Volume 10, May 2020 ISSN 2581-5504

“Behavioural Finance”
Khushboo Tibrewal,
Indian Law Society’s Law College,
Pune
ABSTRACT

Behavioral finance involves the practice of observing and studying the behavior of an
investor or a group of investors while making economic decisions. It helps in making
understand the rationale behind economic decisions of investors and is a nexus between the
psychological theories and the conventional theory on economics and finance. Understanding
behavioral finance through adaptation of different models and theories will help in modifying
the behavior of investors and enable them to achieve improved economic decisions.
The Research paper is done with the aim of making understand the concept of behavioral
finance and its importance by comparing it with traditional finance. The objective is also to
highlight the pillars and theories of behavioral finance along with the behavioral biases and to
substantiate the theories, appropriate research and analysis is also carried out in this regard to
observe how the behavior and emotions of investors drive their economic decisions.

RESEARCH METHODOLOGY

1. The tools used to derive at the research work are as follows –

a. Ratio Analysis: For comparison of Behavioral Finance Vs Efficient Market Hypothesis,
Data has been collected from the official website of NSE, BSE and selected company’s
financial reports. Since the comparison revolves around Capital Markets, listed companies
from different sectors have been chosen randomly.
b. Sources of data: The secondary data has been collected from various sources such as data
through relevant websites, Annual reports of the Listed Entities, Government sites, e-Journals
and Magazines.
c. Statistical Tools: Tools like bar graphs, tabulation, and line & pie diagrams have been
used.

2. Limitations

The topic is about understanding human behavior, attributes and their reaction towards
economic decisions. Because of the subjective nature of humans, the prediction and analysis
on their behavior can never be accurate. The theories, research and analysis made in the paper
tries to achieve maximum accuracy, however due to no certain laws on human behavior
which can accurately interpret human ways and conduct, the research paper is done with
much caution and skepticism.

3. Research Questions

a. What is the difference between traditional finance and behavioral finance?

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b. How does the behavioral bias affect investors’ economic decisions?

c. What are the circumstances under which the theories under efficient market hypothesis
does not hold good and contradicts the concept of behavioral finance?

INTRODUCTION

One of the notional concepts under economics and finance is that people behave rationally to
achieve their objective of wealth maximization, giving no place to softer aspects of human
nature such as emotions, habits and behavior while making finance decisions. This concept
however was analyzed and tested with times to know that the assumption did not hold good
in its entirety when applied in the real world. For instance, we take the example of betting,
gambling, lotteries, where the winning probability is negligible (approx. 1 in 146 million),
still people tend to try their fate on such activities.

The presence of such instances, led the researchers to delve into the area of understanding the
irrational behavior of individuals which modern finance has overlooked. Behavioral finance
thus has become a new area of study and development to find out the underlying forces for an
investor while making investment concerning their cognitive ability and behavior1.

There are evidences back from the past where academicians, scholars have coined the term
behavioral finance and germinated its recognition in the field of economics and finance. John
Keynes, in his book in the year 19632 stated that, “many of our long-term investments reflect
“animal spirits”—intuitions and emotions—not cool-headed calculation”. Herbet Simon and
Hayek, in 19693 mentioned in their book that, “human beings can process only so much
information at once and are not capable of carefully weighing the costs and benefits of every
possible outcome of their decisions”. Contemporarily, The World Development Report4, in
2015 described the concept as, “Even apart from the instability due to speculation, there is the
instability due to the characteristic of human nature that a large proportion of our positive
activities depend on spontaneous optimism rather than mathematical expectations, whether
moral or hedonistic or economic. Most, probably, of our decisions to do something positive,
the full consequences of which will be drawn out over many days to come, can only be taken
as the result of animal spirits—a spontaneous urge to action rather than inaction, and not as
the outcome of a weighted average of quantitative benefits multiplied by quantitative
probabilities.”

