Vol: 7, Issue: 1 2017

Page: 51-59

Role of Behavioral Finance in Investment Decision in Security Market

Namratha Goutamchand

This research work falls under the broad category of behavioral finance that deals with the influence of psychology on the behavior of financial practitioners and its subsequent impact on stock markets. This study is an attempt to investigate the presence and impact of four behavioral biases in the Indian context for the period 2006-2013. These are overconfidence, optimism, the disposition effect and herd behavior. The interest in this field is rapidly gaining pace as it tries to replace some of the ideal assumptions of traditional finance theories like, rational agents and efficient markets. This area proposes a more realistic behavioral agent who is ruled by sentiments and is prone to make biased decisions. It signifies the role of psychological biases and their specific behavioral outcome in decision making. These biases can be heuristic driven, like overconfidence and optimism or frame dependent like the disposition effect and the herd behavior. These biases can prove to be extremely potent in financial markets as they can result in market anomalies like speculative bubbles and busts.