A Study on Factors Influencing Buying Behavior of Securities in Indian Stock

Markets
Authors
1. Mr.K.Riyazahmed, Assistant Professor, MBA, Sona college of Technology, Salem.
2. Dr.MG.Saravanaraj, Director in Management Studies, SNS College of Technology, Coimbatore.

ABSTRACT

Although behavior of investors has been studied for hundreds of years, behavioral finance which
considers the reactions of buyers in stock markets is quite a new area. Behavioral theories which
are based on consumer psychology attempt to understand how emotions affects the individual
decisions of investors. The main objective of this study is to analyze the factors impacts
individual investor’s decision while buying or investing in Indian stock market. In addition the
relationship between these factors and the investment performance is also studied. The study
begins with detailing existing behavioral theories based on which hypothesis is proposed. Then
these hypothesis are tested through the questionnaires distributed to various individual
investors in Salem district. The collected data are analyzed using statistical software like SPSS.
Semi structured interviews with the investment bankers and brokers are then conducted to
have a better understanding of investor behavior. The results shows that there are five
behavioral factors that affects investors buying behavior in stocks: Herding, Prospect, Market,
Overconfidence, and Anchoring. From the analysis, in total, most of the behavioral variables of
four factors: Prospect, Herding, market variables have high impact on individual investors
decision making in the Indian stock market. The variables of Market, herding, prospect are
several ones reported to have high influences on the investment decision making.

1. INTRODUCTION

Stock market is a place where stocks like shares, bonds are bought and sold. In an economy
besides playing the role of investment channelizing, stock market also provides signals to
mangers about investment decisions of people and a catalyst for corporate governance (Samuel,
1996, p.1). People are interested in stock market investments because of its long term growth
prospects, dividend and capital growth, and a hedge against inflation and erosion of purchasing
power of money (Twelves and Bradley, 1998, p.8). Now a days the stock markets are classified in
to three categories developed (US, UK, Japan, EU...), underdeveloped (Vietnam, Estonia,
Kenya...) and developing countries (India, china, Mexico...). In all economies it is possible to
consider stock market as a yardstick of economic strength and progress. Thus the movement of
stock trends represents health of an economy. And most importantly the stock market
movements are outcomes of investor’s decision making towards purchase and sales of financial
securities.
Behavioral finance theories are helpful in understanding the psychology of why people buy or
sell stocks (Waweru et al., 2008, p.25). Many researchers consider behavioral finance theories
are good to understand and explain the feelings and cognitive errors affecting investment
decision making (Waweru et al., 2008, p.25). Due to positive correlation between stock market
and economy, the rise of stock market will positively affect the development of economy and
vice versa. It will be helpful for investors to understand the behavioral factors that influence
their decisions from which they justify their reactions for better returns. Security trading
organizations may use this information for better understanding about investors to forecast
more accurately and give recommendations. Due to time constraint the research focuses only
on the behaviors of individual investors in Salem district of Tamil Nadu. It is necessary to have
further research for various other geographical areas to have a total picture of Indian stock
markets.

2. RESEARCH METHODOLOGY

In general theory is built and tested based on two different approaches: Induction and
deduction. When deductive approach is used the researchers start with the existing theories
and logical relationships among concepts, and then continue to find empirical evidences. In
contrast in inductive researches theory is developed based on the empirical reality and
researchers infer the implications of the findings for the theory that prompted the research
(Gauri & Gronhaug, 2010, p.15-16; Saunder et al., 2009, p.124-126). In this study exploring the
behavioral factors influencing the decision making of investors, which are already ‘out there’ is
the main aim instead of inferring and building theory.
Deductive approach is usually associated with quantitative and qualitative data collection and
analyzing through statistical methods. So this study is based on deductive approach in which
questionnaires are sent to 100 investors in Salem district and interviews are conducted with
investment professionals for better understanding of factors influencing stock purchase and
sales among investors.