1
Martin Sewell, Behavioral Finance, University of Cambridge (First Published in February 2007, Revised in
April 2010), available at <http://www.behaviouralfinance.net/behavioural-finance.pdf> (last visited on 30-05-
2020)
2
John Maynard Keynes, The General Theory of Employment, Interest and Money (First Published in 1936),
available at < http://www.hetwebsite.net/het/texts/keynes/gt/gtcont.htm> (last visited on 31-05-2020)
3
Herbert Simon and F.A. Hayek, The Sciences of the Artificial ( First Published in 1969), available at
<https://monoskop.org/images/9/9c/Simon_Herbert_A_The_Sciences_of_the_Artificial_3rd_ed.pdf> (last
visited on 30-05-2020)
4
World Development Report,2015:Mind, Society, and Behavior, available at
<https://www.worldbank.org/en/publication/wdr2015> (last visited on 31-05-2020)

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Few notable research works in the field of Management of Working Capital are of “Daniel
Kanheman” and “Annes Tversky”, who are considered as the “Fathers of Behavioral
Finance”. They have contributed in the field by their publication, counting to approximately
200 on various theories, models on behavioral finance, cognitive and emotional biases that
result in unanticipated behavior of individuals. Kanheman, in the year 2012 was also the
recipient of Nobel Prize for his work in the area of ‘rationality’ in economics. Their theories
were further developed and evolved by Richard Thaler, who worked on the shortcomings and
gaps left by the former researchers. He gave a new dimension to the research by elaborating
on concepts like prospect theory, endowment theory and other biases.

Understanding behavioral finance will help the Companies to create a management plan to
deal with the bad assumptions of investors and will also help them to provide for ways to
tackle foolishness and irrationality of humans.

CONCEPT AND FRAMEWORK

1. Traditional Finance v/s Behavioral Finance

As rightly said by Meir Statman, “Traditional finance models people as rational, wherein
behavioral finance models people as normal”. Traditional finance discusses the behavior,
investment decisions made by individuals in theory, while behavioral finance focuses on the
real life pattern behind investment decisions5. It is not correct to assume that the investors
always act rational, and therefore, a need arises to differentiate between these concepts.
Following are certain differentiating factors –

a.) Traditional finance can be grouped under normative analysis which is concerned with
deriving rational solutions to problems in hand. Behavioral finance is grouped under
descriptive analysis that concerns the manner in which people actually behave while making
decisions.

b.) The basis of traditional finance is from neo-classical economics which holds on to the
concepts of rational investors who are risk averse and efficient market, where the price
reflects all available information and to that effect, market behaves accordingly6. Behavioral
finance finds its place from psychology i.e. applying the theories of psychology in finance. It
deals with the myriad investor behavior patterns and approaches towards a situation and
examining it.

c.) The concept on which the traditional finance works is “Perfect Rationality” which states
that a “Rational Economic Man” has the ability to work optimally towards the solution for
any complexity and to choose the best alternative for best outcome. However, such a perfect
combination is hard to exist and hence comes the concept of behavioral finance which adopts

5
Ms. Kavita Shah, Study of Behavioral Finance With Reference to Investor Behavior, available at
<https://www.ijaiem.org/Volume3Issue9/IJAIEM-2014-09-28-67.pdf> (last visited on 31-05-2020)
6
Nicholas Barberis and Richard Thaler, A Study of Behavioral Finance (First Published in September 2002)
available at < https://papers.ssrn.com/sol3/papers.cfm?abstract_id=332266> (last visited on 31-05-2020)

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the “bounded rationality” theory that throws light upon human emotions than human intellect
and explains how a person’s anger, fear, hatred, love and pleasure can affect its decisions.

