Sociological & Psychological Investor – Stock Market Behaviourial

Analysis during COVID-19 Pandemic in India

Varun Rajendra Matlani 1 and Harshit Arvindkumar Singh 2

Keywords: Psychology, Sociology, Behavioural Finance, COVID-19, Indian Stock Market

ABSTRACT
The COVID-19 pandemic has had a significant impact, with significant stock price volatility
and outflow from the Indian Stock Markets. The traditional paradigm of finance is inadequate
described by some of the facts that took place during the crisis such as high volatility and the
unbroken faith of financial institutions. In this article, we describe behaving-finance-like
phenomena and certain cognitive errors and biases that are significant during and after the
crisis, namely overconfidence (miscalibration, better than average effect, control illusion,
optimism bias), display distortion, risk aversion, herding behaviour, and bias in accessibility.
We study each of these overconfidence phenomena (miscalibration, better than average
effect, control illusion, bias in optimism), representation bias, aversion to risk, herder
behaviour and availability bias. We study these events from a psychological standpoint and
assess their relevance to financial institutions and markets and the worldwide crisis produced
by COVID-19. This research also includes maximum derivation of financial aspects
backdating to initial phases of COVID-19 through technical indications such as FII Activity,
Market Momentum, Market Breadth and Market Volatility through both primary data
and proprietary mathematical formulations derived from various indices and technical
indications of the market.

1
Student of Law [B.Com, LL.B (H) – 2020-25], 2nd Semester at Gujarat National Law University, Gandhinagar
Email Address: varun20bcl018@gnlu.ac.in
2
Student of Law [B.Com, LL.B (H) – 2020-25], 2nd Semester at Gujarat National Law University, Gandhinagar
Email Address: harshit20bcl004@gnlu.ac.in

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The COVID-19 pandemic has had devastating economic consequences all over the world.
According to the International Monetary Fund (IMF), the world economy will be in the
deepest slump since the Great Depression, with gross production losses above $9 trillion in
2020 and 20213 with this recession being termed as Great Lockdown4. The global stock
market was characterised by extreme uncertainty in late February and early March 2020.
From February 2020 to March 2020, the top ten infected countries such as South Korea,
Japan and Singapore saw a rise in risk of approx. more than 25%. The standard finance
theory, which assumes that markets and humans are completely logical and self-controllable,
fails to account for such extreme uncertainty. The behavioural finance theory, on the other
hand, may justify this uncertainty.5
Competent finance implies a lack of rationality for investors and stocks, and an impact on
investors through their preferences and cognitive mistakes. It is divided into two parts:
psychology, which describes human fallibility, and limits to arbitrage, which suggests that in
a market of logical and irrational traders, irrationality could have a long-term and substantial
effect.
Biases of Investors, Trader and Stock Market – Sociological Reaction to COVID-19
Pandemic
I. EXCESSIVE MARKET CONFIDENCE –

(A) Miscalibration (as determined by Behavioural Finance Theory)

(B) Better-than-average influence
(C) Perception of Dominance
(D) Irrational optimism
are all aspects of the overconfidence hypothesis, which is a common
psychological theory. All aspects of overconfidence have been found to be
prominent on an investor basis in the area of behavioural finance.6 Stock price
volatility has also been linked to overconfidence7. Since uncertainty was such a
prominent feature of the markets during the COVID-19 crisis, the four aspects of
overconfidence have been examined in the following sub-sections in relation to
behavioural finance and its repercussions for financial markets in 2020.

a. MISCALIBRATION (as determined by Behavioural Finance Theory)

3
Gita Gopinath, The Great Lockdown: Worst Economic Downturn Since the Great Depression IMFBlog (2020),
https://blogs.imf.org/2020/04/14/the-great-lockdown-worst-economic-downturn-since-the-great-depression/
(last visited May 25, 2021).
4
Id.
5
Raffaella Barone, From Efficient Markets to Behavioural Finance, SSRN Electronic Journal (2003).
6
Werner F.M De Bondt, A portrait of the individual investor, 42 European Economic Review 831–844 (1998).
7
Alexandros V. Benos, Aggressiveness and survival of overconfident traders, 1 Journal of Financial Markets
353–383 (1998).

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 Overconfidence is a form of miscalibration, or cognitive bias, in which the
level of confidence exceeds the level of accuracy. From this angle,
overconfidence has proven to be very true in the area of finance. Most
importantly, monetary incentives to encourage proper calibration are
ineffective, and overconfidence manifests itself mainly in challenging tasks
(known as the hard-easy effect)8.

