Journal of Behavioral Finance

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An Exploratory Inquiry into the Psychological

Biases in Financial Investment Behavior

Shalini Kalra Sahi , Ashok Pratap Arora & Nand Dhameja

To cite this article: Shalini Kalra Sahi , Ashok Pratap Arora & Nand Dhameja (2013) An
Exploratory Inquiry into the Psychological Biases in Financial Investment Behavior, Journal of
Behavioral Finance, 14:2, 94-103, DOI: 10.1080/15427560.2013.790387

To link to this article: https://doi.org/10.1080/15427560.2013.790387

Published online: 29 May 2013.

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THE JOURNAL OF BEHAVIORAL FINANCE, 14: 94–103, 2013
Copyright 
C The Institute of Behavioral Finance
ISSN: 1542-7560 / 1542-7579 online
DOI: 10.1080/15427560.2013.790387

An Exploratory Inquiry into the Psychological

Biases in Financial Investment Behavior
Shalini Kalra Sahi
FORE School of Management

Ashok Pratap Arora

Management Development Institute

Nand Dhameja
Indian Institute of Public Administration

The purpose of this article is to identify the beliefs and attitudes of the individual investors with
regard to financial investment decision making, with particular reference to the investor biases,
by conducting an in-depth study of investor beliefs and preferences. In total, 30 exploratory
semi-structured interviews were conducted to identify and describe the underlying thoughts
and feelings that affect the individual investment decision-making behavior. Decision-making
rationales are analyzed by means of open coding of verbal data. The findings of the in-depth
interviews indicated that individual investors have numerous beliefs and preferences that bias
their financial investment decisions. These biases reveal the design of the investor’s mind rather
than flaws of the investor’s mind. This study suggests that an understanding of an individual
investor’s psychology would help in better comprehending the way the individual investment
decisions are made. The value of this research lies in its methodology and analysis. Perceptions
and beliefs of the financial consumer with regard to their financial investment biases have not
been explored earlier, so this article contributes to new knowledge in terms of financial product
buying behavior.

Keywords: Psychological biases, Behavioral finance, Financial investment decision behavior,

Exploratory study, Qualitative research

INTRODUCTION should lead to financial satisfaction and to improvement in

The competition in the financial markets has increased over
the years with more players in the market offering invest-
ment alternatives abound (OECD [2004], Planning Commis-
sion [2006], Reddy [2006], Pradhan [2008]). In this regard,
financial product buying behavior has become important
(Diliberto [2006], Mudholkar and Sadique [2007], Pompian
[2008]). Financial investment decisions are an integral part
of any household’s financial management practice. Decisions
pertaining to effective management of financial resources
This paper is a small part of an accepted thesis submitted by
the first author to Management Development Institute, Gurgaon, India.
Address correspondence to Shalini Kalra Sahi, FORE School of Man-
agement, B-18, Qutab Institutional Area, New Delhi 110016, India. E-mail:
skalrasahi@gmail.com
the quality of life. However, the increase in the number and
complexity of the financial products available in the financial
market, makes the financial decision-making process highly
complicated and influenced by various heuristics and biases
(Sjoberg and Engelberg [2006], Lovric, Kaymak and Spronk
[2008]).
Therefore, an understanding of how the individual in-
vestors make decisions is of significant concern, particularly
the role of investor biases (Olsen [2007], Pompian [2008]).
These biases, also called beliefs and preferences, act as a lens
in the decision maker’s thought process.
The understanding of the individual investor’s decision-
making behavior would be more insightful when the actual
decision makers are inquired on their beliefs and preferences.
Keeping this objective in view, an exploratory study was
conducted to find out what these beliefs and preferences are

