Factors Influencing the Decision Making Regarding the Individual Investment Behavior: an Assessment

Topics: Decision making, Risk, Decision theory Pages: 4 (981 words) Published: August 22, 2013

Investor behavior of behavioral finance concentrates on irrational behavior that can affect investment decision and market prices. It attempts to better understand and explain how emotions and cognitive errors influence investors and the decision-making process. In global financial markets the use of approaches based on perfect predictions, completely flexible prices, and the complete knowledge of all the decision of all other players in the market are increasingly unrealistic. The contribution of behavioral finances is not to diminish the fundamental work that has been done by proponents of efficient market hypothesis. Rather, it is to examine the importance of relaxing unrealistic behavioral assumptions and make it more realistic. It does this by adding more individual aspects of the decision-making process in financial markets. Without these contributions of behavioral finance, certain aspects of financial markets cannot be understood. Despite the importance of individuals’ investment decision, however, we know little about the factors that influence them. Finance research has often ignored the individual investors’ decision making process while taking financial investment decisions. There is need to develop behavioral paradigm to probe into the determinants of investor behavior and their impact on individual investor financial decision making.

Behavioral finance is assumed that information structure and the characteristics of market participants systematically influence individuals’ investment decision as well as market outcomes. Investor market behavior derives from psychological principles of decision making, to explain why people buy or sell stocks. Behavioral finance focuses upon how investors interpret and act as information to make investment decisions.

A better understanding of behavioral process and outcomes is important...
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