3. LITERATURE REVIEW

The traditional finance stands on the foundation that humans are homo-economicus. Which is
based on the belief that human are rational in decision making. But empirical evidence shows a
fact that people are not always rational, their financial decisions may be driven by behavioral
preconceptions. Thus studying investor behavior becomes vital in the fields of finance and
marketing to explore the factors and its impacts on buyer’s decisions on purchase and sales of
securities. In case if the decisions of investors does not falls with rationality, effects of
behavioral biases should be identified. It will be more important if their cognitive errors affect
prices and are not arbitraged away easily (Kim & Nofsinger, 2008, p.2). The mid 1980’s is
considered as the beginning of this research area. Share markets are proved to overreact to
information by Debondt & Thaler (1985, p.392-393). If these studies are the genesis of
behavioral finance, this area has over two decades of development.
Behavioral finance papers are mainly based on the data of stocks that do not match well with
the traditional theories of Market efficiency and asset pricing models. According to Ritter (2003,
p.429), behavioral finance is based on psychology which suggest that human decision process
are subject to several cognitive illusions and biases. These illusions are divide into four groups:
Heuristics factors, Prospect factors, Herding factors and market factors.
a) Heuristics are defined as a rule of thumb, which makes decision making easier especially in
complex and uncertain environments (Ritter, 2003, p.431) by reducing the complexities of
assessing probabilities and predicting values to simpler judgements (Kahneman & Tversky,
1974, p.1124). Kahneman and Tversky seems to be ones of the first writers studying the
factors belonging to heuristics when introducing three factors namely Representativeness,
Availability bias and anchoring (Kahneman & Tversky, 1974, p.1124-1131). Waweru et al.
also list two factors named gamblers fallacy and overconfidence into heuristic theory
(Waweru et al., 2008, p.27)
b) Prospect theory and Expected utility theory (EUT) are considered as two approaches to
decision making from different perspectives. Prospect theory focuses on subjective decision
making influenced by investors value system, whereas EUT concentrates on investors
rational expectations (Filbeck, Hatfiels & Horvath, 2005, p.170-171). EUT is the normative
model of rational choice and descriptive model of economic behavior, which dominates the
analysis of decision making under risk. Nonetheless, this theory is criticized for failing to
explain why people are attracted to both insurance and gambling (Le Phuoc Luong & Doan
R.Hedtroim, 2011, p.19). Prospect theory explains some state of mind affecting an individual
decision making process including regret aversion, Loss aversion and mental accounting
(Waweru et al., 2003, p.116)
c) Market factors such as price changes, market information, fundamentals of underlying
stocks, customer preference, over reaction to price changes and fundamentals of underlying
stocks have an impact on investor’s decision making. (Waren et al., 2008, p.36). Normally
changes in the market information, fundamentals of underlying stock and stock price cause
over reaction and under reaction to the price change. These changes are empirically proven
to have high influence on decision making behavior of investors.
d) Herding effect in financial market is identified as tendency to investor’s behaviors to follow
other’s reactions. In the perspective of behavior, herding can cause some emotional biases,
including conformity, congruity and cognitive conflict, the home bias and gossip. Investors
may prefer herding if they believe that herding can help them to extract useful and reliable
information (Le Phuoc Luong & Doan R.Hedtroim, 2011, p.21).
Behavioral factors influencing the investment decision making (source: Waweru et
al.,2008)

Group Behavioral variables

Heuristic theory Representativeness, Overconfidence,
Anchoring, Gambler’s fallacy, Availability
bias.
Prospect theory Loss aversion, Regret aversion, Mental
accounting.
Market factors Price changes, Market information, Past
trends of stocks, Fundamentals of
underlying stocks, customer preference,
over reaction to price changes.
Herding effect Buying and selling decisions of other
investors, choice of stocks to trade of other
investors, Volume of stocks to trade of other
investors, Speed of herding.

As mentioned in the literature review, it is undoubtedly that behavioral factors impact the
investment decisions of the investors in the financial markets, especially in the stock
markets. This study explores the influence levels of behavioral variables on the individual
investors’ decisions and their investment performance as in the following hypothesis.

Hypothesis H1: The behavioral variables that influence the investment decisions of
individuals are grouped into four factors as the reviewed theories: Heuristics, Prospect,
Market, and Herding.
This hypothesis is tested by synthesizing the respondent’s evaluations of the influence
degrees of behavioral factors on investment decisions.

4. RESEARCH DESIGN
Research design provides the frame work of data collection and analysis (Gauri & Gronhaug,
2010, p.54; Bryman & Bell, 2007, p.40). In order to understand the common behavior of
individual investors case study or experimental design or longitudinal design are not suitable
but cross sectional design. When a cross sectional design is employed, data from more than
one case at one single time is collected and analyzed. The patent of the association is
examined by using the collected quantitative or quantifiable data (Staunders et al., 2009,
p.155).
Among various types of data collection methods structured interviews, semi structured
interviews, unstructured interviews, self-completion questionnaire, observation group
discussion etc. Self-completion method is chosen for collecting quantitative data and semi
structured interviews is selected to gather qualitative data for this study.
Hair, Black, Babin, Andersion and Tatham (1998, p.111) suggest that with quantitative
research, at least 100 respondents should be studied in order to have a fit in the statistical
methods of data analysis. So data collected from 100 respondents in Salem region with
convenience sampling method. The questionnaire is divided into three parts: personal
information, behavioral factors influencing investment decisions, and investment
performance. In the part of personal information nominal and ordinal measurements are
used. Behavioral variables are measured through 5 point Likert scale. The collected data are
processed and analyzed through correlation and regression methods are used to find the
relationships and impacts of variables.

5. ANALYSIS & DISCUSSIONS

5.1 Data Background

From 100 respondents data were collected and the profile of respondents with gender, age,
time for attending the stock markets are given in the below figure.