that influence a person’s investment decisions. According
to Cummins and Nistico [2002], qualitative techniques are
useful in understanding the biases of individuals as the in-
terviews would be “representative of what people do under
natural circumstances when they describe themselves and
evaluate their abilities and plan for the future” (p. 47).
The reasons for using the interview method in the context
of understanding the financial investment behavior was as
follows:
(1) People are unwilling to give truthful answers
to questions that invade their privacy (that are
confidential and sensitive in nature), for example,
discussing “personal finances” or financial behavior
(Churchill [2001], Malhotra [2005]) (their financial
status and financial beliefs and preferences). In-depth
interviews, conducted one-on-one, are one of the best
methods available for probing the personal opinions,
beliefs, and values of individuals, enabling very rich
depth of information and allowing for inquiry into
hidden issues.
(2) People are at times unable to provide accurate answers
to questions that tap their unconscious (Churchill
[2001], Malhotra [2005]), for example, the values,
emotional drives, and motivations that lead to pref-
erence of some financial investment products over
others (Churchill [2001]). In-depth interviews cause
no social pressure on respondents to conform to a
certain view.
(3) Self-reported beliefs and biases, in the initial stage
of exploring the phenomenon, are not representative
of what people do under actual circumstances. It is
important that the detection of these tendencies take
place in the process of the describing oneself and
one’s abilities and plans about financial planning and
management, which calls for the interview technique
as a suitable method of collecting qualitative data.
(Cummins and Nistico [2002]).
Given the above considerations, In-depth Interviews, a
direct qualitative research procedure was used for the purpose
of this exploratory study. Hence, by taking a descriptive view
of the how investors make their investment decisions in the
real world settings, we explore the beliefs and preferences
that guide the investor’s behavior (Kvale [2007], Lovric et al.
[2008]).
The research question for the study was:
(a) What are the biases that individual investors have that
influence their financial investment decisions?
LITERATURE REVIEW
The study of how the individual investment choices are influ-
enced by various biases comes under the purview of the micro
FINANCIAL INVESTMENT BEHAVIOR 95
aspect of Behavioral Finance. Psychological biases were first
identified by Amos Tversky and Daniel Kahneman [1974].
Psychological biases in the behavioral finance literature are
referred to as
• “Systematic Errors in Judgment” (Kahneman and Riepe
[1998]);
• “Heuristics (rules of thumb)” (Kahneman and Tversky
[1974], Shefrin [2000], Baker and Nofsinger [2002], Prast
[2004], Pompian [2006]);
• “Beliefs, judgments or preferences” (Kahneman and Tver-
sky [1974], Pompian [2006])
Kahneman and Riepe [1998] stated that judgments are
made by people about the probabilities of the occurrence
of an outcome and values are assigned to these outcomes.
Thus, these beliefs and values are jointly considered in the
formation of the preferences about the options that are risky.
These preferences may also create distortions (Ritter [2003]).
Further, the individual’s past behaviors could have left an
emotional mark on their future thinking process. In the face
of uncertainty, then, decision making becomes more subjec-
tive, reasoning becomes less ideal, and the attempt to take
an action based on the judgment and preferences of the in-
dividuals becomes more pertinent (Pompian [2006]). These
beliefs and preferences lead people to biased decisions (She-
frin [2002]). To understand the behavioral undercurrents of
the financial investment decisions, it is essential to under-
stand the various psychological biases that can influence the
individual investor decision-making behavior and how these
biases impact the individual’s satisfaction with his/her finan-
cial planning and management.
People are prone to psychological biases when they invest
(Montier [2002a, 2002b]). This is because humans are not
capable of carrying out the dynamic optimization problems
that traditional finance theory talks about. Therefore, they
use rules of thumb (heuristics), depend upon their beliefs
and preferences, to deal with the overload of information
which they are not capable of analytically evaluating, thereby
leading to biased behavior (Montier [2002a, 2002b]).
Some of the common investor biases are overconfidence
bias, mental accounting, self-control, framing effect, anchor-
ing bias, representativeness bias, regret aversion, loss aver-
sion, and optimism bias.
“Standard theories of investor behavior are based on the
premise that investors aim to maximize risk adjusted financial
returns over a given time horizon, and that their investment
choices will be almost uniquely determined by this objective”
(Williams [2007]). However, people do not always reference
themselves against some objective standard but against some
internal standards (Cummins and Nistico [2002]). These in-
ternal standards can be influenced by an individual’s values
and beliefs or cognitive limitations, thereby leading the de-
cisions to deviate from the most optimal rational choices.
96 SAHI ET AL.
Hence, biased behavior, as per the standard finance mod-
