Behavioural Finance: Guaging the Investment Logic Among Equity Investors

Abstract

Behavioral finance is a new dimension of finance which aims at supporting the conventional theories of finance by incorporating behavioral content to the decision-making process. The basic philosophy of behavioral finance is that the investors are not rational and that they get influenced with several factors which actually question the traditional finance. An underlying assumption of behavioral finance is that, the information system and structure and characteristics of market participants have a wide influence on the individual’s investment decisions as well as market outcomes. Theories of behavioral finance provide reasonable explanation to investors’ decision making and trading behavior. The study considers two behavioral aspects of investors ,viz, disposition effect and herd behavior to associate the nature of attitude of investors with their investment logic. This process influences financial decision makers such that they act seemingly in irrational manner, and make suboptimal decision, violate traditional finance claim of rationality. The impact of this suboptimal financial decision has ramification for the efficiency of capital markets, personal wealth, and the performance of corporations.