As the pandemic progressed, this cognitive bias was glaringly mirrored in

GDP growth forecasts around the world. Even as investors watched the crisis
unfold in other emerging and industrialised countries, GDP growth forecasts
for 2020 in India were mis calibrated as much higher than the actual probable
figure. From February to April, Moody's updated its GDP growth forecasts for
India several times, lowering them from 5.4 percent on February 17, 2020 to
0.2 percent on April 28, 2020. (Table 1). Even though India was at a high risk
of importing COVID-19, the growth rate forecasts for India remained
reasonably high [9].

Time Period Projected Change in Case Change

Growth Rate Projection in Cases
Feb 17, 2020 5.4% -18.18% 3 -
Mar 9, 2020 5.3% -1.85% 48 1500%
Mar 27, 2020 2.5% -52.83% 883 1739.58%
Apr 28, 2020 0.2% -92% 31,360 3451.53%
Table 1: GDP Growth Rate Projections (2020) by Moody’s and Confirmed
Cases in India9

b. BETTER-THAN-AVERAGE EFFECT

People have an unrealistically high opinion of themselves and believe they are
more than the average representative of their classes in their fields10. In stock
markets, the better-than-average impact has been linked to higher trading
rates11, as traders believe their knowledge is superior to that of their peers.
Overconfident CEOs and administrators, in particular, believe their skills are
superior, which has been seen to affect organisational policies as well as
overinvestment.

Because of these prejudices, ‘overconfident banks' relax lending conditions,

increase lending volumes, increase leverage, and take on more debt.
Overconfident banks, on the other hand, incur greater capital gains, a more
8
Baruch Fischhoff, Paul Slovic & Sarah Lichtenstein, Knowing with certainty: The appropriateness of extreme
confidence., 3 Journal of Experimental Psychology: Human Perception and Performance 552–564 (1977).

9
A. Dev, Moody’s cuts forecast for india’s gdp growth this year to 0.2% (2020)
10
Tian Liang, Overconfidence and endogenous information acquisition, 3 China Finance Review International 5–
25 (2013).
11
Markus Glaser & Martin Weber, Overconfidence and Trading Volume, SSRN Electronic Journal (2003).

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 serious reduction in their net worth, and a higher risk of CEO turnover and
defaults than non-overconfident banks when a financial crisis strikes.12
Overconfident financial firms are more likely to experience greater losses and
defaults since the 2020 Stock Market Crash, as measured by the riskiness of
their portfolios prior to the crash. This will also set a precedent for future
years, which will be characterised by more cautious and low-risk investments.

c. ILLUSION OF CONTROL

People sometimes assume that they will manipulate circumstances that are
merely controlled by chance, according to psychological studies.13 The
perception of dominance is the name given to this cognitive bias. Stress,
competitiveness, implemental attitude, preference, climate, and familiarity
have all been linked to the creation of an illusion of power and, as a result,
have been identified as maladaptive for traders.14 The overconfidence in risk
management models that led the financial bubble to burst is an example of
illusion of power, which was especially prominent during the 2008 Financial
Crisis.

This sense of control is also evident in strong responses to the current crisis. A
knowledge survey of corporate company filings (earnings conference calls and
Form 10-K) during the first quarter of 2020 by Wang et al. shows a hostile
investor response. This means that the industry misjudged the effect of the
COVID-19 pandemic on businesses.15

d. OPTIMISM BIAS

The optimism bias has a close relation to the improved result than normal.
People normally think that they experience more positive experiences,
particularly when they see events as "controllable." They are not likely to
experience negative events. In the financial sector, for instance, people feel
that they are more likely than anyone to achieve financial success.16 Optimism
still prevailed during the financial crisis of 2008 when untested models were
justified with optimism and negatives. The present situation may also show
bias of measurable tune. Even as banks experienced their income drop and
anticipated billions in lending losses in 2020[17], investors remained positive

12
Po-Hsin Ho et al., CEO Overconfidence and Financial Crisis: Evidence from Bank Lending and Leverage, SSRN
Electronic Journal (2015).
13
Shelley E. Taylor & Jonathon D. Brown, Positive illusions and well-being revisited: Separating fact from
fiction., 116 Psychological Bulletin 21–27 (1994).
14
Mark Fenton-O'Creevy et al., Trading on illusions: Unrealistic perceptions of control and trading performance,
76 Journal of Occupational and Organizational Psychology 53–68 (2003).
15
Victor X. Wang & Betty (Bin) Xing, Battling Uncertainty: Corporate Disclosures of COVID-19 in Earnings
Conference Calls and Annual Reports, SSRN Electronic Journal (2020).
16
Tian Liang, Overconfidence and endogenous information acquisition, 3 China Finance Review International 5–
25 (2013).