els, has been considered as a flaw that needs to be cor-
rected (Shefrin [2000], Pompain [2006]). However, this as-
pect comes into consideration when the concept of Homeo
economicus is the reference point, where human beings are
rational agents as per the standard finance and economics as-
sumptions. However, people are not rational as the traditional
theory shows and are, by the designs of evolution, susceptible
to biases.
Hence, when the research goes back to the times of evolu-
tion, the meaning of bias shows a different picture (Montier
[2002b]). According to Slovic [1987], “the ability to sense
and avoid harmful environmental conditions, is necessary for
the survival of all living organisms” (p. 280). According to
Haselton and Nettle [2006], “one of the curiosities of human
cognition—the fact that it seems riddled with biases—may
be a functional feature of mechanisms for making judgments
and decisions” (p. 47). For example, “limits to learning” is
one reason people have biases. Montier [2002b] explained
that humans have a natural tendency toward self-deception
because this is a form of saving face against innate weak-
nesses and helps an individual fit into the society. Further,
self-deception on account of limits to human learning is fur-
ther attributed to positive illusions when people create as
a way to ensure their mental health and well-being (Taylor
and Brown [1988], Montier [2002b]). Positive illusions can
lead to the well-known biases of overconfidence, optimism,
illusion of control, illusion of knowledge, and self-control.
Psychology and departures from homo economicus be-
havior matter in financial markets, thereby making the study
of behavioral finance relevant in many ways. There is a need
to identify and understand the various biases that determine
the investors’ attitude toward investments. This would help in
giving more insight to the financial advisors and researchers
to make better-designed policies, practices, and products that
would suit the investment needs of the individual.
METHOD
Given the paucity of the prior empirical research that in-
vestigated the behavior of the financial consumer, regarding
financial investment decisions, in India, a qualitative personal
interview approach was adopted to gather in-depth informa-
tion within a real life context and build theory.
Data Collection Method
In-depth semi-structured interviews were carried out to study
the financial investment behavior of the individual investors
in India. In in-depth research interviews, participants are
“conversation partners” or “informants” and not respondents
as they are in survey interviews (Rubin and Rubin [1995],
Kvale [2007]). The motive of the interview is to pose ques-
tions so as to obtain knowledge pertaining to the informant’s
world by “striping the surface of the conscious experience”
(Kvale [2007], p. 19). The conduct of the in-depth interview
was inspired by the grounded theory approach, emphasiz-
ing the role of human actors in shaping and giving meaning
to the world around them, stressing the interrelationships
among conditions, meaning, and action (Strauss and Corbin
[1990]).
Since the objective was to investigate individual level con-
structs in the context of financial investment decisions, in-
depth interviews were considered as an appropriate tool to
unravel the beliefs, preferences, and predispositions. Further,
financial matters are not discussed candidly and comfortably
in group discussion. Hence, in-depth interviews were con-
sidered a useful tool.
Sampling
For the successful accomplishment of the objectives of the
study, a representative sample was required. This pertained to
a small group of people who were “nested in their context and
studied in-depth” (Miles and Huberman [1994], p. 27) and
were “information rich” (Gliner, Morgan and Leech [2009],
p. 124). Therefore, it was important to obtain a suitable sam-
ple size that would generate enough data (Strauss and Corbin
[1990], Auerbach and Silverstein [2003], Creswell [2003])
to help arrive at analytical generalizations (Firestone [1993],
Miles and Huberman [1994]).
Variability in this phase was ensured through purposive
sampling (Miles and Huberman [1994], Gliner et al. [2009]).
The sampling strategy employed was criterion sampling,
wherein the informants were searched based on certain crite-
ria (Patton [1990], Kuzel [1992]). Including the informants
based on a certain criteria was critical with regard to the
phenomenon we were trying to study.
To qualify for the interview, the informant was required
to be:
• A resident of the National Capital Region (NCR), of Delhi,
India.
• Must have been making financial investment decisions in
his/her household for at least the last two years.
• Informant’s family should belong to Socio-Economic
Classification of India(SEC)1- A.
• Informant must have investment in at least three differ-
ent investment categories. The investment product cat-
egories were insurance, post office saving, fixed de-
posits/recurring deposits, mutual funds, public provident
fund/employee provident fund, equity, bullion, real estate,
and cash.
To facilitate the identification of the individuals who meet
the criterion, a snowball method was employed. One key
informant was identified and he/she was asked to suggest
others who would fulfill the criteria. Hence, sampling was
based on criterion and snowball methods (Miles and Hu-
berman [1994], Gliner et al. [2009]). The data so gathered
 FINANCIAL INVESTMENT BEHAVIOR 97

