FACTORS INFLUENCING INVESTMENT

BEHAVIOR: AN ANALYSIS ON
INVESTORS OF KERALA.
ABSTRACT

The study aims to explore the behavioral factors affecting the investment decision of
individual investors of Indian Stock Exchange with reference investors of Kerala state ,
India. The decision making is a cognitive process based on heuristic which results in
selection of investment avenues from the available alternatives. Behavioral factors such as
overconfidence, representative bias, regret aversion, mental accounting and herd behavior are
taken an independent variable for the study. This study was a descriptive study based on
stratified random and multi stage random sampling methods were applied in selection of
1000 respondents comprising the cross section of population. 916 responses was taken after
the data validation process. Descriptive statistics such percentage analysis , mean value,
factor analysis , chi square was used to test the variables. Exponential Factor Analysis was
applied to identify the significant factors. Five factor were extracted from factor analysis and
its impact was analyzed using Chi Square Test. Representative bias was found to be more
influential factor while herd behavior is the least factors among the investment behavioral
bias. All the variables are found to be statistical significant. Therefore the study concluded
that the behavioral factors have significant impact on the investment decision of the investors
of Kerala.

Key word : behavioral science, behavioral finance, behavioral investment, portfolio

management, representative bias, overconfidence, herd behavior, regret aversion, Kerala
 1. INTRODUCTION

Rationality and irrationality are the two fundamental aspects of finance theory. The
traditional finance theory ( eg : Expected utility theory of Neumann & Morgenstern(1944))
and the modern finance theory of Markowitz ( eg : Modern Portfolio theory
Markowitz( 1952) Efficient market hypothesis (Fama, 1991)) explain the concept of utility
function of maximizing the wealth with in informal efficient market. The key assumption of
all these theories is that activities of an economic human being are rational and his/her main
target is profit maximization. These theories are based on assumptions that the investor is
rational, riskaverse and uses the utility curve to maximize his wellbeing.

The assumptions of efficient market were violated because of speculations and volatility of
the market, which was termed as “market anomalies”. Although theories of modern finance
were considered to be successful, an alternative theory was developed which explains the
irrational behavior of investor. The alternative theory was named as Behavioral finance
which incorporates the psychological aspects of decision making. The behavioral finance
model emphasizes investor behavior, leading to various market anomalies and inefficiencies.
This new concept for finance explains individual behavior and group behavior by integrating
the fields of sociology, psychology, and other behavioral sciences. It also predicts financial
markets. These psychological themes dealt with the complexity in decision making process.
The complexity emphasize the two aspects of behavioral finance : Behavioral finance micro
and Behavioral finance macro. (Pompain, 2006, pp. 89)

1. Behavioral Finance Micro (BFMI) examines behaviors or biases of individual investors

that distinguish them from the rational actors envisioned in classical economic theory.

2. Behavioral Finance Macro (BFMA) detects and describes anomalies in the efficient
market hypothesis that behavioral models may explain.

1.1 INVESTORS DECISION MAKING PROCESS :

Traditional economic theory suggests that investors act rationally to maximize their returns
from their investment. According to theory, optimal investment selection requires a series
step of decision making process in the allocation of their investment. The decision making
process of the investor varies according to their different preferences related to their aversion
of risk and preference in different composition of their investment portfolio. In normal
circumstances, investment portfolio of an investor will be based on personal attitude to
investment risk and time horizon.

Decision on investment management is an complicated task and lifelong decision making

process. The process incorporates both micro factors as well as macro factors which affects
financial decision making. The micro factors incorporates the “want and need” of an
investor, which affect the personal financial concerns. The financial concerns were the family
structure: marital status and number of financial dependents, financial objectives, income and
the surplus income, life stage. When the micro factors linked with individual factors, macro
factors deals with macroeconomic environment of an investment arena. Micro factors
represent the “heuristics”, which was a systematic violation of rationality that affects
investment decisions. They are the simple rules of thumb which have been proposed to
explain how people make decisions, come to judgments and solve problems, typically when
facing complex problems (Kahmenan and Tversky 1974).

The decision making process is a cognitive process which results in selection of a course of
action among several alternatives. Most of the investors in financial market do not have
sufficient knowledge about the investments and its economic concepts. Therefore , there is a
need to conduct a research on that influences investment decisions (Lusardi & Mitchell,
2006). By exploring the cognitive biases and errors in portfolio management process, the
investor can improve their behavior by avoiding their mistakes and ensure an optimum
portfolio management.

