Effect of Investor’s Psychology on Investment Decision

Effect of Investor's Psychology on Investment Decision

Karishma Acharya

Abstract

The study intends to investigate the effect of investor’s psychology on investment decision. Data for the study was collected through convenience sampling technique from 392 investors of Nawalparasi-West district on five points likert scale through a pre tested questionnaire. Descriptive and casual comparative research design was used to conduct the research study using correlation. Independent sample t-tests revealed marital status based differences across various aspects of investor psychology, with married generally showing higher ratings. One-Way ANOVA identifies significant differences in investor’s psychology across different age groups, level of education, and occupation. It was found strong positive relationship between self image/firm image co-incidences, accounting information, advocate recommendations, neutral information, and personal financial needs and investment decision. The study contributes to the existing literature by providing empirical evidence on the determinants of investor’s psychology on investment decision. The insights derived from this research can inform marketers' strategic decision-making processes, guiding them in developing better investment decisions for attaining the beneficial returns.

Investment refers to the allocation of resources such as money, time, or effort into assets or ventures with the expectation of generating profitable returns or future benefits. Investing requires choosing where to allocate funds among different types of investment opportunities (Nalurita et al., 2020). The primary objective of an investor is to generate profit, as managing personal finances is a universal necessity. Different investors adopt varying strategies; some prioritize saving substantially, others prefer thorough research before investing, and there are those who rely on their intuition to guide their investment decisions (Shahid et al., 2018). Investors of various types aim to maximize returns while minimizing investment risks. Typically, individual investors make rational decisions by evaluating the risk-return tradeoff to determine the optimal portfolio allocation within a mean-variance boundary. Making investment choices relies on a combination of external and internal factors (Osagie &Chijuka, 2021).Investment choices depend on lots of things like how someone feels and what's happening in the investment world. Investment can be done usually on two forms: real investment, which includes physical assets like land and machinery, and financial investment, which involves stock market, bonds and debentures (Gyanwali & Neupane, 2021).

There has been a growing preference for financial investment among individuals. People usually look at things such as company’s performance, market trends, and their own instincts to decide where to put their money. Investors have the ability to make decisions and can assess their decision-making skills by examining the results (Khan, 2021). They might also use tools to help them make decisions. Investors allocate their funds across various avenues with the aim of securing greater future returns compared to their current outcomes. They strive to cater to individual requirements while facing a constraint on decision-making time (Basana & Tarigan, 2022). The projected behavior of investors in making decisions about stock investments is tied to the intentions of individual investors when selecting stocks. These intentions are evident in how stock returns are estimated through the utilization of diverse information sources (Pahlevi & Oktaviani, 2018). People are increasingly engaged in investment due to rising living standards and needs. The earnings from a traditional 9-5 jobs often aren't sufficient to meet these needs, making investment crucial for financial growth. However, successful investment requires rational decision-making and thorough market research to ensure wise choices. A good decision making involves the act of selecting from different options. Making decisions about investments is a complex process of selecting the most optimal choice from a range of alternatives (Moueed et al., 2015).

Understanding investor’s psychology is crucial in knowing market behaviors. Making any investment choices relies significantly on a range of both internal and external factors. Internally, human behavior plays a crucial role, while externally, the  various factors such as company performance and market information are critical in decision-making (Osagie & Chijuka, 2021). Investor’s decisions are not solely based on rational analysis but are also influenced by emotions such as fear, greed, and herd mentality. Decision making in investment involves complex cognitive processes such as information processing, risk assessment, and pattern recognition. Understanding how these cognitive processes interact with psychological biases to shape investment decisions is essential for developing effective strategies to mitigate irrational behavior (Shefrin, 1984).

Various researches has examined the influence of risk aversion and behavioral factors on investment decision-making but have neglected to explore the impact of corporate governance at the firm level. This oversight is significant because investor behavior, which often deviates from rationality, contributes to stock market fluctuations and heightened volatility. Consequently, daily fluctuations in share prices are observed, rendering traditional financial tools insufficient for accurately assessing stock price movements (Farooq et al., 2015). The central problem to be addressed in this study is to explore and analyze the effects of investor psychology on investment decision-making processes and their implications for financial markets. Investor psychology encompasses a wide range of concepts, including cognitive biases, emotions, risk tolerance, and decision-making processes (Ezama et al., 2014). It was investigated on an investment decision, Fear and Social projection in which it is argued that people tend to rely on their own emotional state to predict other people‘s behavior, which in turn affects their own actions (Moueed et al., 2015).