TABLE 1
Sample Characteristics

S.No. Occupation Gender Age Investment Experience

Informant 1 Private Service Male 60/65 >10 years

Informant 2 Private Service Male 45/50 > 10 years
Informant 3 Government Employee Male 35/40 5/10 years
Informant 4 Private Service Male 25/30 2/5 years
Informant 5 Government Employee Male 45/50 5/10 years
Informant 6 Government Employee Male 40/45 5/10 years
Informant 7 Government Employee Female 40/45 >10 years
Informant 8 Private Service Female 25/30 2/5 years
Informant 9 Private Service Male 30/35 5/10 years
Informant 10 Government Employee Male 35/40 5/10 years
Informant 11 Government Employee Male 35/40 5/10 years
Informant 12 Government Employee Male 45/50 >10 years
Informant 13 Government Employee Male 35/40 5/10 years
Informant 14 Private Service Male 30/35 5/10 years
Informant 15 Private Service Male 30/35 2/5 years
Informant 16 Government Employee Male 25/30 5/10 years
Informant 17 Government Employee Male 40/45 >10 years
Informant 18 House Wife Female 30/35 5/10 years
Informant 19 House Wife Female 35/40 5/10 years
Informant 20 Government Employee Female 35/40 5/10 years
Informant 21 Private Service Female 30/35 2/5 years
Informant 22 Private Service Male 35/40 5/10 years
Informant 23 Retired Male 60/65 >10 years
Informant 24 Private Service Male 30/35 5/10 years
Informant 25 Self-Employed Professional Female 40/45 >10 years
Informant 26 Retired Male 65+ >10 years
Informant 27 Business Male 45/50 >10 years
Informant 28 Business Male 60/65 >10 years
Informant 29 Self-Employed Professional Male 45/50 >10 years
Informant 30 Self-Employed Professional Male 30/35 5/10 years

allowed the determination of sample size. In this case of pur-
posive sampling, the selection of informants continued until
the point of data saturation, that is, when no new information
was discovered.
In this exploratory study, in-depth interviews were con-
ducted with 30 informants to understand the underlying fac-
tors that affect the choice of investment. Each interview was
between 30 minutes and 1.5 hours of duration. The data col-
lection was carried out at the informant’s home or at a suitable
place of convenience as per the informant.
The interview approach followed in this study, was a
response-guided approach (Thomas [2003]), in which the
interview started with some prepared questions and then the
follow-up questions were logical extensions to the answers
given to the initial question. This enabled a detailed investi-
gation of the respondent’s opinion. Conversational prompts
were employed, and a laddering technique was used. Ques-
tions were constructed in such a way as to provide direction
to respondents, but not restrict responses. Each question had
several open-ended probes that were used to encourage fur-
ther discussion on the topic. Close-ended questions were
asked pertaining to the demographics, information on family
income, occupation, and so forth.
The sample comprised both male (n = 23) and female
(n = 7) informants, with number of years of investment
experience, different occupation types, i.e., business, service,
retired, housewives, and different age groups (see Table 1).
Data Analysis Technique
The data collected from the interviews were analyzed using a
technique called “Open Analysis” (McKeone [1995]). In this
technique, which is a form of content analysis, the dominant
messages and subject matter within the text were identified.
The process followed in Open Analysis for analyzing the
interview text is similar to the one followed in the case of
Open Coding as elaborated by Strauss and Corbin [1990].
Hence, the statements that were made by the informants
were analyzed for their significance with respect to their
beliefs and preferences impacting their choice of investment
products and satisfaction with their financial situation.
Once the particular phenomenon was identified, they were
clubbed into categories. (Strauss and Corbin [1990]). The
open analysis of the text was done by reading the inter-
view text line by line and then noting the instances (Strauss
and Corbin [1990]). For understanding the beliefs and
98 SAHI ET AL.
preferences, even one statement was of significance. This
technique of qualitative form of content analysis summa-
rizes and classifies the text material by assigning labels or
categories to them. This inductive approach to content analy-
sis was more useful since there were limited previous studies
that have explored the phenomenon.
RESULTS AND FINDINGS