2. OBJECTIVE OF THE STUDY

The purpose of the study is to identify the determinant of investment behavior with their
relative importance in managing portfolio.

The determinant of investment behavior was analyzed by applying the concept of behavioral
finance among the individual investors of Kerala, who normally trade at National Stock
Exchange or Bombay Stock Exchange.

3.1 Variables of the study

Independent variables: Investor’s behavior of which determinants are:

a) Overconfidence.
b) Representative bias
 c) Regret aversion
d) Mental accounting
e) Herd behavior

Dependant variable: Investment decision

3.2 Hypothesis development

H1: There is a significant relationship between overconfidence and the investor’s decision
making.

H2: There is a significant relationship between representative bias and the investor’s
decision making.

H3 : There is a significant relationship between regret aversion and the investor’s decision
making.

H4: There is a significant relationship between mental accounting and the investor’s decision
making.

H5: There is a significant relationship between herd behavior and the investor’s decision
making.

3. LITERATURE REVIEW

According to Hilbert(2012) , individual and retail investors are more influenced by

behavioral bias such as herding, overconfidence and reinforcement bias as compared to their
institutional counterpart. The study was justified in the study of Suresh( 2013) found out the
various financial traits and biases such as hindsight bias, loss aversion , endowment effect,
mental accounting, disposition effect and anchoring helps individual in sound financial
decision making.

(Dhole, 2014) conducted study among the medical graduate to examine the impact of
behavioral traits such as herding, mental accounting, gambling, etc . (D, Gokhan, 2011)found
the gender has interaction with five of the financial behavioral factors such as overreaction,
herding, cognitive bias, irrational thinking and overconfidence). And he also pointed out that
the level of individual savings has an interaction with four of the financial behavioral factors
(overreaction, herding, cognitive bias and irrational thinking).

(Lubna Riaz,et.al , 2012)every individual is different from others due to various factors which
include demographic factors, age, race and sex, education level, social and economic
background; same is the situation with the investors. The most critical challenge faced by
them is the investment decision; they act in a rational manner and usually follow their
instincts and emotional biases while making investment decisions.

(Arvid Hoffmann O.I, et.al, 2010) analyzes how systematic differences in investors’
investment objectives and strategies impact the portfolios they select and the returns they
earn. The findings provide support for the behavioral approach to portfolio theory and shed
new light on the traditional approach to portfolio theory.

(Chandra, 2008) explore the impact of behavioral factors and investor’s psychology on their
decisionmaking, and to examine the relationship between investor’s attitude towards risk and
behavioral decisionmaking. The findings of this research exhibit the irrational investment
behavior of investor. The investment decisionmaking are influenced by behavioral factors
like greed and fear, cognitive dissonance, heuristics, mental accounting, and anchoring. These
behavioral factors must be taken into account as risk factors while making investment
decisions. This research will help investment advisors and finance professionals judge
investor’s attitude towards risk in a better way, thus leading to better investment decision
making.

(Nelson Maina Waweru, 2008) investigated the role of behavioral finance and investor
psychology in investment decisionmaking at the Nairobi Stock Exchange with special
reference to institutional investors. Using a sample of 23 institutional investors, the study
established that behavioral factors such as representativeness, overconfidence, anchoring,
gambler's fallacy, availability bias, loss aversion, regret aversion and mental accounting
affected the decisions of the institutional investors operating at the NSE. Moreover, these
investors made reference to the trading activity of the other institutional investors and often
exhibited an institutionalherding behavior in their investment decisionmaking.

4. METHODOLOGY :

This is a descriptive study to identify the behavioral factors affecting the investment decision
of the investment with respect to Indian Capital Market. The primary data were collected
through structured questionnaire from the individual investor who resides in Kerala.
Individual investors represent the working households both in private and in public sector.
The Kerala state is the universe of the study and the investors who invest into capital market
is considered to be the population of the study. Stratified random and multi stage random
sampling methods were applied in selection of 1000 respondents comprising the cross section
of population. For the purpose of the study a sample of 1000 respondent were selected from
the state of Kerala by dividing the state into three zones namely the Northern zone , the
Central zone and the southern zone. 916 samples were extracted from the population.
Structured questionnaire was designed for collecting primary data. The study adopted 5 point
likert scale for exploring the determinant of investment behavior. The collected data was
processed and analyzed by suing SPSS software. The statistical techniques such as Cross
tabulation, chisquare , Factor analysis and Cronbach’s Alpha test were applied to obtain the
result from the study.