2. Pillars of Behavioral Finance

The Pillars of behavioral finance refers to the theories, concepts developed in response to the
field of the study of behavioral finance. Few of which are discussed as follows –
a.) Risk Aversion: Broadly speaking, there are three kinds of risks namely, ‘risk seeker’ who
prefers uncertainty in investments, ‘risk neutral’, who is indifferent between investments and
‘risk averse’, who avoids taking risk. Traditional finance assumes that people are risk averse.
Risk can be measured by the curvature of marginal utility of wealth 7. A risk seeker has
convex marginal utility which means that marginal utility is increasing at an increasing rate
with the increase in wealth. A risk neutral person will have a linear utility curvature which
states that marginal utility increases at constant rate with increase in wealth. A risk averse has
a concave marginal utility which suggests that marginal utility increases at a decreasing rate
with increase in wealth.
b.) Neuro-Economics: It is an emerging field of study with respect to behavioral finance
concerning how people react, behave while making economic decisions. As the name
suggests, it maps the brain activity of investors coupled with observation and experiments to
study the basis of economic decision made by investments before, during or after the task of
investment decisions.
c.) Prospect theory and Bounded Rationality: It is considered as an alternative to the
expected utility theory under normative analysis. The theories fall under descriptive analysis
by describing how people actually behave unlike normative analysis which describes how
people should behave. Prospect theory works by assigning values in the form of weights to
gain and losses rather than to final wealth8. For instance, the value functions assigned is
normally steeper for loss aversion, concave for gains (i.e. risk aversion) and convex for loss
(i.e. risk seeker).

IDENTIFYING BEHAVIORAL BIASES

Literal meaning of bias is a preference; partial judgment; prejudice in favor of a viewpoint. In
the context of the paper, biases refer to the irrationality in making financial decisions which
are driven by feelings. Irrationality can be due to cognitive errors i.e. statistical or calculative
errors, or can be due to emotional biases i.e. through intuition, impulses, etc. Cognitive errors
are rectifiable as they arise from faulty reasoning and therefore, by improving the reasoning,
clarity and education, it can be corrected. Emotional biases, on the other hand are hard to
rectify as they stem from a person’s emotions, habits that are not objective in nature. The
perceptions, beliefs of individuals cannot be controlled which therefore leads to irrational
decisions. Few of the biases that rule investors behavior is discussed as under –

7
Victor Ricciardi, The Psychology of Risk: The Behavioral Finance Perspective (First Published in July 2008),
available at < https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1155822> (last visited on 31-05-2020)
8
Kahneman and Tversky, Prospect Theory: An analysis of decision under risk (Econometrica, First Published in
1979, Vol.47. No. 2) pp. 263-292

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1. Mental accounting: According to this concept, people have an inclination for assigning
special functions to each asset group, while ignoring the debt payment obligations it has in
the present9. The theory can be better explained with an example. An individual creating a
specific head and assigning funds for a family vacation, while it has credit card debt for
payment becomes illogical as the person is saving funds bearing little or no interest value
while upholding a 25% interest on a credit card debt payment.

In matters of investment, this theory comes in place where investors diversify their portfolio
between safe and speculative portfolios to counter the negative returns ignoring the fact that
the net wealth will remain unaffected than in the case if he had held larger portfolio.
Although such behavior seems illogical, people tend to do it as they have certain value
attached to assets which they feel “too important” to relinquish.

To mitigate the mental accounting bias, it is to be understood that the money is the same
which is saved for a purpose bearing negligible interest and can be used to save high interest
payments. The fungible nature of money, if recognized can help avoid the irrational behavior
of individuals.

2. Gambler’s fallacy: The theory is based on determining the probability of event or series
of events. A lack of understanding can result in wrongful assumptions about a particular
event. In gambler’s fallacy, an individual bases the probability of the happening or non-
happening of event on the criteria of the result of past series of events ignoring the fact that
the probability of each event is independent of its occurrence in the past10. For instance,
where a series of 10 coin flips shows “tails” side up each time, an individual may predict that
the next flip will most likely have “heads” although each coin flip is independent and no past
flips have any bearing on future flips.

In investments people fall prey to this bias. For example, investors decide to liquidate a stock
where it has witnessed growth for a considerable period assuming that it is unlikely for the
stock to continue growing. Similarly, investors might hold up to a stock even after its
continuous downfall assuming that further downfall is improbable and the situation will
change.

The gambler’s fallacy can lead to wrong assumptions and predictions. Investors should hence
decide on the basis of fundamentals and technical analysis and must educate themselves
before investing.