The interviews with individual investors showed certain be-
havioral tendencies that people exhibited with regard to fi-
nancial investment decisions. Several themes emerged.
Tendency to Prefer Known Risks Over Unknown
Risks/Preference for Certainty
It was observed that the some people gave preference to cer-
tain outcomes rather than uncertain outcomes and pointed to
any scope of doubt with which they did not feel comfortable.
Certainty was preferred over uncertainty. This revealed that
the tendency was to prefer risks that are known rather than the
ones that are unknown, sometimes manifesting in the form of
investing in instruments of which they have some knowledge.
Certain outcomes meant more security and less ambiguity.
This preference also led them to invest in instruments that
are having fixed returns or safety/security of principal. Peo-
ple who preferred such options claimed to be at peace and
satisfied with their investment planning.
“Prefer to take a fixed rate on housing loan. . . more certainty.”
“I don’t invest in the share market as it goes up and down.”
“I invest more in debt instruments where the principal is
secure and return fixed.”
“I opt for the dividend option in mutual funds, as there is
more surety.”
“I don’t like surprises. Security is very important for me.”
“I would invest in companies that I know.”
Tendency to Rely on a Point of Reference
It was seen that people tend to rely on specific information
or a value that serves as a guiding factor for their future
decisions. This makes them consider that “value” as the basis
for judging their investment actions. By focusing on this point
of reference, the person takes his/her decisions accordingly.
In the interviews, this point of reference emerged as “the best
performance,” “the expected gains percentage,” “par value,”
and “rate of return.” Relying on reference points gave people
a sense of satisfaction as they had a benchmark to judge their
investments. This behavior showed more in case of equity,
mutual funds, gold, and real estate investments.
“I compare my investments with reference to their best per-
formance in a given period.”
“If I put my cap of gains at 20%, then after that, will see
how much loss from that point and then decide to invest
further or not.”
“Till date, I have never sold any stock which has gone below
par.”
“When a stock was falling, I waited, then when a base circuit
is reached; I exit and put in another script.”
Tendency to Make Investment Decisions Based
on Information Easily Available
Based on how easy it was to recall some information, people
made their investment decisions. This information pertained
to some aspect that they felt was very important for the deci-
sion to be made. Further, some respondents based decisions
on what news they received recently. In some cases, an in-
cident that took place in the financial market place was very
dramatic and left a mark in the mind of the person. Basing
decisions on easily available information allowed people to
feel that they made informed decisions.
“I will choose investments based on the information easily
available to me.”
“I know that this investment did very well before, so I invested
here again.”
“Last week I read that the gold prices will go up so, I invested
more in gold.”
“I invest in instruments that are readily accessible and con-
venient.”
Tendency to Verify and Confirm the Information
Some people have a tendency to verify and confirm the infor-
mation they get before basing their investment decisions on
this information. People search for information that supports
their view point. This allowed them to believe that others are
also sharing the view, hence the view may prove to be true.
This support seeking allowed the people to feel sure of their
choice of investments.
“Before making an investment decision, I seek information
that supports my decision.”
“In case someone suggest to me a particular investment op-
tion, I would check from two to three people before
investing.”
“If someone suggests something, I check with others on that
suggestion and if it’s good, I go and invest.”
“I always find information that matches my beliefs about the
investments.”
Safe Playing Tendency
Some people showed safe playing tendencies and invested in
those instruments with which they had previous experience.
They were inflexible when circumstances required changes
in their portfolio. They preferred traditional investment prod-
ucts such as fixed deposits and public provident fund. They

