The Role of Behavioural Factors in the Investment Decisions of Household Investors

Abstract

The process of investment requires investors to take various types of decisions and the quality of those decisions determines the outcomes of the investment process. Standard finance theories and behavioural finance theories present different views on investment decision making based on the concept of rationality. Behavioural finance theories indicate that investors fail to perform in a completely rational manner when making investment decisions due to various biases. The objective of the study is to identify the behavioural finance based factors influence the investment decisions of household investors in the Northern Province of Sri Lanka. The necessary data for the study were collected from 1810 household investors in the Northern Province of Sri Lanka and the sample respondents were selected under Proportionate stratified random sampling method. The analytical tools of exploratory factor analysis and confirmatory factor analysis were used to analyze the data. The current study concluded that Representativeness bias, Overconfidence bias, Availability Bias, Loss Aversion bias, Regret Aversion bias and Herding influence the investment decisions of household investors.