5. ANALYSIS AND INTERPRETATION PROFILE

OF RESPONDENTS

5.1 DEMOGRAPHIC AND SOCIO ECONOMIC PROFILE

In this session the researcher investigate the respondent by their demographic characteristics
was represented in Table 1 .

TABLE 1 DEMOGRAPHIC PROFILE OF INDIVIDUAL INVESTOR

Frequency Percentage Significance

Variables Chi Square
level
Male 662 72.3
Gender 181.729 .000
Female 254 27.7
1824 115 12.6
2534 238 26.0
3544 269 29.4
Age group 4555 141 15.4 96.664 .000
Above 55 153 16.7
Married 683 74.6
Higher
secondary 84 9.2
education
Educational Graduate 182 19.9
Professional 571.144 .000
qualification 160 17.5
qualification
Post graduate 450 49.1
Others 40 4.4
Source : Primary Data
Gender : Of the total respondent 662 male and 254 female. According to the survey, major
chunk of the investors around 72.3% belongs to male category and remaining 27.7% belong
to female category. Generally men bear the financial responsibility and take most of the
investment decisions to fulfill the financial goals. The Chi Square value of 181.729 is
significant at five per cent level indicating that there is a significant difference among the
gender of investors.

Age group : Age is a crucial factors which depicts the personal and financial maturity of
the investors. For the present study the age group of the investors are segmented into 5 scales
such as 1824, 2534, 3544, 4555 and above 55. The analysis of the profile indicates that the
age group of 3544 years constitutes the largest group amongst the investors.

Educational qualification : Education plays a vital role in shaping the personality and
formulating the decision. In Kerala the system of education was developed with the help of
state and private agencies. High levels of literacy and higher levels of education among the
Keralaities have been reported. Threefifths of the educated employed were in regular
employment . Educational Qualification of the sample contained 84 investors were up to
Higher Secondary Education , 182 investors were Graduate, 450 investors were Post
Graduates and remaining 160 investors were Professionals. Thus, maximum respondents
were Graduates and Post Graduates i.e. highly qualified.

TABLE 2 SOCIO ECONOMIC PROFILE OF THE INVESTOR

Variables Frequency Percentage
Less than 200,000 122 13.3
200,000 500,000 335 36.6
Income from all 500,00010,00,000 280 30.6
sources 10,00,00015,00,000 63 6.9
15,00,000 20,00,000 58 6.3
Above 20,00,000 58 6.3
Less than 100,000 420 45.9
200,000500,000 359 39.2
Investment surplus 500,00010,00,000 99 10.8
10,00,00015,00,000 34 3.7
Above 15,00,000 4 .4
Savings 594 64.8
Money extracted from business 142 15.5
Sources of income Personal borrowings 45 4.9
Inherited amount 88 9.6
 Bank finance 47 5.1
Less than 10% 249 27.2
Expected return from Between 10% 15% 424 46.3
investment Above 15% 243 26.5
Less than 1 year 201 21.9
Investment experience 24 year 324 35.4
More than 5 years 391 42.7
Source : Primary Data

Income from all sources : Income from all source represent the household income such as
spouse salary, employment income and income from other sources. The sample contained
122 investors with income less than Rs.2 lakh, 335 investors were from the income group of
Rs. 25 lakhs, 280 were from Rs. 510 lakhs, 63 were from the income group of Rs. 1015
lakhs, 58 were from the income group of Rs. 1520 lakhs and remaining 55 investors were
from income group of Rs. 20lakhs and above. Thus, majority of the investors were from the
income group of Rs.25 lakhs. While comparing the income between the genders , it was
found that 38.5% of makes and 31.5% of females are having an income of 200,000 –
500,000. 31.0% of males and 29.5% females are in the category of income group of 500,000
– 10,00,000.