showed less willingness to take risk with their money and
were satisfied with whatever returns they got as long as their
principal did not get eroded.
“Experience has made me careful.”
“I put half of my money in conventional instruments.”
“If somebody tells me that certain things will not be good in
the future, I will withdraw and invest elsewhere.”
“I usually pick the tried and tested investments.”
Tendency to Invest Differently Based on Income
Source
Some people had a tendency to take risks with money that
was not earned directly and invest the money earned through
direct income in safe investment products. People considered
the money earned through their sweat and hard work as more
precious than the money that was not earned by the direct
effort. This made people have different risk preferences for
the money based on the source. The directly earned money
was invested in instruments that were safe and secure whereas
the easy money was invested in riskier investment options.
“If any money from my salary then will invest in gilt, if any
money from other sources then will play around.”
“When I have ‘x’ amount of money that I know I can play
with, I will invest in equity/derivatives.”
“Don’t want to play around with my basic income.”
“I safeguard my principal and invest the interest income in
high risk investments.”
“I am able to take higher risks with money that doesn’t belong
to me.”
Tendency to Invest with the View Point of
Socially Responsible Investing
Some people are socially conscious and base their invest-
ment decisions on the social responsibility level of the com-
pany and on how ethical the company is. Some people con-
sider these corporate practices to be of paramount importance
when deciding on their investment decisions. This tendency
was observed irrespective of the investment products but was
more prominent in case of equity investments.
“I would invest in companies which have been stakeholders
friendly.”
“I would invest in companies which have CSR activities on
going.”
“Companies that follow the ethical practices are more attrac-
tive to me.”
Tendency to Consult (not Consult) or Rely (not
Rely) on Financial Experts
Some people have a tendency to rely on the financial experts
for their investment decisions. They believe that these people
are the best judges on the most appropriate investments. This
FINANCIAL INVESTMENT BEHAVIOR 99
belief is so prominent in the minds of some persons that they
blindly follow investment advice, whereas others do not trust
their advisors.
“I let my investment advisor make my investment decisions
for me.”
“I consult an investment advisor before making an investment
decision.”
“Advice given by analysts is not genuine, so I don’t rely on
their advice.”
“I get convinced only if an expert tells me that an investment
option is worth putting my money into.”
“I believe that my investments will do well if I have invest-
ment advisors guiding me.”
“I don’t trust financial advisors.”
Tendency to Invest in Instruments which are
Familiar
Some people tend to develop a strong liking for certain in-
vestments just because they are familiar with them. This
makes them feel as if they have more knowledge pertaining
to such investment products or experience pertaining to such
investments and thus get a sense of comfort and security.
Also, they misappropriated the risk inherent in the invest-
ment just because they had knowledge pertaining to these.
Familiarity with investments also developed on account of
past experience on the part of the people or experience of
their parents/other family members.
“I am into telecom industry, so I invest in companies of this
sector.”
“My mother used to invest in Fixed Deposits, so I invest in it
also.”
“I just looked at the company names before investing.”
“Faith in bank name is important for me.”
“I have to do what my father has done.”
Tendency to Look at the Formulation of the
Outcome before Deciding on the Investment
Some people when presented the same option in one way
gave a certain decision; when the framing of the decision
changed, the people altered their choices. It was observed
that when people were asked whether they would invest in
a company that had 25% chance of increase in profits in the
coming year or a company where there is 75% chance of
losses in the coming year; they chose the former. In actual
fact, the former is just 100–75% (i.e., total probability less
the chance of loss), which is equal to 25% (i.e., the chance
of increase in profits). Meaning thereby that both these state-
ments have the same outcome. Hence, the way the problem
was presented influenced the choice of the people.
“I would not take risk when it comes to guaranteed gains.”
“I would be ready to take risks when it comes to possible
losses.”
100 SAHI ET AL.
Tendency to Feel that Past Decisions could have
been Better or were Inevitable
It was observed that some people felt that the past events
seemed more predictable (when analyzed at a later date),
than they were when the event had actually happened. Peo-
ple considered decisions outcomes inevitable after they had
made those decisions. When an event has taken place or a
decision has been made, people seem to believe that the out-
come was not a surprise at all and that they could predict the
outcome; it was not just a random phenomenon. This behav-
ior made them feel that they possessed some instinct/sixth
sense to guide their decisions.
“I knew, I would have gained more if my advisor had waited
for a longer period.”
“I knew it all along that this investment is going to go up.”
Averse to Losses/Fearful of Losses
Some people have expressed that they make investment de-
cisions taking the loss aspect into consideration. The loss of
money weighs more in the minds of some people, and that
guides their investment choices. Some people do not even let
go of their loss-making investment and wait for it to come
up again, just so they would not have to bear the loss. People
tend to strongly prefer avoiding losses to acquiring gains.
Losses make people feel depressed and unhappy.
“Will try to minimize the loss.”
“I will not sell my portfolio at a loss.”
“I look at the risk of losing money, before deciding where to
invest.”
“I prefer that my investments grow slowly rather than taking
a chance of losing my money in an attempt to seek higher
returns.”
Tendency to Budget for Investment and
Expenditure
Some people exhibited the tendency to form budgets and
would behave differently when making decisions pertaining
to certain investment options. Most people expressed that
they would make budgets for saving and investments before
planning their expenditures. People tended to make separate
categories in their minds and divided their money in these
categories. For example, some people set aside money for
their retirement in a separate bank account. Others set aside
for some trip, purchase of assets, and so forth.
“I would not use the money that I have saved for one thing
for something else.”
“I find it easy to budget for my regular household expenses
after setting money aside for savings.”
“I have separate accounts for my retirement funds, children’s
fund, which I don’t touch.”
“I have a monthly budget of INR 20,000 for my household
expenditure and INR 5,000 for eating out in a month.”
(INR = Indian Rupee; US$ 1 = INR 55 approx.)
Tendency to be Confident on Own Ability
Some people exhibited a strong sense of confidence on their
abilities to make better investment decisions than others.
They considered their knowledge at par, if not above, that
of the financial experts. Their behavior exhibited a strong
sense of optimism and belief that their potential for making
profitable investment decisions, was above average. They
attributed the success of their investments, on their ability.
“I invest where I feel I will do well.”
“I am at par with the knowledge of financial experts.”
“I know that my investments will go up in the future/long
term.”
“The investments I made have always outperformed the mar-
ket.”
“I have the ability to perform successfully all the financial
investment planning activities myself.”
Tendency to Feel Regret
Some people tended to avoid certain investment decisions
for fear of regret. Some have experienced a loss and regret
their investment decision and do not venture in that invest-
ment option again. Others have felt bad that they missed an
opportunity that could have led to some substantial gains. To
avoid this feeling of regret, people prefer the tried and tested
investments. They anticipate that they would make an error
and hence end up taking a decision that will not cause them
to feel regret later.
“Burnt hands in share market, have not gone again.”
“I reflect on past financial decisions when making current
decisions.”
“If I bought something and it went down, I would feel very
bad.”
“I feel bad that I didn’t invest in that option, as it increased
drastically some months later.”
Tendency to Rely on Family and Friends
It was observed that some people had a tendency to rely on
their family members for advice. People trusted the judgment
of their spouse, parents, close friends, and relatives. Consult-
ing others was more so as to get the unbiased opinions and to
make sure the family was not against the investment decisions
that were taken.
“My spouse has a major influence on my investment decision
making.”
“I involve and consult my spouse with regard to saving and
investment decisions.”
“Parents attitude has been my guiding force.”