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 as expected, with the US Federal Reserve System setting down rates, buying
bonds, aid and lending backstop.17

II. REPRESENTATIVENESS BIAS

It is a cognitive prejudice in which people combine something with their

analogues and predict their future based on analogs 18(specifically, horizontal
representation bias). This prejudice has been seen for the quality of investments in
behavioural finance literature. Investors also view past returns as representations
of future potential returns, which is why decisions have been taken based on a
prejudice to the fact that past market trends reflect future prices.19

The stock market crash in 2020 is also contrasted with the financial crisis in 2008
and the 1930s Great Depression. Examples of bias in representation are such
similarities. Statman warns that even though the market today appears to be
similar to the market in early 2009 when a downturn in the stock market reverts to
a rise in the stock, today the stock market may instead be represented in late 1929
if its decline did not actually hit a low level until 1932 [20]. Indeed, partial
comparisons may have a negative effect on the markets over the long term as they
are simply sentimental representations.

III. AVERSION OF RISK

In addition, gold is a good investment and gains worth with increased risk
aversion.20 The Gold Price rose by 33% from 23 March 2020 to August 2020. This
shows more evidence that avert risk has risen as a result of the global COVID-19
crisis. The World Gold Council ratio w.r.t. INR is given in Figure 1. The decline
in the ratio at the end of February also shows the growth in risk aversion. Though
further study is required on risk aversing as a result of the COVID-19 pandemic
outside Asia, an uptick in risk aversing is likely to characterise the behaviour of
investors worldwide.

17
T. Westbrook, Forex-dollar slips as optimism holds ahead of fed (2020)
18
C. Zhang, An important factor on bearish expectations of investors: application of cognitive biases in market
forecasts, China Business Research of Economic Theory 7 (2008) 73–74.
19
] P. McCaffrey, Meir statman on coronavirus, behavioral finance: The second generation, and more (2020)
20
R. Demirer, K. Gkillas, R. Gupta, C. Pierdzioch, Time-varying risk aversion and realized gold volatility, The
North American Journal of Economics and Finance 50 (2019) 101048.

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 Figure 1: Gold Prices in Indian Rupee derived from World Gold Council

IV. HERD MARKET BEHAVIOUR

An Information Cascade occurs when multiple people make the same decision in a
sequential order. This is a herding behaviour theory in which traders disregard
their private information and instead trade in accordance with observed trades. In
the case of the 1997 Asian Financial Crisis, the contagion spread quickly at first,
and herding behaviour persisted until the crisis was over.21

Given the severity and surprise of the current market crisis, there is reason to look
into any changes in investor herding behaviour in global markets. Surprisingly,
cryptocurrency markets saw no significant change in herding behaviour until
March 13, 2020.22

Although cryptocurrency markets are linked to global economic activity, they are
decentralised and thus, in terms of herding behaviour, may not be directly
comparable to traditional financial markets. More research is needed to determine
the existence of unusual herding behaviour.

V. AVAILABILITY BIAS
21
T. C. Chiang, B. N. Jeon, H. Li, Dynamic correlation analysis of financial contagion: Evidence from Asian
markets, Journal of International Money and finance 26 (2007) 1206–1228.
22
L. Yarovaya, R. Matkovskyy, A. Jalan, The effects of a’black swan’event (covid-19) on herding behaviour in
cryptocurrency markets: Evidence from cryptocurrency USD, EUR, JPY and KRW markets, EUR, JPY and KRW
Markets (April 27, 2020) (2020).

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 It is a cognitive mistake in which decisions are partially judged on the basis of the
appropriate circumstances. In the sense of behavioural finance, both investors and
financial institutions trust in the banks' risk management capacity following a long
series of positive results. This overestimation of risk management and the placing
of undue confidence in investors and the markets further underestimated real risk.
Finally, there is increased consumer entry, additional investors, access to low-cost
financing, weak oversight, and more risky investment, all leading to a crisis.

In recent years, long after the 2008 financial crisis, public confidence in financial
institutions and markets has increased. While public confidence literature for
financial institutions is restricted and characterised mainly by volatility following
the 2020 stock market crash, it is important to recognise the availability and
revision of investor expectations. Turbulences and crises in the financial market
have shown a substantial fall in citizen confidence23 and the recent trend leads
investors to focus more on new events. If the effect of the economy continues to
impact financial institutions dramatically in the coming months, trust in the
financial system will therefore decrease.24

Sociological Analysis of Stock Market & Investors on Technical Analysis

23
A. Thakor, Lending booms, smart bankers, and financial crises, American Economic Review 105 (2015) 305–
09.
24
S. Walti, Trust no more? the impact of the crisis on citizens’ trust in central banks, Journal of International
Money ¨ and Finance 31 (2012) 593–605.