Investment surplus : The respondents were asked their investment surplus per year.
Investment surplus represent the net income after meeting all the expenses. Only if the
investor has more than one source of income for his/her family, he/she will think over the
number of investment avenues. This because the total amount of income decides the amount
of savings after meeting the expenditure in commitments during the lifetime. The investors
who has investment surplus less than Rs 1 Lakhs are 45.9%, followed by investors who has a
surplus income of between Rs 2 Lakhs – Rs 5 Laksh are 39.2%.

Sources of income : Source of income plays an important role in deciding the number of
investment avenues to be invested. Even though the respondents are categorized as working
employees, some of the investors do have business in their name of their spouse. Considering
this nature of the respondents , the source of income for investment is categorized as (a)
savings, (b) money extracted from business (c) personal borrowings (d) inherited amount and
(e) bank finance. From the data collected from, it was analysed that 64.8% of sources of
income represents savings. However 15.5% counted to money extracted from business and
9.6% from the inheritance.
Investment experience: Experience of investors in capital market is a vital factor for the
behavioral factors and estimation of risk tolerance level. Long years of experience in
investment helps them to understand the complex behavior of the market and adopt
appropriate strategy so that their overall return from the investment will be maximum. From
the sample, it was analyzed that the investors have experience more than 5 years. 42.7% of
investors have experience more than years in Indian financial market. 35.4% of investors
have the experience have investment experience between 2 5 years.

5.2 MULTIVARIATE ANALYSIS OF BEHAVIORAL ASPECTS

OF INDIVIDUAL INVESTORS.
The principal component analysis approach suggests that the number of components
extracted is equal to number of variables analyzed , necessitating that it is to be decided just
how many of these components are truly meaningful and worthy of being retained for
rotation and interpretation. In general the first the first few components will account for
meaningful amounts of variance and that later components will tend to account for only
trivial variance. The next step of analysis is therefore, to determine how many meaningful
components should be retained for interpretation. The following three criterions are generally
used for the purpose:

a. Eigen value one criterion

b. the Scree test
c. the proportion of variance accounted for.
The Eigen value one criterion, which is also known as Kaiser criterion is one of the most
commonly used criterion to retain the number of components for rotation and interpretation.
Secondly, with Scree test, the Eigen values associated with each component are plotted in a
graph and observed for a „break‟ between components with relatively large Eigen values and
those with small Eigen values. The components that appear before the break are assumed to
be meaningful and retained for interpretation and after the break are assumed to be
unimportant and are not retained. According to the third criterion, the number of factors are
retained based on the variance of data set.

On the basis of the criteria mentioned above, the component matrix is formed for further
orthogonal rotation using varimax rotation algorithm which is standard rotation method . The
multivariate analysis extracts obviously 16 behavioral components, but five components
were judged sufficient to explain the significant data variance and also qualified the above
mentioned criteria for solving the number of components to be retained problem. In fact, all
the five components so selected seem to explain 64.120 % of total variance and the remaining
variance is explained by other variables as given below :

TABLE 3 : COMPONENTS AND VARIANCE EXPLAINED

Sl . Components Eigen value % of variance Cumulative
No explained variance
1 Component 1 3.851 24.070 24.070
2 Component 2 2.241 14.007 38.077
3 Component 3 1.634 10.210 48.286
4 Component 4 1.421 8.878 57.164
5 Component 5 1.113 6.956 64.120
Source : Primary Data

The observation of the table above provides an insight that only these five components
extracted from the Principal component analysis are significant enough to retain for rotation
and further interpretation as all these components qualify the criteria of the Eigen value –
one.

The questions were designed to explore the levels of behavioral variables’ which has its
impacts on the individual investment decisions at Indian Capital market. The suitability of
data for the purpose of factor analysis was tested using two analyses, namely KMO
test and Bartlett’s test of Sphericity.

The Kaiser MaiyerOlkin Measure of sampling adequacy is a statistic which indicates the pr
oportion of variance in the variables which might be caused by new factors. The KMO
statistic varies between 0 and 1. A value of 0 indicates that the sum of partial correlations is
large relative to the sum of correlations, indicating diffusion in the pattern of correlations
(hence, factor analysis is likely to be inappropriate). A value close to 1 indicates that patterns
of correlations are relatively compact and so factor analysis should yield distinct and reliable
factors .The result derived from Principal Component Analysis along with KMO and
Bartletts Test are given below :
 TABLE 4 : KMO AND BARTLETT'S TEST
KaiserMeyerOlkin Measure of Sampling Adequacy. .758
Bartlett's Test of Sphericity Approx. ChiSquare 4303.746
Df 120
Sig. .000
Source : Primary Data

The Kaiser Meyer score of 0.758 shows a high level of data adequacy. This KMO score
means that factor analysis can be used here to reach a meaningful conclusion as 75.8 % of
common variance was explained by the underlying factors. Also the score of Bartlet’s Test of
Sphercity is significant (0.000) with a Chi – Square value of 4303.746.

