The Effects of Behavioral Elements on Individual Investor Decisions and Choices
The study of human psychology on the financial practitioners’ behavior, as well as the effects on the available markets, is known as Behavioral Finance (Richards, 2005). Behavioral finance tries to analyze and give explanations on how emotion and cognitive error influence investors. Unfortunately, most economic theories assume that people always make rational decisions; which is not always the case (Richards, 2005). However, human beings have in the past, according to the study carried out made irrational, inconsistent and incompetent investment decisions. It explains that people when faced with uncertainties, make decisions as well as choices that are not rational. Since they are agents that are acting on behalf of the principal investors, institutional investors’ behave in a different manner when compared to the individual investors. Therefore, the study of these individual investors is imperative (Hirshleifer, 2015). The primary reason for the study is to establish how behavioral factors affect the investment decisions of individual investors at the Saudi Arabia Stock Exchange. The research will assist individual investors and institutions as a reference material to analyze and predict the trends in the security and stock market. Generally, investors need skills and education on behavioral finance so that they can make prudent decisions (Hirshleifer, 2015). Therefore there is a need for research to assist them.
Statement of the Problem
A lot of empirical literature of psychology document that individuals make errors and cognitive decisions in how they think by overconfidence or putting too much thought on their past experiences. Accordingly, past experiences lead to psychological distortion (Cheng, Hameed, Subrahmanyam, & Titman, 2017).
The research question is:
What are the behavioral factors that affect the individual investor’s decisions concerning their investments?
Behavioral finance attempts to merge and analyze the individual behavior and the cognitive psychological theory on the economics of convention as well as finance so as to offer clarification on why individuals and institutions make a wrong investment decision.
The study examines the effects of individual behaviors on their investments decisions at the Saudi Arabia Stock Exchange and how it affects the individual investor decisions and choices.
Materials and Methods
Descriptive design data is used. Under the technical literature review, this research outlines the different behavior at the stock exchange as well as the theories of behavioral finance and the behavioral factors. Relevant studies and analyses carried out in the past are also examined. I used detailed design data (Richards, 2014). Using interviews and questionnaires administered to the individuals that are investors at the Stock Exchange, the primary data will be collected. Their response rate is also registered. In order to measure the consistent reliability of the measurements, the Alpha test is used. SPSS will be employed in the analysis of the data (De Bondt, Muradoglu, Shefrin, & Staikouras, 2015). Quantitative and qualitative analysis have been used in the research.
Qualifications of the Research
The purpose of the study was to find the behavioral factors that affect the individual investor’s decisions and the choices. The demography on the other hand involved each and every person’s representation of the respondents based on the ages. The study performed an intrinsic role to the investors since it enables them understood how the emotions and psychological effects can be solved.
Conclusion and Justification
Behavioral finance attempts to merge and analyze the individual behavior and the cognitive psychological theory on the economics of convention as well as finance so as to offer clarification on why individuals and institutions make a wrong investment decision. The research will, therefore, help in contributing to the general knowledge in the financial sector as well act as future reference material to scholars and investors. It will assist in minimizing the impact of bad decision making. The research will help also the investors to understand how emotions and psychology affect investments decision. It also supports individuals to make to evaluate themselves about their previous decision and gauge the biases extent so as to make the necessary adjustments.
Cheng, S., Hameed, A., Subrahmanyam, A., & Titman, S. (2017). Short-Term Reversals: The Effects of Past Returns and Institutional Exits. Journal of Financial and Quantitative Analysis, 52(1), 143-173.
De Bondt, W. F., Muradoglu, Y. G., Shefrin, H., & Staikouras, S. K. (2015). Behavioral finance: Quo vadis?.
Hirshleifer, D. (2015). Behavioral finance. Annual Review of Financial Economics, 7, 133-159.
Richards, T. (2014). Investing Psychology: The Effects of Behavioral Finance on Investment Choice and Bias. John Wiley & Sons.
Sewell Jr, W. H. (2005). Logics of history: Social theory and social transformation. University of Chicago Press.
Statman, M. (2010). Handbook of Finance: What is behavioral finance? (Vol. 2). Hoboken, NJ: John Wiley and Sons.