Respondents Profile
> 10 yr
5-10 yr
3- 5 yr
1 - 3 yr
< 1 year
55 &above
46-55
36-45
26-35
18-25
Female
Male
0 10 20 30 40 50 60 70 80 90 100

Figure 5.1 Distributions of Gender, Age and time for attending the stock markets

Figure 5.1 shows that number of male are very high in than the female investors and
investors with the frequency of investments up to 1-3 years are 75% of the total
respondents. Which means most of the individuals have just paid attention to the stock
markets. From the data collected no respondent have taken any course of stock exchange.
5.2 Impact levels of Behavioral factors on individual investment decisions

The impact levels of behavioral variables on the investment decisions are identified by
calculating the values of sample mean of each variable. Mena values of these variables can
decide their impact levels on the investment decision making as the following rules:
 Mean values less than 2 shows that the variables have very low impacts
 Mean values are from 2 to 3 shows that the variables have low impacts
 Mean values are from 3 to 4 shows that the variables have moderate impacts
 Mean values are from 4 to 5 shows that the variables have high impacts

5.2.1 Impacts of Heuristic variables on the investment decision making

As mentioned above heuristic variables are grouped into two factors:
overconfidence gambler’s fallacy and Anchoring ability bias. The impact of these
factors are shown in the following table:

Factors Variables Mean Std. Deviation

overconfidence X1: You believe that your skills and 2.82 1.01
knowledge of stock market can help
gambler’s fallacy you to outperform the market.
X2: You are normally able to anticipate 2.45 0.72
the end of good or poor.
Anchoring ability X3: You forecast the changes in stock 2.39 0.63
prices in the future based on the
bias recent stock prices.
X4: You prefer to buy local stocks than 2.81 0.71
international stocks because the
information of local stocks is more
available.
Table 5.1 Impact of heuristic variables in investment decision making

As in the literature review chapter, behavioral variables of the heuristic dimension that
impact the investment decisions consists of representativeness, overconfidence, gamble’s
fallacy, anchoring and ability bias. From the above data it shows that all heuristic variables
have moderate impact on investment decision making.

5.2.2 Impacts of prospect variables on the investment decision making

Factors Variables Mean Std. Deviation

Prospect X5: After prior loss you become more 4.18 0.84
risk averse.
X6: You avoid selling shares that have 3.06 0.85
decreased in value and readily sell
shares that have increased the value.
X7: You tend to treat each element of 1.77 0.72
your investment portfolio separately.
X8: You ignore the connection between 4.08 0.64
different investment possibilities.
Table 5.2 Impact of prospect variables in investment decision making
 In the dimensions of prospect, all its three kinds of behavior: loss aversion, regret
aversion and mental accounting have their representative variables influencing the
decision making of the investors stock investment. With mean scores of 4.18, 4.08,
3.06 loss aversion, connection between different investment possibilities and risk
aversion have high impact in the investment decisions.

5.2.3 Impacts of market variables on the investment decision making

Changes in the stock prices, market information, and past trends of stocks are
variables of market that influence the individual investment decisions. The results
are shown in the following table:

Factors Variables Mean Std. Deviation

Market X9: You consider carefully he price 3.49 1.05
changes of stocks that you intend to
invest in.
X10: Market information is important 4.17 0.42
for your stock investment.
X11: You put the past trends of stocks 3.57 3.57
under your considerations for your
investment.

Table 5.3 Impact of market variables in investment decision making

Market information have high impact with mean score of 4.17 and price changes
and past trends have equally higher impact on the investment decisions with mean
scores of 3.49 and 3.57.

5.2.4 Impacts of herding variables on the investment decision making

Factors Variables Mean Std. Deviation

Herding X12: Other investor's decisions of 3.63 1.51
choosing stock types have impact on
your investment decisions.
X13: Other investor's decisions of the 3.65 1.51
stock volume have impact on your
investment decisions.
X14: Other investor's decisions of 3.65 1.54
buying and selling stocks have impact
on your investment decisions.
X15: You usually react quickly to the 3.78 1.36
changes of other investor's decisions
and follow their reactions to the stock
market.
Table 5.4 Impact of herding variables in investment decision making
As in the table 5.4, individual investors follow above the moderate level on the other
investor’s trading decisions. Mean values of 3.63, 3.65, 3.65, and 3.78 are above moderate
in following the herd mentality while decision making.

6. FINDINGS & CONCLUSION

From the analysis, in total, most of the behavioral variables of four factors: Prospect,
Herding, market variables have high impact on individual investors decision making in the
Indian stock market. There are few items (Heuristics & one variable of prospect) having the
low impacts (X1, X2, X3, X4, X7) on investors decisions. The variables of Market, herding,
prospect are several ones reported to have high influences on the investment decision
making.

These findings do not support the Hypothesis H1 that proposes that all the factors of
behavior finance have high impacts on investment decisions. However, the standardized
deviations of all behavioral variables are fairly high in comparisons to their mean values
suggest that there are some differences among the assessments of respondents about the
impacts of al behavioral variables on their investment decisions. Further the study can be
taken forward to find out the influence of behavioral factors on individual investment
performance using factor analysis. This will help to understand the relationship among
variables and its relative impact on the investment performance.

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