The communality table identified the variance exhibited by 16 variables of investors’

behavioral factors. The statements with factor loading 0.40 or higher is clustered to form
separate constructs ( Haier 2006) It ranges from .510 to .773. This implies that the variance
is significant in its range of 51.0 % to 77.3 %. This further concludes that the variables
grouping in the formation of factors is significant and meaningful.

TABLE 5 : COMMUNALITIES
Initial Extraction
I am confident of my ability to do better that others in stock picking 1.000 .510
My past investment successes were above all , due to my specific skills
1.000 .576
and experience
I have complete knowledge about investment avenues and can realise
1.000 .585
the movements in the market
I feel satisfied with my investment decision in past 1.000 .580
Before the investment decision I evaluate the past price movements to
1.000 .737
predict future price ( Technical analysis )
I strongly believe the current performance of stock is an indicator for
1.000 .652
future performance
News about the company in ( newspapers ,magazines ) affect my
1.000 .712
investment decision.
I seek the opinion from my friends and colleagues 1.000 .720
During the time of bearish market, I borrow money to invest into the
1.000 .731
market
If I hear views from a famous analyst that conflicts with my opinion
1.000 .668
about my stock , I would change my opinion immediately
I will book profits in a winning stock and then felt i could have waited 1.000 .680
I will hold losing stock for too long expecting trend reversal 1.000 .773
I do habit of purchasing lottery tickets 1.000 .558
Invest only on diversified portfolio 1.000 .558
Investment based on time horizon 1.000 .703
I invest for my retirement as savings 1.000 .515
Extraction Method: Principal Component Analysis.
Source : Primary Data
After excluding the factors with loading less than .40 , five factors were extracted from 16
variables . Two variables were excluded as factor loading is less than .40. The following table
depict the factors that affect the behavioral aspects of the investors .

TABLE 6 FACTORS EXTRACTED USING PRINCIPAL

COMPONENT ANALYSIS
Component
1 2 3 4 5
Before the investment decision I evaluate the past
price movements to predict future price ( Technical .851
analysis )
Representative
During the time of bearish market, I borrow money
bias .827
to invest into the market
I strongly believe the current performance of stock is
.770
an indicator for future performance
I have complete knowledge about investment avenues
.762
and can realize the movements in the market
I feel satisfied with my investment decision in past .760
Overconfidence My past investment successes were above all , due to
.757
my specific skills and experience
I am confident of my ability to do better that others
.698
in stock picking
I will hold losing stock for too long expecting trend
.836
reversal
Regret aversion I do habit of purchasing lottery tickets .707
I will book profits in a winning stock and then felt i
.629
could have waited
Mental Investment based on time horizon .821
accounting Invest only on diversified portfolio .721
I invest for my retirement as savings .620
Herd behavior News about the company in ( newspapers ,magazines
.841
) affect my investment decision.
I seek the opinion from my friends and colleagues .840
While going for an investment decision , I will go
through the recommendations given by famous .828
analyst
Extraction Method: Principal Component Analysis.
Rotation Method: Varimax with Kaiser Normalization.a
Source : Primary Data

Table 6 exhibits the five behavioral factors that have an influence on investment decisions
of individual investors of Indian Capital Market.
FACTOR 1: REPRESENTATIVE BIAS

It is a cognitive bias in which individual categories a situation based on pattern of their

pervious experiences or belief about the scenario. Even at the downward trend in market,
certain investors intent to buy or build their portfolio .Representative bias explain how
investors become stereotyped while taking their decision in investment.