9
Richard Thaler, Mental Accounting Matters (First Published in July 1999) available at
< https://doi.org/10.1002/(SICI)1099-0771(199909)12:3%3C183::AID-BDM318%3E3.0.CO;2-F> ( last visited
on 31-05-2020)
10
Dek Terrell, A test of the Gambler’s Fallacy: Evidence from pari-mutuel games ( First Published in May
1994) available at < https://doi.org/10.1007/BF01064047> (last visited on 31-05-2020)

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3. Overreaction bias: The changes in the stock market due to the new information provided
in the market often leads to overreaction by the investors11. For instance, when there is some
good news, it is assumed that the news should raise the price of the stock and shall remain
rising until any further information is provided.

Overreacting over such actions in the market, investors tend to create larger than appropriate
effect in the market often overlooking that the price change is sudden and temporary. Basing
their investment decisions on such temporary factors can lead to irrationality in their behavior
and therefore instead of a hasty decision, investors should spend time on watching the market
and the stock movements and then arrive at a decision.

4. Availability bias: According to this theory, investors act on the basis of recent trend and
newer information in their decision making than considering old information and data for
investments. For instance, if one sees a car accident on the road which the person takes
regularly to drive to office, the person will become extra cautious for a week or so while
driving along he same road although the road has not become more dangerous than it has ever
been, but the accident made the person skeptical, but the person will adopt his old driving
habit by the following week.

To overcome the availability bias, retention of perspective is important. A thorough research

on the investment portfolios will give better understanding on how to react on recent
developments and will help in acting accordingly to achieve long term goal.

5. Overconfidence: Confidence means trusting one’s abilities pragmatically, while

overconfidence is exaggerating one’s ability and having an over optimistic approach to
perform a task. In investment decisions, overconfidence can prove detrimental in the long
run. Overconfident investors trade more frequently in the market as they believe that they are
better in choosing the winning portfolios12. However, on an average, these traders gain
significantly low yields in the market.

On avoiding overconfidence bias, it needs to be understood that the volatility of the stock
market and the new set of challenges associated with it needs proper study and research.
Refining the investment techniques can also be adopted as one of the ways to avoid
overconfidence.

11
Srinivasan Rangarajan, Behavioral Finance: Overreaction and Availability Bias (Published in May,2014),
available at < https://getricher.in/2014/behavioural-finance-overreaction-and-availability-bias/> (last visited on
31-05-2020)
12
John Doukas and Dimitris Petmezas, Acquisitions, Overconfident Managers and Self-attribution Bias (First
Published in May 2007) available at <https://doi.org/10.1111/j.1468-036X.2007.00371.x> (last visited on 31-
05-2020)

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RESEARCH AND DATA ANALYSIS

The research is broadly carried out on 3 aspects of Efficient Market hypothesis to break the
ideal assumptions and conventional theories of the hypothesis. The objective is to show how
the theories under the efficient market hypothesis do not hold good at all times and situations
wherein there has been a contradiction is discussed through the aid of research. The aspects
are discussed as under –
1. Valuations not justified by fundamentals
One of the assumptions under Efficient Market Hypothesis is that prices fully reflect the
available information as it is backed by large number of rational investors. To prove that
there are circumstances been occurred in the past where the theory could not upheld itself, a
research is done to pick up the financial information for a particular year (“2018” in our case)
of a four companies in a particular industry (“Tea Industry” in our case). The Price Earnings
ratio (P/E ratio) was compared with respect to fundamental ratios of each company under the
industry and it was found that in the industry there was one such company whose valuation
was not supported by its fundamentals. The following table shows the P/E ratios and
fundamental ratios of each company and the observations are made below –

Average Average
Current Average
Name of Interest Profit Sales Growth
Market P/E D/E ROE
company Coverage Growth Growth Rate
Price (5yrs)
(5yrs) (5yrs)

Tata Global 260.60 42.24 0.12 8.17 1.43 0.29 6.52 3.56%

Bombay
1187.60 19.15 0.42 30.52 21.10 9.64 17.89 12.09%
Burmah

Tata Coffee 118.65 14.67 0.72 9.66 20.19 0.03 14.62 11.53%

Dhunseri Tea 283.45 120.62 0.75 5.62 (1.30) 4.13 10.74 -

Source: NSE, BSE, Companies’ Annual Reports

Observations13

1. On the basis of Debt/Equity Ratio (D/E ratio), Dhunseri Tea is the riskiest company
out of the 4 companies.

13
The observations are solely on the basis of the information extracted from the box above and no additional
inputs have been referred.

