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Investment Management by Individual Investors:
A Behavioral Approach
--Abhijeet Chandra,
--Dinesh Sharma
For small and marginal investors, managing their investments is like managing any enterprise. They apply all their skills, knowledge
and expertise in managing their money to get the best from investments. Despite all efforts, some cognitive and psychological factors
affect their decisions. This study proposes to identify the major psychological biases that influence the individual investors' behavior and
that, in return, may drive a momentum effect in stock returns. In this study, survey approach has been used to achieve this objective.
The study used a structured questionnaire in which potential investors were asked for their reactions to some specific situations. The
study was undertaken within the geographical area of Delhi and National Capital Region (NCR). The results revealed some
psychological and cognitive peculiarities. It was interesting to find that the individual investors' behavior is driven by some psychological factors
such as conservatism, under confidence, opportunitism, representativeness and informational inferiority complex. The results of the study
are helpful in understanding the hidden aspects of individual investors' behavior.
© 2010 IUP. All Rights Reserved.
Behavioral Finance and Efficient Markets:
Is the Joint Hypothesis Really the Problem?
--Mamadou A Konté
We consider two identical assetsA and Bthat have different prices. The asset A always reflects its fundamental value
while asset B may be mispriced. The latter reflects its fundamental value only in average. It is shown that the misvaluation of the
asset B can be interpreted as a chance (randomness of errors) or as a noise traders' effect, plus it limits to arbitrage explaining why
it is difficult to distinguish between the two arguments. So the result, obtained independently of the joint hypothesis, suggests use
of evolutionary models to reconcile both paradigms.
© 2010 IUP. All Rights Reserved.
Bank Herding and Incentive Systems as
Catalysts for the Financial Crisis
--Peter Haiss
Why do good bankers sometimes respond with the same disastrous strategies? Rooted in regulatory economics and behavioral
finance, the paper offers a taxonomy of effects that narrows the scope of the banks' decision making into a funnel-shape and thus,
prepares the ground for a financial crisis. The basic message of the paper is that inconsistent decision rules, rigid bank regulations,
stakeholder-focused incentive structures within banks and uncritical adoption of innovations may force banks into decisions that are
micro-functional, but macro-dysfunctional. Behavioral aspects play a key role in the suggested remedies on the regulatory
side (macroprudential regulation, supervision of incentives) and on the banking side (proper reward systems and structured decision
making) to re-establish prudent banking.
© 2010 IUP. All Rights Reserved.
Foreign Institutional Investment and
Stock Market Returns in India: Before
and During Global Financial Crisis
--P Srinivasan,
--M Kalaivani,
--K Sham Bhat
Augmented Dickey Fuller and Phillips-Perron tests were employed to examine the stationarity of both the net foreign
institutional investment and NSE market return series. Instantaneous Granger Causality test
was also employed to examine the contemporaneous relationship between net foreign institutional
investment flows and equity market returns in India for the pre-global financial crisis
and during the crisis periods. By and large, our analysis revealed that there was an evidence of negative feedback trading hypothesis
and positive feedback trading hypothesis by foreign investors before the global financial crisis period and during the crisis period
respectively. This implies that foreign institutional investment acts as a smoothening effect and destabilizes forces before and during the crisis
period respectively. However, such positive feedback trading strategies from foreign institutional investors seems to be the rationale
during the period of global financial crisis.
© 2010 IUP. All Rights Reserved.
Segmentation of Investors Based
on Choice Criteria
--R Kasilingam,
--G Jayabal
Understanding the criteria used by investors to evaluate any investment instrument is important for the marketers of any
investment product. It is also important for them to segment the investors based on their choice and know the characteristics of each
segment of investors. The present study has identified four commonly used criteria namely convenience, risk protection, return and
liquidity. By using these criteria, investors are segmented into three categories namely, rational, normal and irrational based on the extent
to which they consider each criterion. Rational people analyze any investment instrument by using all the criteria, whereas
irrational people take investment decisions without considering any. The discriminant analysis is used to test the suitability segmentation.
© 2010 IUP. All Rights Reserved.
Working of Credit Rating Agencies in India:
An Analysis of Investors' Perception
--Bheemanagouda,
--J Madegowda
Since 1987, credit rating has made headway into the Indian capital market. Since their inception, credit rating agencies have
played a significant role in the Indian capital market as have their counterparts abroad. At the same time, the working of the rating
agencies has been criticized by many for not having been able to accomplish the coveted goal of investor interest protection as they
failed in predicting the fall of big corporate concerns. Rating agencies were also under the scanner during the current global financial
crisis. Against the backdrop of their role and criticism, the paper makes an attempt to elicit and analyze the opinion of investors on
the working of credit rating agencies in India and offers some suggestions to enable the rating system to be efficient and effective.
© 2010 IUP. All Rights Reserved.
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