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The COVID-19 pandemic has affected every individual and their surroundings. It also has a
debilitating impact upon economic activities globally and in India as well. World Bank has
estimated a baseline forecast of a contraction of 5.2%in global GDP- which would be the
deepest global recession in decades.25 Pandemic was expected to push most countries into
recession in 2020, with per capita income falling in a large fraction of countries. India was no
outlier to the predictions made by World Bank. Indian GDP contracted by as much as 24% in
the first quarter of 2020-21 as compared to previous year’s quarter.26 Stock markets around
the globe already discounted all of these economic impacts during the start of the pandemic
in February to April 2020. Between 18 February to 31 March 2020, Dow Jones fell by as
much as 37%, Nikkei of Japan fell by 30%, FTSE of UK fell by 27% while Nifty 50 of India
also fell by 40%. Apart form the rapid spread of the pandemic, the financial news, media and
amplifiers have worked as fear spreaders about COVID-19. High pessimism in media led to
further dampening of investor sentiment which pushed the market further down into

correction. This psychological pressure negatively impacts investors and investing decisions,
which can decline any individual country’s economy.
Figure 2: Chart shows the performance of Indian Markets (Nifty) in comparison to US
Markets (Dow Jones) and Japanese Markets (Nikkei). Blue graph represents Nifty 50 Index,
Orange line represents Dow Jones and Green line represents Nikkei Index
This study has analysed the fear in the Indian stock market during the pandemic and how
investors reacted to the same. Fear within the market has been based upon various vital
parameters selected by us.
25
WorldBank, The Global Economic Outlook During the COVID-19 Pandemic: A Changed World World Bank,
https://www.worldbank.org/en/news/feature/2020/06/08/the-global-economic-outlook-during-the-covid-19-
pandemic-a-changed-world (last visited May 27, 2021).
26
Government of India Ministry of Statistics and Programme Implementation (MOSPI)

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1) FII Activity
Foreign Institutional Investor is a company that invests its money in other companies of
India. They could be hedge funds, mutual funds, foreign banks, corporate funds etc. Since FII
invest huge sums of money in the Indian markets, their buy and sell calls have a considerable
impact on the broader markets. When FIIs are net buyers- which means that they have
collectively brought more than sold- then stock market tends to perform well. And vice versa.
FII carry out high level of due diligence before they invest, so they put their money only in
fundamentally and technically sound companies.
FII activity data for the months of February, March and April 2020 are as follows:
Values in Rs Crores
Month Gross Purchase Gross Sales Net Purchase/Sales
February 2020 114,891.25 127,575.55 -12,684.30
March 2020 154,904.51 220,721.21 -65.816.70
April 2020 122,483.01 127,691.51 -5,208.50
Table 2: FII Activity Data (Source: Moneycontrol.com)
The above data shows that FIIs net sold in Indian Stock Market in the first three months of
pandemic Rs. 83,709.50 Crores. Huge outflows from institutional investors like FII depicts a
negative sentiment in the market during the above time period.
2) Market Volatility
Investopedia defines volatility as ‘a statistical measure of the dispersion of returns for a given
security or market index’.27 Rise in market volatility is a measure of rising fear in the market.
In India, one of the best ways to gauge volatility in stock market is by using an indicator
called ‘India VIX’. This is a volatility index which is based on the Nifty index option prices.
India VIX calculates volatility figures in percentage terms from best bid-ask prices of Nifty
Options Contracts.28 A higher value of India VIX depicts higher volatility in the market. This
indicator is also known as ‘investor fear gauge’. With other factors at constant, in most
scenarios a high VIX reflects rise in investor fear and lower VIX suggests towards
complacency in the market. During the period of market turmoil, VIX tends to spike up,
largely reflecting investors hedging their positions from further declines in stock portfolios.

27
James Chen, Volatility Investopedia (2021), https://www.investopedia.com/terms/v/volatility.asp (last
visited May 27, 2021).
28
NATIONAL STOCK EXCHANGE (NSE), National Stock Exchange of India Ltd. - VIX Dynamic Data NSE (2020),
https://www1.nseindia.com/live_market/dynaContent/live_watch/vix_home_page.htm (last visited May 27,
2021).