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2. On the basis of Interest Coverage Ratio, Dhunseri Tea is the riskiest company out of
the five companies.
3. The average sales growth of Dhunseri Tea for last five years has been 4.13%. During
the same time, the profit has decreased by 1.30%. This shows that the cost per unit of
production has increased during the period.
4. The Growth rates for the Companies were also calculated to evaluate the future
prospects of the Companies. The growth rate has been calculated using the formula (
Retention Ratio * Return On Equity )
5. Due to 100% Dividend Payout and no Retention in the last year, there is no growth
rate for Dhunseri Tea.
Following the observations, it can be said that if the EMH assumptions are implemented then
Dhunseri Tea should have traded at a lower P/E Ratio as compared to the peers however, the
investors are willing to pay 5-6 times more than what they are willing to pay to its peers
despite the weak fundamentals of Dhunseri Tea. It therefore shows how the decisions of
investors are not always rational and that the price doesn’t reflect all available information.

2. Mutual Funds that have consistently outperformed the market

Another assumption under EMH is that information is freely available to all the participants.
The total effect of the information comes from the competition prevailing in the market
amongst all the participants. Thus, at any point of time, the price of a security will match the
intrinsic value of the security14. The research is carried out in this regard and for this purpose
three mutual funds were selected to showcase their performance over the years and it is
observed that these Mutual Funds have regularly outperformed the corresponding indexes.
The results have been summarized below:

2.1. ICICI Prudential Value Discovery Fund

Source: Valueresearchonline.com

Observations: ICICI Prudential Value Discovery Fund has been regularly out-performing
the corresponding Index from 2009 onwards.

14
Michael Jensen, The Performance of Mutual Funds in the period 1945-1964 (First Published in May 1968),
available at < https://doi.org/10.1111/j.1540-6261.1968.tb00815.x> (last visited on 31-05-2020)

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2.2 UTI Equity Fund

Source: Valueresearchonline.com

Observations: UTI Equity Fund has been regularly out-performing the corresponding Index
from 2009 onwards.

2.3. Sundaram S.M.I.L.E. Fund - Regular Plan

Source: Valueresearchonline.com

Observations: Sundaram S.M.I.L.E. Fund - Regular Plan has been regularly out-performing
the corresponding Index.

3. Cases where individual stock has outperformed the mutual funds in the market

In contrary to above observations, there are cases where the individual stocks of the entity has
performed better and the investor has gained higher return after investing in the individual
stocks through thorough study and analysis of fundamentals as compared to return from
Mutual Funds.
For analyzing the same, the top 3 companies in UTI Equity Fund portfolio were taken on the
basis of percentage holding of assets and the return from Mutual Funds were compared with
the return from individual stocks and the results were as follows –

Company Sector % Assets

Bajaj Finance Financial 6.29
IndusInd Bank Financial 5.51
HDFC Bank Financial 4.97

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The below graphs have been shown to explain the observation:-

3.1. Bajaj Finance Ltd.

Source: Valueresearchonline.com

3.2. IndusInd Bank

Source: Valueresearchonline.com

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3.3 HDFC Bank

Source: Valueresearchonline.com

Observations: Thus it is evident that although Investment Managers tend to outperform the
market by taking benefit of the opportunities and having strong fundamentals, it may so
happen that individual investors through their research on market behavior as well as their
findings may earn higher return on individual stocks than what they could have earned
through investing in Mutual Funds.

