Author(s) :

Kiran yadav, Shikha Daga.

Volume/Issue :

Abstract :

There is a debate in the investing world that revolves around whether investors adhere to classical theory or accord with the prospect theory. This study aims to examine the impact of prospect theory on the process of making investment decisions. The study has employed a hypothesis deductive technique, in which the suggested research model was tested using structural equation modelling in AMOSS Data that was obtained from 278 individual investors who participated in the Indian stock market for this study. The empirical findings indicate that biases driven by prospect theory have an impact on the irrational decision-making process among individual investors. The study also introduced a second-order measurement invariance related to prospect theory which has not been widely explored before. Investors tend to avoid losses and experience fear about potential losses; consequently, they may make irrational decisions. Surprisingly, even knowledgeable investors are susceptible to biases associated with prospect theory demonstrating significant and a positive relationship between prospect bias and irrational investment decision-making amongst individual investors. Risk perception of individual investors partially mediates and robo-advisory moderates the relationship between irrational investment decision-making and individual investors biases. The study's conclusions exhort individual investors to recognise and assess their prejudices and emotions. This research will assist in raising investor understanding so they can determine their financial capability after weighing all of their options

No. of Downloads :

29

KEYWORDS:

Prospect Theory, Mental Accounting, Higher Order, Robo Advisory, Loss Aversion

INTRODUCTION & OBJECTIVES:

Do the investors make decisions rationally? Recent development in finance highlights that human beings (Tversky et al., n.d.) are never rational in fact individual psychology plays an important role in decision-making. Behavioural finance a new paradigm in finance demonstrates how actually investors behave. Behavioural finance is an area of research that integrates concepts from finance and psychology to comprehend how people make financial decisions . It seeks to explain why people often deviate from traditional economic assumptions of rationality when it comes to their financial choices. Behavioral finance explores the psychological biases and cognitive errors that influence investors and consumers, leading to suboptimal decision-making in the financial realm. Behavioral finance challenges the assumption of traditional finance about the efficient market hypothesis, which suggests that financial markets are perfectly efficient and that prices always reflect all available information. Instead, behavioral finance proposes that markets are influenced by the irrational behavior of investors, resulting in market inefficiencies. Because behavioural finance has such a strong effect on investors' success, it has become an essential component of the decision-making process (Jahanzeb et al., 2012). Additionally, behavioural finance demonstrates that emotional factors can play a role in affecting decision-making. Financial and investing decisions are addressed from a human perspective by behavioural finance. (Ricciardi & Simon, 2000). Prospect theory is a branch of behavioural economics that explains how people choose between probabilistic options when there is risk and it is uncertain how likely certain outcomes will be. Compared to the anticipated utility theory, this theory—which was created in 1992 by Amos Tversky and Daniel Kahneman—is seen to be more psychologically accurate in explaining how people make decisions. According to prospect theory, the value function is convex in the loss region as it depicts that the investors are risk seekers when they face loss, and concave in the gain region which depicts investors are risk-averse when they face gains (Kuo and Chen, 2012). Shefrin and Statman (1985) extended the prospect theory (Kahneman and Tversky, 1979) giving the name―the disposition effect to this phenomenon by applying it to investment behavior and concluding that the investor sells the winning stock early and holds the loser one. Waweru et al. (2008) study depicts how prospect theory influences investors' decisionmaking through mental accounting, regret aversion, and loss aversion. This study aims to examine the impact of prospect theory on the process of making investment decisions. The introduction of robo-advisory services to provide a digital platform for investment is a technical innovation in the Corporate Governance Insight, Volume: 5, Number:2, December 2023, eISSN: 2582-0834 39 field of finance. In this study, we also try to examine whether these robo-advisory services help to mitigate the biases of investors. The remaining study is organised as: Section 2 provides the literature review, theoretical background and development of the hypothesis along with the conceptual model. In section 3 research methodology is described. Section 4 is about the data analysis and in section 5, the findings are discussed. Section 6 deals with the conclusion of the study

DOI:

10.58426/cgi.v5.i2.2023.37-51