TABLE 7 : REPRESENTATIVE BIAS

Std. Analysis Cronbach's
Mean
Deviation N Alpha

Before the investment decision I evaluate

the past price movements to predict future 4.15 .980 916
price ( Technical analysis )
I strongly believe the current performance
of stock is an indicator for future 4.05 1.050 916
performance .823
During the time of bearish market, I
4.17 .951 916
borrow money to invest into the market
Source : Primary Data

Representative bias factor extracted by the factor analysis accounts for 24.070 of data
variance. The Indian individual investors agreeing the fact that their investment decision was
represented by past price movement and the current performance of the stock. They believe
that current trend is the indicator for the future performance of their stock. Even at the time
of bearish they borrow money for the take advantages at the time of upward trend.

FACTOR 2 : OVERCONFIDENCE:

The overconfidence is the tendency of the investor to relay more on their abilities and skills.
It implies realistically trusting in one’s abilities and very optimistic in assessment of own
knowledge or control over a situation. This bias makes the investors to outperform the
market. Four questions were put forward to investors specifically to assess their
overconfidence bias.

Kahneman and Riepe (1998) point out at the importance of overconfidence for financial
decision taking, in that, overconfidence combined with optimism, produces overestimation
of individual knowledge, exaggeration of the ability to control events, and risk
underestimation

TABLE 8 : OVERCONFIDENCE
Std. Analysis Cronbach's
Mean Deviation N Alpha

I am confident of my ability to do better

3.49 1.128 916
that others in stock picking
My past investment successes were above
all , due to my specific skills and experience 3.84 1.000 916

I have complete knowledge about .728

investment avenues and can realize the 3.38 1.166 916
movements in the market.

I feel satisfied with my investment decision

3.92 .900 916
in past
Source : Primary Data

This factor extracted by the factor analysis accounts for 14.007 % of data variance. The
Indian individual investors seems to be trusting their predictive skills and conceived the
ability in stock picking.

From the study it was analyzed that majority of the investors were satisfied with their
investment decision and confident about their skills and experience. The study strongly
supports the study of (Allen & Evans, 2005) which suggests that people usually believe in
their skills and knowledge to outperform the market. The two factors that contribute to
overconfident bias were: illusion of knowledge and illusion of control. The illusion of
knowledge occurs when the investor’s feels they have complete knowledge about the
investment avenues.

FACTOR 3 : REGRET AVERSION

Regret aversion is a part of prospect theory, it exhibit the investors behavior in which losses
are three times painful than the pleasure of gain. It is an negative emotion evoked from
different choices that could generate a preferred outcome. It express the tendency of investor
to purchase lottery tickets for a better future. From the analysis it has been identified that,
even though the investors purchase lottery but it is not for investment but a service to society
based on various schemes offered by Kerala Government.

TABLE 9 : REGRET AVERSION

Std. Analysis Cronbach's
Mean Deviation N Alpha

I will book profits in a winning stock and

then felt I could have waited 4.25 .836 916

I will hold losing stock for too long .702

4.05 .959 916
expecting trend reversal
I do habit of purchasing lottery tickets 3.52 1.240 916
Source : Primary Data

A feeling on self blame n bad decision, that is emotion generated by seeing the winning stock
which was already sold out was high among the investors in Kerala. The degree of regret for
losing stock with an expectation of trend reveal explains the correlation of regret aversion
with the experience to hold the stock for expecting a trend reversal (Fogel & Berry, 2006).

FACTOR 4 : MENTAL ACCOUNTING

Mental accounting describes the propensity of the people to place some events into different
mental accounts based on certain attributes. There are three component of mental
accounting. The first components capture how outcomes are perceived and experienced, and
how decisions are made and subsequently evaluated. The second component of mental
accounting involves the assignment of activities to specific accounts. The third component of
mental accounting concerns the frequency with which accounts are evaluated and choice
bracketing. Each of the components of mental accounting violates the economic principles of
fungibility (Thaler, 1999). Therefore based on the attribute three variables are selected for
identifying the mental accounting.

TABLE 10 : MENTAL ACCOUNTING

Analysis Cronbach's
Mean Std. Deviation
N Alpha
I invest for my retirement as savings 3.71 1.101 916
 Invest only on diversified portfolio 3.76 .955 916
Investment based on time horizon 3.84 .955 916 .562
Source : Primary Data

The concept of mental accounting is same as Prospect theory of (Kahneman & Tversky,
1979), which implied the individual will deconstruct their investment problem into local
decision with their cognitive simplicity. This is the reason why they prefer to invest based on
fixed time horizon and using diversified portfolio. The segregation are based on the
integration of multiple gains with fixed investment objectives.