3. Evidence of Herd Behavior in the Stock Market

There have been incidents in the stock market where investors have just followed the market
trend and ignored judging the stocks on the basis of fundamentals and its future prospects
resulting in the failure of the assumption under EMH which states that an investor acts
rational to maximize their utilities. This trend is known as the herd behavior and to find out
about the behavior, analysis was made on the effect of prices of stocks that followed on the
actions of the renowned investor, “Rakesh Jhunjhunwala”. The observations made are as
under -

News No. 1: Lupin hits over one-year low on speculation of Rakesh Jhunjhunwala
selling some of his stake. (Business Line, 18th March, 2016)
The Business Line reported on March 18, 2016 that the ace investor Rakesh Jhunjhunwala
is expected to sell some of his stake soon15. In no time, after the news was broadcasted, Lupin
Limited fell as much as 8.32% to its lowest since February 3, 2015 in intra-day trade. The
stock continued to fall post March 18, 2016 which evidently displays the herd behavior.

15
The Hindu Business Line, Lupin shares partly recover after hitting 52 - week low, available at
<https://www.thehindubusinessline.com/markets/stock-markets/lupin-shares-partly-recover-after-hitting-
52week-low/article8409172.ece> (last visited on 31-05-2020)

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DATE OPENING HIGH LOW CLOSING

th
18 March, 2016 1,673 1,673 1,539 1,558.90
21st March, 2016 1,570 1,570 1,502.20 1535.35
22nd March, 2016 1,541 1,564.40 1,536.80 1,549.75
23rd March, 2016 1,562 1,562 1,531.92 1,524.50

1,700
1,600
1,500
1,400
17th 18th 21st 22nd 23rd
March, March, March, March, March,
2016 2016 2016 2016 2016

News No. 2: Rakesh Jhunjhunwala buys 3 million shares of Man Infra (Live Mint, 29th
Jan, 2015)
The Live Mint reported on January 29, 2015 that Mr. Jhunjhunwala buys 1.21% stake i.e. 3
million shares in Man Infra Constructions Limited at Rs. 36 per share16. Soon after the report,
the stock price witnessed a hike with closing at 20% higher i.e. Rs. 43.2 per share on Bombay
Stock Exchange.

DATE PREV CLOSE HIGH LOW CLOSING

rd
23 Jan, 2015 37.05 37.70 35.50 36.15
27th Jan , 2015 36.15 36.95 36 36.30
28th Jan, 2015 36.30 37.70 35.55 36
29th Jan, 2015 36 43.20 35.80 43.20
30th Jan, 2015 43.20 47.80 43.20 45.30
2nd Feb, 2015 45.30 48.40 45.30 46.80
Source: NSE and BSE

16
The Live Mint, Rakesh Jhunjhunwala buys 3 million shares of Man Infra, available at
<https://www.livemint.com/Money/ZzKJAghlfSnozlJrOxK5BP/Rakesh-Jhunjhunwala-buys-3-million-shares-
of-Man-Infra.html> (last visited on 31-05-2020)

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50
40
30
20
10
0
23rd Jan, 27th Jan 28th Jan, 29th Jan, 30th Jan, 2nd Feb,
2015 , 2015 2015 2015 2015 2015

As clearly understood from the graph, the stock was on a deteriorating trend until the news of
Mr. Jhunjhunwala buying the shares resulted in an upward movement in the price of stock up
to Rs. 43.2 from Rs. 36 in a single day and kept on increasing for the next 2-3 days.
Thus, it can be wrong to say that investors are always rational in their approach and instances
such as the herd behavior where the investors follow the renowned investors show that they
are normal rather than rational.

ANALYSIS
Behavioral finance involves the study of rationale behind investors’ decisions. The gaps in
the theories of conventional finance which explains investors as rational and market as
efficient are filled by behavioral finance. The pillars of behavioral finance, namely, risk
aversion, neuro-economics, prospect theory and bounded rationality are the foundations of
behavioral finance that has evolved over a period of time. Also, the behavioral biases
mentioned in the research paper are the prejudices which lead to the irrationality of investors
while making investment as it ignores the market behavior and future prospects and putting
focus only on investors’ emotions, intuitions which are not backed by any fundamentals or
research. The famous prospect theory propounded by Kahneman and Tversky determines that
people tend to be more loss sensitive i.e. they feel more pain in receiving a loss as compared
to the joy which the person receives from an equal amount of gain.

