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Investors have certain cognitive and emotional weaknesses
which come in the way of their investment decisions. Over
the past few years, behavioral finance researchers have
scientifically shown that investors do not always act rationally.
They have behavioral biases that lead to systematic errors
in the way they process information for investment decision.
Many researchers have tried to classify the investors on
the basis of their relative risk taking capacity and the
type of investment they make. Empirical evidence also suggest
that factors such as age, income, education and marital
status affect an individual's investment decision. This
paper classifies Indian investors into different personality
types and explores the relationship between various demographic
factors and the investment personality exhibited by the
investors. The results of this study reveal that the Indian
investors can be classified into four dominant investment
personalities casual, technical, informed and cautious.
The traditional economic theory has always considered investors
as fully rational decision-making entities. But over the
past few years, behavioral finance researchers have scientifically
shown that investors do not always act rationally or consider
all of the available information in their decision-making
process. They have behavioral biases that lead to systematic
errors in the way they process information for an investment
decision. These errors, because of their systematic character,
are often predictable and avoidable. But they continue to
occur frequently and are made by both novice and professional
investors alike.
Behavioral finance is a new emerging science that studies
the irrational behavior of the investors. According to the
behavioral economists, individuals do not function perfectly
as the classical school tells us. Martin Weber (1999) makes
the following observation, "Behavioral Finance closely
combines individual behavior and market phenomena and uses
the knowledge taken from both the psychological field and
financial theory" (Fromlet, 2001). Behavioral finance
attempts to identify the behavioral biases commonly exhibited
by investors and also provides strategies to overcome them.
Empirical evidence suggests that factors such as age, education,
income, education and marital status affect an individual's
investment decision such as risk tolerance (Riley and Chow,
1992; and Schooley and Worden, 1999), aversion to realized
losses, investor's confusion between good companies and
good stocks (Fama and French, 1992; Shefrin and Statman,
1995; and Filbeck et al., 2005).
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