Research in Behavioural Finance: An Overview

 

What is Behavioural Finance?

Behavioural Finance is a field of study that combines psychology and finance to understand how emotions, biases, and cognitive errors influence investors' financial decisions—often leading them away from rational economic theories.

✅ Core Assumption:

Unlike traditional finance (which assumes rational investors), behavioural finance assumes that:

  • Investors are not always rational.

  • Decisions are influenced by heuristics, biases, and emotions.

  • Markets are not always efficient due to collective investor psychology.

🧠 Key Concepts and Biases Studied:

Concept / BiasDescription
OverconfidenceBelief that one's abilities or predictions are more accurate than they are.
Loss AversionFear of losses leads people to avoid risks, even when gains are likely.
Herd BehaviourTendency to follow the crowd in investing decisions.
Anchoring BiasRelying too heavily on the first piece of information (anchor) when making decisions.
Mental AccountingTreating money differently based on its source or intended use.
Prospect TheoryPeople value gains and losses differently, leading to irrational decision-making.
Framing EffectDecisions change depending on how choices are presented.

🎯 Popular Research Topics in Behavioural Finance:

TopicExample Research Question
Impact of emotional intelligence on investment behaviourDo emotionally intelligent investors make better decisions?
Herd mentality in stock market crashesWas herd behaviour a key driver in the 2008 crisis?
Role of media and sentiment in asset pricingHow do news headlines affect short-term stock prices?
Gender differences in risk toleranceDo men and women perceive investment risk differently?
Influence of cognitive biases on mutual fund selectionDoes anchoring bias affect SIP decisions?

📊 Methods Used in Behavioural Finance Research:

MethodPurpose
Surveys/QuestionnairesTo study investor perceptions and biases
ExperimentsTo simulate financial decisions in controlled settings
Regression AnalysisTo model the effect of behavioural traits on financial outcomes
Case StudiesTo analyze real-world behavioural financial events
Event StudiesTo examine market reactions to news or events

📈 Example Study (Simplified):

Title: The Effect of Overconfidence on Retail Investment in Indian Stock Market

  • Objective: To analyze if overconfident investors trade more frequently.

  • Method: Survey + regression analysis using trading frequency as DV.

  • Findings: Overconfident investors showed higher trading activity, often underperforming long-term investors.

📚 Important Indian and International Journals for Behavioural Finance Research:

  • Journal of Behavioral Finance

  • Journal of Economic Psychology

  • International Journal of Behavioural Accounting and Finance

  • IIMB Management Review

  • Asian Journal of Behavioural Research in Finance

✍️ Useful Research Titles for Students:

  1. “A Study on the Impact of Herd Behaviour in Investment Decisions among Millennials”

  2. “Effect of Framing on Mutual Fund Selection: An Experimental Approach”

  3. “Do Emotions Affect Stock Market Decisions? A Behavioural Study among Retail Investors”

  4. “Behavioural Biases and Portfolio Diversification: Evidence from Indian Investors”

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