The research section of the research paper hits the underlying assumptions in efficient market
hypothesis. The data analysis on “Valuation not justified by fundamentals” contradicts the
assumption that market participants are rational beings, making optimal decisions by trading
off costs and weighing the benefits statistically. There are number of examples of companies
where the valuation is not justified by fundamentals and is not just limited to one or two
industries, rather they are pervasive.

The research catering to the mutual funds outperforming the market brings down another
assumption of market efficiency that relevant information is freely available to all the
investors and the competition among the market participants result in a market where prices
of individual investor always reflect the total effect of all information which includes

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information about events that have already happened and that are expected to happen in
future.

The herd behavior of investors shown in the research portion of the paper puts down the
efficient market assumption that investors study the market and theories on investment before
investing. It shows that they just follow the movement of ace investors in the market without
putting heed on the stock performance, its fundamentals and future prospects. Thus, the fact
that investors do not take rational decisions provides opportunities to the investment
managers to outperform the market.

THE IMPACT OF COVID-19 ON INVESTMENT DECISIONS

Greed and fear have always been a dominating trait in investment decisions. The
unprecedented situation caused due to the Corona Virus has made people to more likely take
wrong decisions and the uncertainty has made it difficult to respond to the market with
accuracy. In this regard, it is important to mention the role of narratives. Narratives or public
sentiment is an essential factor in making decisions even in this pandemic with respect to the
savings and investment plans. The investors’ behavior are although changing as they are
willing to ride out the storm and even add more money during the bad phase of the market,
however it is important for them to not panic or overreact. The investors should hold back to
their stocks and act at the appropriate time rather than taking decisions in a haste and getting
followed by the behavioral biases ending up in irrational decision making. Thus, it is better to
be calm before taking big and long term investment decisions looking at the prevailing
situation.

Certain contemporary events such as the outbreak of Corona Virus, hike in the crude oil
prices and the YES Bank case where it was put under moratorium have impacted the market
and caused deterioration in the stock performances, however it can also be seen as an
opportunity in disguise as the Government and the RBI have been constantly handling the
situation to prevent negative fallout of the situation.

Thus, it needs to be understood that what is being experienced now is volatility and not
absolute loss. The markets have always revived through the doom and gloom as evident from
the past where in 2008, Nifty collapsed to a low of 2,600 level from highs of 6,200 level in
January 2008. At that time it was predicted that the market might take a decade to recover,
however, the market was back to 6,100 level by October 2010 i.e. in just eighteen months.
History has shown with time the continued progress of mankind and has assessed that there is
no reason that the trend will not reverse this time. Staying on course is what is expected from
the investor.

CONCLUSION

Behavioral finance strikes a balance between traditional finance and modern finance as
traditional finance safely does away with considering psychological factors of investors in
making decisions which ultimately changes the market prediction and outcomes. Modern

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finance, on the other hand, recognizes an investor’s emotions, intuitions and thought process
behind any investment decision. Understanding behavior is as difficult as predicting weather
and in fact more difficult as the economy, unlike weather is not made up of molecules for
which the law of physics can provide any conclusion. There are no concrete laws on human
behavior and conduct unlike the law of physics. However, this limitation cannot become the
reason to overlook behavioral finance, but the approach should be to study and understand it
in a broader sense so that it can be complimented along with the traditional finance so as to
improve the economic decision of investors.

Thus, in the volatile market situations, it is important to keep in mind both the fundamentals
of the stock and the market as well as the behavior, attitude of investors and their investment
patterns so as to achieve improved economic decisions by the investors which will provide an
efficient market system and increase in investment base resulting in an upliftment of the
economy.

REFERENCES

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Volume 10, May 2020 ISSN 2581-5504

10. Dek Terrell, A test of the Gambler’s Fallacy: Evidence from pari-mutuel games ( First
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13. The observations are solely on the basis of the information extracted from the box above
and no additional inputs have been referred.
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