Impact of Behavioral Biases on Investors’ Stock Trading Decisions: A Comprehensive Quantitative Analysis

Abstract

Objective: This paper aims to investigate the impact of specified behavioral biases on investors' stock trading decisions in North India. It has been observed that most of the research works are based on financial theories, which affect investment decisions. But besides the theories nowadays, behavioral biases also play an important role in investment decisions, which was less focused in the previous literature. Methods: The study used primary data collected from a sample from North Indian States (Uttar Pradesh, Delhi, Haryana, and Punjab) through a structured questionnaire to analyze the impact of specified behavioral biases on investors' stock trading decisions. We used structural equation modelling to find out the significant impact of behavioral biases on stock trading and investment decisions. Findings: The investigation determined that the majority of the designated cognitive biases, such as the Overconfidence Bias, the Representativeness Bias, and the Herding Bias, exert a significant influence on the decisions about stock trading and investment made by investors. Novelty: The ample research in this domain has primarily occurred in various countries, with only a limited number of studies conducted specifically at the Indian level. Nevertheless, based on the literature review, it is evident that this study is groundbreaking in North India. The objective of this research is to enhance the effectiveness of financial advisors by gaining a deeper understanding of the psychological aspects of clients. This, in turn, will aid in developing portfolios tailored to individual behavior, aligning with client preferences. Recognizing and addressing behavioral biases is crucial for individual investors as they strive to make informed and successful financial decisions. Keywords: Behavioral Biases, Overconfidence (OC) bias, Representativeness Bias (RB), Herding Bias (HB), Structural Equation Modelling