The Impact of Behavioral Biases on Investors’ Decision-Making Tools in the Secondary Equity Market: A Pearson Correlation Analysis

Abstract

Significant relationships exist between the behavioral biases exhibited by the secondary equity investors and the type of decision-making tool employed to make the stock selection decision. Examining a sample of 436 secondary equity investors residing in Chennai, the study tests the relationship between the biases exhibited and the tools employed using Pearson correlation analysis. Nine behavioral biases, namely, mental accounting, anchoring, gambler’s fallacy, availability, loss aversion, regret aversion, representativeness, overconfidence, and optimism, were measured on a Likert scale using scenario-based questions. Twenty variables influencing the stock selection decision were measured and then reduced to the type of decision making, namely: economic analysis, industry analysis, company analysis, technical analysis, and advocate’s recommendation. Pearson correlation analysis was performed on three subgroups of the data, divided by the rate of actual return earned, in order to obtain more refined results. The results were more significant for the high-actual-return group, with actual returns above 15.01%. Knowledge of the biases exhibited when employing each decision-making tool can offer useful guidance for investors and for financial advisors/wealth managers seeking to advise their clients appropriately.

TOPICS: Fundamental equity analysis, technical analysis, wealth management