Understanding Investor Behaviour Using Prospect Theory: An Indian Perspective

Abstract

Kahneman and Tversky's Prospect Theory tries to explain investor behaviour under risk when alternative outcomes are available to them while making an investment decision. Loss Aversion, Regret Aversion, and Mental Accounting are the three dimensions of this theory. Loss aversion is an investor emotion that prevents unloading unprofitable investments because they lead to a loss. Regret Aversion is the anticipation of regret where an investor holds to loss-making investments with the fear of admitting an incorrect investment decision. Mental Accounting is the value investors place on money, often leading to detrimental results. This research attempts to gain deeper insights into the complex investor behaviour which forms an important aspect of behavioural finance. An online survey of 282 pan-India stock market investors is done on the three dimensions and the collected data is analysed using One-way ANOVA to measure the relationship between independent (income, investment amount, education qualification, age, gender, and investor experience) and dependent variables (loss aversion, regret aversion, and mental accounting). This study is of significant interest to financial institutions for product design, to the government in making economic policy, and financial advisors who can consider the independent variables as crucial factors that make their clients prone to behavioural biases.