“If someone close to me is able to convince me that I made
a wrong investment then I will take my money out.”
Tendency to Rely on Own Skills
Some people preferred to rely on their own skill when it
came to investment decisions. They felt that they could not
give the responsibility for their hard-earned money to others
and that others may not make the best decisions because they
may have ulterior motives. The sense of control over ones
investment decisions was important for them. They trusted
their own judgment and intuition as they felt that others could
not be the best judge for their money.
“My Intuition has a major role in my investment choices.”
“Nobody guides me on investment matters; I study and find
out on my own.”
“I have my own judgment with respect to investments and
don’t take advice from others.”
“I discuss with others on investment matters but in the end
it’s my decision.”
“I do not discuss with others before making investment de-
cisions.”
“I am my own financial advisor.”
Trend Following Tendency
The interviews revealed that there were some informants
who made investment decisions by looking at the past per-
formance of the investments. These people strongly believed
that the past was an indicator of future and hence if in the
past the investment had done well, it would also do so in
the future. They gave emphasis on looking at the charts and
graphs as well as the people behind the investment. In their
belief, if the people behind the company have given good
performance in the past, they will continue to do so.
“Will look at trend before investing.”
“Will look at past performance before investing.”
“I believe that the past trends would continue in the future.”
“Past is an indicator of future.”
“I go by the people behind the investment.”
Tendency to Consume Today rather than Save
for Tomorrow or Visa-Versa
Some people were not able to manage their desire to consume
today and hence would not be able to plan for their savings.
These people had to impose some form of saving on them
so as to curtail their spending tendencies. The investment
choices that these people preferred were those that would
require a certain sum of money to be set aside at regular time
intervals. These people based their investment choices on the
criteria of forcing themselves to save money.
“My consumption is more than my income.”
FINANCIAL INVESTMENT BEHAVIOR 101
“I can’t get over the habit of my consumption, so I don’t have
much saving left.”
“I don’t have control over my expenditures.”
“If I have money, I will consume it. So I try to save something;
even of it is very small amount.”
“Since I am a spendthrift, I have taken SIP (Systematic In-
vestment Plan), so that through ECS (Electronic Clear-
ing Service), approx. INR 3000–4000 will be taken out
of my account automatically.”
DISCUSSION
The purpose of this article is to identify the behavioral bi-
ases of the individual investors that guide their financial in-
vestment behavior. The people interviewed expressed their
beliefs and preferences relating to their own behavior. From
the preceding section it is clear that individuals have various
beliefs and preferences that bias their financial investment
decision behavior. The analysis of the interviews revealed 19
themes that emerged from the interview data. These themes
suggest that individuals use various filters to make sense of
the information made available to them, and these filters re-
veal the designs of the human mind when it comes to making
financial investment decisions. These themes are classified
under three broad categories (Table 2):
(1) Affective influence and emotions
(2) Information processing strategies and perceptual or-
ganization principles
(3) Psychological motives
From this point of view, the following valuable findings
can be derived from the study:
Biased behavior could be on account of:
(a) Affective influences and emotions. “Emotions are
painful or pleasurable feelings which are of mental ori-
gin. They contribute to a person’s motivations and there-
fore affect its decisions” (Greenfinch [2007]). According
to Cohen [2005], “emotions are automatic processes as-
sociated with strong positive or negative utility” (p. 5).
When the emotional impact of decision is very strong, it
overpowers the cognition and results in decisions made
from an affective point of view. The impact of these bi-
ases is such that the feelings of hope and fear divert the
attention of the decision maker and makes him/her take a
decision more on emotional parameters than on reason-
ing. Some people tend to relate to money in an emotional
way and thus get biased in their decision making.
(b) Information processing strategies and perceptual orga-
nization principles.People use heuristics and are biased
in their beliefs and in processing information (Prast
[2004]). Due to the presence of these heuristics and bi-
ases, the information is not used in an objective manner
102 SAHI ET AL.

