this <br> task becomes much complex and difficult. In order to reduce this mental burden, every <br> individual takes help from different consultancies, people, and other organizations. As <br> seen in various financial decisions individual investors generally try to find his/her <br> assets and liabilities and then do financial planning in accordance; but the most <br> important criteria they generally omit is they are risk tolerance level. <br> The study where has been conducted with a primary objective to develop the financial <br> model to profile and investors (belonging to different tolerance levels) according to <br> different behavioural biases. However, the study has been conducted among investor of <br> Uttar Pradesh Region only, the replication of results on a larger population needs to be <br> analysed. The data has been collected from 500 individual investors (the absolute figure <br> is 487 after data editing) in the form of a structured Questionnaire having closed ended <br> questions. The questions related to behavioural biases have been developed on a 5 point <br> Likert scale. <br> The results show that the investors of Uttar Pradesh are found to be affected by different <br> behavioural biases which is prominently reflected in their irrational behaviour towards <br> financial decision making. The study found 8 behavioural biases (as propounded by NM <br> Waweru in the year 2008) namely representativeness, overconfidence, gamblers fallacy, <br> availability bias, loss aversion, regret aversion, mental accounting, and herd behaviour. <br> However, one biases named as anchoring bias does not seem to influence the investors <br> of Uttar Pradesh. The results also categories the investors into five different categories <br> of risk tolerance as conservative, above moderate, moderate, below moderate and <br> aggressive one (as defined in GL-RTS model in the year 2015). <br> The study here attempts to generate an association between these biases and different <br> risk tolerance levels. It is found that four biases (representativeness, over confidence, <br> gamblers fallacy, availability bias) are strongly, positively associated with risk <br> tolerance. However other 4 biases (loss aversion, regret aversion, mantel accounting, <br> and herd behaviour) are strongly, negatively associated with risk tolerance level. <br> The study also claims that various demographical factors (gender, age, marital status, <br> education, employment income, investment preference) do have an impact on the <br> financial risk tolerance level of an individual and hence this must be taken into account <br> while considering any financial alternative for an investment decision. <br> This study will help an investor to construct his/her own behaviourally modified <br> portfolio or to suggest it to others. However, future research with more behaviour biases <br> and on a larger population will contribute much to the present study.