FACTOR 5 : HERD BEHAVIOUR :

Herd behavior is the most generally accepted observations on financial markets worldwide in
a psychological context. People generally trust friends , relatives and colleagues more while
taking a decision. Or they will be stereotyped with the recommendations provided by famous
analyst. This explains the market price reflects the outcome of investors’ collective
assessment and as a result the true value of the market may be incorrect.

TABLE 11 : HERD BEHAVIOR

Std. Analysis Cronbach's
Mean Deviation N Alpha
While going for an investment decision , I
will go through the recommendations given 3.47 1.149 916
by famous analyst
News about the company in ( news papers
and magazines ) affect my investment 3.52 1.128 916
decision
.628
I seek the opinion from my friends and
3.39 1.155 916
colleagues
Source : Primary Data

5.3 CHI SQUARE ANALYSIS

The significance of the five factors were extracted from Exploratory factor analysis was
tested using the Chi square analysis. The result of Chisquare analysis was listed below Table
12 .
 C
TABLE 12 : CHI-SQUARE TEST FOR TESTING THE SIGNIFICANCE

Sl Components of Chisquare df P value Sig

No: Variables value
1 Representative bias and 151.299 48 .000 Significant
investment decision
2 Overconfidence and Significant
87.211 64 .029
investment decision
3 Regret aversion and Significant
194.876 44 .000
investment
decision
4 Mental accounting and Significant
187.462 44 .000
investment decision
5 Herd behavior and Significant
166.186 48 .000
investment
decision
Source : Primary Data

Using the Chisquare analysis it was identified that all the 5 variables are highly significant
with respect their investment decision. As the P value is less than .05, the null hypothesis was
rejected there by accepted the alternative hypothesis. .

6. SUMMARY AND FINDINGS :

1. The investors from Kerala are highly influence by the representative bias. They prefer to
invest into the stock market during the time of bearish market ( mean value of 4.17). And
their decision was based on the past price movement ( mean value of 4.15) and the
current performance ( mean value of 4.05). This was statistically tested using Chisquare
analysis with value of 151.299 and Pvalue of .000. This indicate the representative bias
are highly significant behavioral factor with respect to investment decision
2. Illusion of knowledge and illusion of control exist among the investors of Kerala. They
always feel that their investment was right , which supported the evidence documented by
(Nofsinger, 2011). He found that people always think that they are better than they are
really and they tend to rely on the past success of their investments. The hypothesis was
tested. The F value was 87.211 with a P value of 0.029, which was less than 0.05.
therefore the null hypothesis was rejected stating that overconfidence bias have a
significant relationship with investment decision.
3. Regret aversion represent an emotional sentiment of investors. The regret aversion is
high among the investors who book profits on winning stock ( mean value of 4.25) and
 also who is expecting for trend reversal ( mean value of 4.05). However, the people have
a tendency to buy lottery ticket for a speculative benefit. While testing the hypothesis , it
was found that regret aversion has significant relationship with the investment decisions
of the investors of Kerala.
4. Mental accounting represents how the investor segregate their money based on their
preference. The mental accounting behavior of investors of Kerala supports the postulates
of (Thaler, 1999). The first assignment of activities are shown on investment based on
time horizon ( mean value of 8.84) and the second assignment on activities or choice
bracketing was shown on behavior of investing on diversified portfolio. The regret
aversion bias on investment biases was significant as te P value is less than 0.05.
5. Herd behavior represent whether the investment decision is based on the
recommendations or from expert opinion. However herd behavior was found to be least
factor among the investors of Kerala. But this bias have relationship with the investment
decision making process of the investors.

7. CONCLUSIONS

This study has helped in extracting the factors that has an impact on investing activity of
investors . There are five behavioral factors of individual investors was analyzed , such as :
Overconfidence, representative bias, regret aversion, herd behavior and mental accounting.
All the behavioral factors found to be significant with the investment decision. This research
is an investigation into individual investors, not institutional investors. The investors
perception on investment behavior was collected using questionnaire and applied exploratory
factor analyses procedure. The empirical result was validated and its reliability was checked
using Cronbach's Aplha statistics. On the other hand, understanding the behavioral factors
influencing investors’ decision can help financial institutions to make their marketing
strategies.
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