Monday, September 2, 2019

An Analysis on Factors influencing on Stock Investment Decision: A Behavioural Finance Perspective

1. Background

Behavioural finance is regarded as an emerging discipline in finance, which is also rapidly expanding. The behavioural finance emerged in the 1980s as a new concept in finance which combines behavioural and psychological aspects of financial decision-making. It challenges the traditional finance to understand why investors behave in a particular manner while investing in financial assets. The standard finance or traditional finance is based on various theories and principle arbitrage principles of Miller & Modigliani; the portfolio principles of Markowitz; the capital asset pricing theory of Sharpe, Lintner & Black; and the option-pricing theory of Black, Scholes & Merton, these theories and principle assumes that market participant behaves rationally so the market is efficient and systematic. The investors are theoretically considered to be rational regarding the investment decision by traditional finance; in other words the mainstream finance believe that the investor assumes that the investment decision is made with rational expectation, furthermore, whenever a new information arrives the investor updates their belief and that is reflected through the investment decision which is to maximize their expected return at a given level of risk.

On the other hand, the behavioural finance incorporates behavioural biases and intellectual psychological component accompanied by economics and finance so that the viable supportive argument can be drawn for the irrational behaviour of people during the financial decision (Javed, Bagh, & Razzaq, 2017). DeBont's and Thaler's (1985) paper on stock market overreaction provides initial ground for behavioural finance. The behavioural finance deals with the human decision process which is subjective to the cognitive illusion which has been discussed by various scholars (e.g. - Illiashenko, 2017; Ritter, 2003).  According to Barberis and Thaler (2003), even though the investors are able to process all the available information accurately, not all the investor are rational, their investment related decision has behavioural preconceptions. Thaler (1994) coined the term 'quasi-rational' which indicate for much less than the full rational situation. In the word of Ritter, (2003) the behavioural finance believes in the asymmetric distribution of financial information. The investor’s decision to invest in a particular stock is an investment decision which is subject to several cognitive illusions, one among these illusions is caused by a heuristic decision process.