The Determinants of Investment Decision-Making: A Behavioral Perspective

ABSTRACT
The purpose of this paper is to examine the relationship among the individual behavioural factors
namely, Investor Optimism, Investment Ability, Investor Effort and Risk Appetite. A sample of
264 investors was drawn from the population of 300 investors using a structured questionnaire
from investment avenues in karur district. The result of analysis have shown that out of four
factors, three factors viz., Investment Ability, Investor Effort and Risk Appetite are found to be
significant predictors of investment decision-making.
Key words: Investor Optimism, Investment Ability, Investor Effort, Risk Appetite.
Introduction
Investment is a real investment and not financial investment.

It is a conscious act of an

individual or any entity that involves development of money (cash) in securities or asset issued
by an financial institution with a view to obtain the target returns over a specified period of time
(John maynard Keynes, 1938). Investment decision-making behavior theories on investment
activities is examined that the traditional portfolio approach was the dominant approach in the
market until 1950s. Although, this approach is lacked a scientific paltry, it is seen that it was the
dominant view in the market for a long time due to the fact that its workability was relatively
easy (Civan, 2007). In the historic investment conception, the investors think that they can
decrease the risk just by increasing the number of investment instruments. They have without
considering the relations between the revenue of investment instrument (Dermirats and Gungor,
2004). In the traditional investment approach, the investors are recommended to invest in the
instruments with a high revenue possibility. However, they are not informed about how the risk
will be measured and the mean values of yields realized in the past defined as expected return
(Reilly and Ve Brown, 1999). The study execute by Markowitz in 1952 named portfolio
selection establish the development of new theories in the field (Cihangir et al., 2008). There
are similar studies done in the field of investment (Kardiyen 2008). With the help of the theory
developed by Markowitz, it was suggested that the risk cannot be reduced by increasing the
number of financial instruments and the decision for investment should be made by taking in to

consideration the direction and degree of relation among the investment instruments (Demirtas
and Gungor, 2004). According to the modern portfolio theory of Markowitz, the overall risk of
portfolio could be lower than the each financial asset and some cases that the non-systematic risk
of portfolio could be reduced to zero. After all, it was pointed out that investors could prefer
some portfolios for being less risky although they produce the same amount of revenue and again
they could prefer others for higher revenues even though they have the same level of risk
(Markowitz, 1952). In Markowitz view, the risk can be reduced considerably with reverse
correlations among the investment instruments as well as by diversifying the instruments
available in the investors (Cetin, 2007). According to this theory, Markowitz preferred the
portfolios with lower risks instead of the once with higher revenues. While forming a portfolio
and diversification (Civan, 2007), as a result of the studies accomplish in the following periods
meanwhile which analytical models failed to explain individual investors behavior. There are
two studies of Kahneman and Tversky, who were interested in the area of finance. Their first
study, which was on short-cut motive errors (Kahneman and Tversky, 1974) was published in
1974, although the second study, which was on frame dependency, was published in 1979
(Bayar, 2011) and these two people formed the basis for behavioural finance (Bayar, 2011).
Kahneman and Tversky (1979) mentioned that irrational investors in their studies. In this sense,
the expectation theory suggested that whip up big interest. In this theory Kahneman and Tversky
stated that investors concentrated on loss and gains at different levels and also, Kahneman and
Tversky argued that instead of expected risk, perceived risk must be taken in to account with his
study entitled Integration of outcomes of psychological research into economic sciences and
decision making against indecision that he wrote with Tversky, Kahneman received the nobel
prize for economics in 2002. For Kahneman, this prize was an index that behavioural finance
was widely and scientifically accepted.
To summarize, this is absents of understanding of individual behavioural factors that
influencing the investment decision-making. Also, the relationship between individual
behavioural factors namely, Investor Optimism, Investment Ability, Investor Effort, Risk
Appetite and Investment Decision-making is less explored in previous studies. So, the objective
of the study was to examine the impact of individual behavioural factors on investment decisionmaking.

Need of the Study

Mehmet Islamoglu, Mehmet Apan, Adem Ayvali, (2015) under took a study titled Determinants
of factors affecting individual investor behaviours: a study on Bankers, in this study, the authors
investigated the factors influence individual investor behavior. As a result of the study, it was
identified that six factors influenced individual investor behavior and concluded that there was a
statistically significant relationship between the factors affecting individual investors investment
behaviours. Brahma bhatt, P. S. Raghu Kumari, Dr. Shamira Malekar (2012), expressed that
people have a tendency to see their own actions and decisions as totally rational, when they are
truth is they may not be. Mohd Abass Bhat, Fayaz Ahmed Dar (2012), under took a study titled
A Conceptual framework on Emotions and Investment Decisions. In this study, they proved
the emotions play a vital role in investment decisions and building long-term wealth requires
counter-emotional investment decisions.
From the literature review, it is observed that the concept of individual behavioural factors has
been less explored in the field of investment decision making. So, an attempt has been made to
gain deeper understanding on the significance of investors optimism, investment ability, investor
effort and risk appetite in the investment decision making.
Research Objective
To examine the impact of individual behavioural factors on investment decision-making
in investment avenues.
To examine the relationship between individual behavioural factors and investment
decision making.
To test and validate the proposed research model.
Review of Literature
In this paper, a comprehensive literature review about individual behavioural factors and
Investment decision-making has been carried out. (Chosen and Jaakko , 2011) shows that most
investors had affected based on extra Motivation to invest in stock, over and beyond financial
return expectations.

(Zaghlami, 2009) study revealed that some psychological particularities

that are not expected by the financial behavioral literature and the study were conducted on
Tunisian investors. (Mahendra, 2008) study stated that irrational investment decision making is

a widespread phenomenon. They study the perils of irrational decision-Making in investments

choice which finally can lead to great risk. (Vera, 2008) identified the demographic profile and
investor personality can be the two determinants for making perception about the investor
psychology, which if scientifically studied could help the Wealth Management professionals to
advice their clients to invest better stock. (Commines, 2009) in their article discussed the
hedonistic psychology of investors. It cites that the pursuit of happiness becomes hedonistic
when people want to get the Most of their investment and gaining wealth is no longer confining
that one becomes overly materialistic. (Markowitz, 1952) proposes that a two-criterion approach
when an investor is faced with the desire for higher returns but not wanting the uncertainty of
returns, which he perceives as risk. Many other researchers have extended this discussion. The
literature has developed into two schools of thought as researchers have sought to explain the
choices investors make about risk within their investments. One group of scholars has used
demographic features that relate the significance of gender, ethnicity, wealth, income, and a
variety of other factors to the explanation of investment management decisions. (Kerr, 2014)
shows that the other group has its foundations in psychology, using investors psychological
characteristics to explain choices that are made concerning investment decisions. The theory of
planned behaviour considers behavioural intention as immediate antecedent right before the
future behavior. This relationship has been proved and strongly supported by many previous
experimental studies (Sheppard, Hartwick et al.1988, Armitage and Conner 2001).
(Ajzen, 1991) defines behavioural intention to be assumed to capture the motivational factors
that influence a behavior; they are indications of how hard people are willing to try, of how much
of an effort they are planning to exert, in order to perform the behavior.
Many studies also claim the strong involvement of intention in behavior performance in a
way that increases the chance of the behavior being conducted. At the same time, they also agree
that individuals investment intention strongly affect behavior and may lead he/she will perform
his/her behavior. (East 1993), Harrison, Mykytyn Jr et al. 1997, Brown and Venkatesh 2005,
Song and Zahedi 2005, Michael 2011). In the case of investment on stock market, behavioural
intention is considered to present individual investors motivation to make a specific investing
decision.