There are
so many fields of finance and the behavioural finance is the one of them that helps
the investors to take decision about investment. One has to take into consideration
so many factors while investing as an individual is not always rational as he
thinks he is. This paper analyses the development of behavioural finance by
reviewing stock market and factors affecting the investment decision of
investors. Society plays the major role in affecting the decision making power
emotionally and psychologically, their tolerance level of risk.

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Key Words: Investment, Behaviour, Emotional
Factors, Psycholigical factors, risk.


finance is the study of psychology to understand the behaviors of investors,’
why investors make the financial decision and identify the common traps between
the investors while making their decisions.

finance is that branch of finance that, with the help of theories from other behavioral
sciences particularly psychology and sociology, tries to discover and explain
phenomena inconsistent with the paradigm expected utility of wealth and
narrowly defined rational behaviors.

In the
earlier years 1950’s, the traditional finance model developed by the economist
of the University of Chicago. The basic assumption of the traditional finance
model is that investors behaving rationally while taking the decision of
investment. According to Jenen & Mercbleng” traditional Finance theory
stands directly on the nation of the ‘rational man’, a person who is much
different from individual.

finance theories are based on the same ground that investor behaves rationally
& stock market are behaving efficiently. But after the so many researchers,
financial economists found that psychology of the investors effect the
investment decision procedure. There are two types of investors first,
investors who invest their money through the agents/agencies & others who
invest their money individually. Investors who invest own their own decisions
of investment may be effected by cognitive error & extreme emotional bias
can cause the investor to take bad decision.

to hirschey & nofsinger ‘ behavioral finance is study of cognitive errors
& emotions in financial decisions.

finance studies all the aspects of individuals that can influence their decisions.
Psychology and emotional factors play a very important role in investment
decisions. Investors may not be rational at all the times. He may takes decision
in the pressure of emotions like distress , agitation, timidity, suspicion ,
family security etc. Besides these factors psychological factors also plays an important
role i.e. perception, attitude, beliefs, values etc.

market provides higher returns at higher risk on the basis of some assumptions
i.e. risk tolerance, control the emotions, diversify the investments etc.
Making the right decision in a matter of seconds is what the stock market is
all about.


Review of

Chandra (2008) introduces the concept of decision making in stock market:
incorporating psychology with finance. He concludes that individual investors
do not always act rational investment decision maker. Individual investor decision
may be affected by the several psychological & emotional biases i.e.
overconfidence, representativeness , mental accounting, cognitive dissonance,
greed and fear etc.

(2014) focuses on the behavioural factors influencing individual investor’s
results at the Colombo stock exchange. Study shows that the herding, heurists
(overconfidence and availability bias) , prospect and market factors all have
influence on the investment decisions of individual investors.

The wall
street journal (2009) found that where behavioural finance comes in, most investors
are intelligent people, neither irrational nor insane. But Behavioual finance
tells us we are also normal with brains that are often full & emotions that
are often overflowing and that means we are normal smart at times and normal
stupid at others.


objective of this paper is to critically analyse the development of behavioural
finance- impact of psychological & emotional factors on investment in stock
market. The evidence shows that theses factors plays major role while taking
the investment decision.

under various factors affecting the decision making

Heider (1958) observed that investors are overconfident about their own judgment
which leads to unsuccessful collection of favorable information only. Due to
bias in decision making wrong decision will be taken by the investors.

According to the Kant perception is the unity of ego which converts into
personal knowlege which may be negative or positive effect on decision making.
According to Sankhya, Swamt Sivananda that it is set state of mind of
individual , the validity or the invalidity of knowledge is self evident and
does not affected by any external conditions. If the affect of perception is
negative results poor decision making results loss.

Dissonance: Shiller (1998) defines that Cognitive Dissonance plays very important
role in decision making because individual strikes with their own beliefs or
assumptions until they get evidence regarding invalidity of the facts, it creates
higher chances of mistake in decision making in share market because share
market prices are never remain constant and affected by the daily ups and down.

Ritter & Warr(2002) describes that if the pattern of any situation is long enough
then it will be slowly adjust to which results to overreact &
underweighting of the long term average leads to probability in the decision
making, individual may or may not be taken correct decision.

Regret :
It is strong emotional situation related to an information about the past
regarding a decision making in the past leads worse results in the future.
Kaheman and Tversky (1999) define regret as the frustration which occurs as a
consequence of bad choice. It is the feeling of responsibility for loss (

& Adjustments : According to Phung (2008) , Anchoring means the tendency to
attach or anchor our thoughts to a reference point even though it may have no
logical reference to the decision at hand. Investor takes decision under the
new concepts. After forming an opinion, investors are often unwillingly to
change it, even though they got new or relevant information.

typical investor’s decision is usually heavily influenced by the actions of his
acquaintances, neighbors or relatives. if the population around is investing in
the particular stock, the tendency for potential investors is to do the same
but this strategy is bound to backfire in the long run.

research should be done before investing the money in stock market but rarely
done by the individual investor. Their decision is influenced by the friends,
workplace, values, beliefs, family etc. Some investors are not ready to invest
their money which companies deals with cigarettes, tobacco etc. because these businesses
are against their values.



and emotional factors have more impact on decision making for investment
decision making for investment purposes. Investors are rational but under some
circumstances they become irrational results wrong decision which leads to generation
of loss in investment decision. Investors have several goals such as safety,
income, growth etc but biasness creates hurdle in correct decision making
according to above mentioned theories.

So, while
taking investment decision correct and full information without biasness should
be collected & proper decision taken through the behavioural finance.


Abhijot Chandra – Concept of decision making in stock market : incorporating
psychology with finance, National Conference : FFMI 2008, IIT- Kharagpur and
MPRA paper No. 21288, posted 13 March,2010.

Kengatharan.S. -The influence of Behavioual factors in making investment
decisions & performance : study on investors, Asian journl of finance &

 (3) Bashir Ahmad Joo and Kokab Durri-
Comprehensive review of Literature on Behavioural Finance, Indian Journal of
commerce & Management studies, Volume VI Issue 2,May 2015.

(4) Dr. E.
Apparao & Prof. N. Kishore Babu- Asurvey on Investors tords Investment
avemnus n Godavari Districts of Andhr Pradesh, Acme Intellects International
Jounal of Research in Management, Socil Sciences & Technology, Vol-9 No. 9,
Jan 2015



Phd Schollar-