TABLE 2
Categorization of Individual Investor Biases

Affective Influences Information Processing Strategies &

and Emotions perceptual organizing principles Psychological Motives

Tendency to feel that past decisions could
have been better or were inevitable
Averse to losses/fearful of losses
Tendency to feel regret
Tendency to invest with the point of view of
Socially responsible investing
Tendency to prefer known risks over
unknown risks/preference for certainty
Tendency to rely on a point of reference
Tendency to make investment decision based on
information easily available
Tendency to look at the formulation of the
outcome before deciding on the investment.
Tendency to consume today rather than save for
tomorrow or visa-versa
Tendency to invest differently based on income
source
Tendency to budget for investment and
expenditure
Trend following tendency
Tendency to verify and confirm the information
Safe playing tendency
Tendency to invest in instruments which are
familiar
Tendency to rely on family and friends
Tendency to consult (not consult) or rely (not
rely) on financial experts
Tendency to be confident on own ability
Tendency to rely on own skills

(Prast [2004]). Heuristics are very often used when se-
lections have to be made in light of too complex infor-
mation (Zaleskiewicz [2006]). Further, people’s minds
comprehend and archive information according to some
categorization schemes which allows people to easily
“navigate their brain’s classification structure” (Pom-
pian [2006], p. 95), despite the fact that this violates the
fungibility principle (Thaler [1999], Keren and Teigen
[2004], Haselton, Nettle and Andrews [2005], Green-
finch [2007]). Since, the individuals cannot effectively
analyze the plethora of information available in the mar-
ket, there is a tendency to rely on heuristics.
(c) Psychological motives. Psychological motives such as
fear, greed, security, conformity, and safety impact the
decisions choices and bias an individual toward options
that suit the individual’s motives (Haselton et al. [2005],
Roszkowski and Grable [2007]). Psychological motives
are also guided by our social nature and impact our
investment decisions.
IMPLICATIONS
The findings of this study indicate that individuals have var-
ious perceptions and beliefs with regard to their financial
investment decision behavior. These perceptions and beliefs
together bias the individual to take a particular course of ac-
tion. Some of these biases come from an emotional point of
view while others from a logical point of view. This study
extends the existing knowledge base by establishing the im-
portance of individual investor biases in financial investment
decisions. This is pertinent in furthering the understanding
of the investor Psychology as investor biases reveal the in-
tricacies of the human mind. Also, the positive relationship
of many of the biases with the individuals sense of satisfac-
tion with their financial planning and management, further
establishes that the investor biases are a normal phenomenon
and that they are systematic behaviors that guide the process
of investors’ decision making. When it comes to financial
investment decisions, it is pertinent to note that a certain de-
gree of uncertainty and risk is inherent in each investment
decision choice and given the fact that the future holds a
certain level of uncertainty associated with it, the investment
decision behavior is expected to be biased (Slovic [1972],
Thaler [1999]). However as Olsen [2007] stated, a “bias is
not necessarily bad as long as it leads to the results that the
decision maker wishes” (p. 53). It is essential to understand
why people develop these biases and how it helps them to
cope with the demands of decision making. This research
provides evidence that investor biases are an inherent part
of the financial investment behavior and financial service
providers will benefit greatly by using psychographic vari-
ables like investor bias, to gather a better understanding of
the financial consumer.
LIMITATIONS AND FUTURE RESEARCH
DIRECTIONS
This exploratory research has some limitations. As the re-
search was conducted using a qualitative methodology, ana-
lytical generalizations were made. Also, the sampling method
used in this study was judgment and snowball sampling,
which is a nonprobability sampling technique. Although it
serves the objectives of the study, this method has its own
limitations. Further research can be conducted that would
give support to the findings of the present study based on
a larger scale survey of the individual investors. Also, there
could be more investor biases that influence individual in-
vestor behavior. The list of biases resulting from this study
is not exhaustive. In addition, the data collected pertained
to the Indian investors, and further studies can be conducted
across other countries to provide comparative assessments
of the behavioral tendencies of individual investors. In doing

so, further insights can be provided on the financial product-
buying behavior of individuals, which can benefit the finan-
cial service providers and the government regulators in better
designing financial products and policies so as to enable the
financial consumer to achieve greater financial well-being.
NOTE
1. http://www.timm.indiatimes.com/timm/ecoclass.jsp
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