Behavioural Finance and Investment Decisions: Does Behavioral Bias

Abstract

Abstract This paper examines the nexus between behavioural bias and investment decisions in a developing country context. Specifically, this study tests the effect of four behavioural biases (overconfidence, regret, belief, and ―snakebite‖) on investment decisions. Descriptive statistics and inferential statistics including multiple regression are used to examine the behavioural biases-investment decisions nexus. The study reveals that the four bias have a significant positive and robust relationship with investment decision making. The result also shows that the "snakebite" effect contributes more to the decision making, followed by belief bias then regret bias. Overconfidence bias, however, contributes the least effect on investment decisions. Our contribution confirms the prospect theory and that behavioural bias influences investment decisions in the developing country perspective. Keywords: behavioral Finance, behavioural bias, investment decisions, finance, developing countries 1. Introduction Investors for many years depends on the modern financial theories and expert opinions in making investment decisions to maximize returns either in the short term or long term. Finance theories and models such as Capital Structure (Modigliani & Miller, 1958); Capital Asset Pricing Model (Sharpe, 1964; Lintner, 1965, and Mossin, 1966); Efficient Market Hypothesis (Fama, 1970); and Options Pricing model (Black and Scholes, 1973) postulated that investors are rational, and they base on available information in making decisions. Chin (2012) suggested that the logical nature of investors in decision making could not explain the volatile nature of the stock market because of some behavioural biases. Thus, the finance theories regarded these as irrelevant. However, the collapse of the deep-rooted institution such as Long Term Capital Management companies (LTCM) due to stock market changes indicates that something was wrong with modern financial theories (Prosad et al., 2015). Nofsinger and Varma (2014) added that these anomalies delineate that something was lacking in the contemporary theory of rationality. Henceforth, Kengatharan (2014) argued that investors do not behave rationally because cognitive and emotional biases could influence their decisions. Jaiyeoba and Haron (2016) suggested that investors do not follow the strictly complex mathematical theory of prediction when making financial decisions under uncertainties and investors relied on behavioural factors to make investment decisions, especially in the stock markets. Kahneman and Tversky (1979) argued that investment decisions are based on psychological underpinnings, and their argument led to the resurgence of behavioural finance in recent times to complement the modern finance theories (Ahmad et al., 2017; Jaiyeoba & Haron 2016). Behavioural finance postulates that human beings are irrational in their decision making (Ahmad et al. 2017). Ahmad et al. (2017) further argued that the irrationality nature of human beings is biological, psychological, and sociological. Other Scholars posit that behavioural biases have a significant influence on individual investors than institutional investors who depend on expert portfolio advisors in decision making (Barberis and Thaler, 2003; Fama, 1998). Surprisingly, existing literature has not fully delved into studying behavioural finance to access its relevancy. The few extant studies on behavioural finance also have fragmented results from diverse contexts (Ahmad et al., 2017; Jaiyeoba & Haron, 2016; Prosad et al., 2015). For instance, whiles Prosad et al. (2015) argued that behavioural http://ibr.ccsenet.org International Business Research Vol. 13, No. 11; 2020 66 biases are contingent on investor's demographics and overconfidence, Jaiyeoba and Haron (2016) stipulated that investment decisions are based on psychological preferences that are context-driven. Also, several studies in developed countries and few emerging markets found that behavioural biases influence investment decisions (Kengatharan, 2014; Qadri & Shabbir, 2014; Nofsinger & Varma, 2014; Jaiyeoba & Haron, 2016; Prosad et al. 2015). This conclusion has not been ascertained in developing countries, especially in the West African countries. This study fills these gaps in research regarding true predictive abilities of the constructs of the behavioural biases or factors that influence investor's decisions. Specifically, the study examines the effects of behavioural biases on investment decisions in a developing country, Ghana. Our contributions are fivefold. First, the study's results would enable the practitioners to identify their mistakes and provides particularly suitable suggestions for financial experts in making stock investment decisions. This could allow financial advisors to become more prudent in understanding the psychology of their clients and enable them to improve investment portfolios. Second, investment bankers would understand the market feelings as they float shares to make a reasonable financial decision to help maximize their returns. Third, the study addresses the information deficiency to government and seekers of finance from the Stock Exchange and Securities in developing countries on the behavioural biases. This would form the foundation of formulating strategies on how to maximize Stock Exchanges potential as capital seekers. Also, the study's findings would help policymakers to appreciate the implication of future decisions, policies, and regulations. Finally, the study will contribute to, arguably, the available literature in the field of behavioural finance from the developing context perspective. The findings will complement the modern theories in investment decision making not only in the Ghana Stock Exchange (GSE) but also in the stock market in other developing countries. The rest of the study is structure as follows. Section 2 reviews the relevant theoretical and empirical literature on behavioural finance and investment decisions. Section 3 and Section 4 presents the methods and results, respectively. Chapter 5 concludes the study and offers recommendations for further research.