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Figure 3: The above chart represents India VIX over a period of time. A massive spike in
market volatility can be seen during the months of pandemic
3) Market Momentum
Momentum signifies trend and movement in the market. It can either be positive or negative.
Positive momentum indicates bull markets, whereas negative momentum indicates bear
markets. Momentum helps in determining the broader mood and direction of the markets.
One of the ways to calculate the momentum is by using the exponential moving averages
(EMAs). If the broader indices (here, nifty 50) is trading above both long-term moving
average (90 days EMA) and short-term moving average (30 days EMA), then markets are
considered to be in uptrend. If the nifty is below both long term and short-term moving
average, then broader markets are considered to be in downtrend and it is a sign of onset of fa
bearish phase.

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Figure 4: Above chart shows nifty 50 with 90-day EMA (orange line) and 30 Day EMA
(green line). Around 25th February market momentum turned negative and it went below both
the moving averages. There is also a visible ‘death cross’ in the moving averages. Death
cross happens when a short-term moving average cuts the long-term moving average and
turns negative. This indicates the onset of a bear phase in the market.
4) Market Breadth
Market breadth is an indicator which is used to analyse the number of stocks advancing
relative to the number of stocks declining in a given index (here, nifty 50). 29 Market breadth
looks at the relative change of advancing to declining securities in a market. When a larger
number of companies within the market are doing well, it shows positive signs for the
economy in general. This broad market uptrend is depicted through a positive market breadth.
Market breadth can be captured by calculating AD ratio (Advance Decline Ratio) which is
calculated by dividing the number of stocks that have gone up by the number of stocks that
have decreased.
Month Advances Decline AD Ratio
May 2020 848 950 0.89
April 2020 1096 748 1.46
March 2020 697 1181 0.59
Feb 2020 742 1098 0.68
January 2020 924 913 1.01
December 2019 867 968 0.90
November 2019 864 979 0.88
(Source: National Stock Exchange of India Website – www.nseindia.com)
Table 3: The above table shows Advance-Decline Ratio over a few months among the NSE
listed stocks

29
Cory Mitchell, Market Breadth Definition Investopedia (2021),
https://www.investopedia.com/terms/m/market_breadth.asp (last visited May 27, 2021).

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Months of February and March 2020, had the lowest AD Ratio as compared to preceding
months which depicts that number of stocks declining were much more than the number of
stocks which were advancing. This shows a negative market breadth during those months.
Conclusion
From the above-mentioned parameters, it can be reasonably concluded that there was
rampant fear in the market during the initial phases of pandemic that is February to March of
2020, the benchmark indice of India – NIFTY50, contracted around 40% between 18 th
February 2020 to 31st March, 2020.
We prefer to focus on what is most available in the time of a global crisis such as the current
pandemic and absorb information at its factor when adapting to crisis. This is ironic, because
when we need to take care of a global problem is when we have to. It is vital that we take our
subconscious inclinations into account and decide on further actions.

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Bibliography

Alexandros V. Benos, Aggressiveness and survival of overconfident traders, 1 Journal of

Financial Markets 353–383 (1998).
Bank World, The Global Economic Outlook During the COVID-19 Pandemic: A Changed
World World Bank, https://www.worldbank.org/en/news/feature/2020/06/08/the-global-
economic-outlook-during-the-covid-19-pandemic-a-changed-world (last visited May 27,
2021).
Baruch Fischhoff, Paul Slovic & Sarah Lichtenstein, Knowing with certainty: The
appropriateness of extreme confidence., 3 Journal of Experimental Psychology: Human
Perception and Performance 552–564 (1977).
Cory Mitchell, Market Breadth Definition Investopedia (2021),
https://www.investopedia.com/terms/m/market_breadth.asp (last visited May 27, 2021).
Gita Gopinath, The Great Lockdown: Worst Economic Downturn Since the Great Depression
IMFBlog (2020), https://blogs.imf.org/2020/04/14/the-great-lockdown-worst-economic-
downturn-since-the-great-depression/ (last visited May 25, 2021).
James Chen, Volatility Investopedia (2021),
https://www.investopedia.com/terms/v/volatility.asp (last visited May 27, 2021).
Mark Fenton-O'Creevy et al., Trading on illusions: Unrealistic perceptions of control and
trading performance, 76 Journal of Occupational and Organizational Psychology 53–68
(2003).
Markus Glaser & Martin Weber, Overconfidence and Trading Volume, SSRN Electronic
Journal (2003).
NATIONAL STOCK EXCHANGE (NSE), National Stock Exchange of India Ltd. - VIX
Dynamic Data NSE (2020),
https://www1.nseindia.com/live_market/dynaContent/live_watch/vix_home_page.htm (last
visited May 27, 2021).
Po-Hsin Ho et al., CEO Overconfidence and Financial Crisis: Evidence from Bank Lending
and Leverage, SSRN Electronic Journal (2015).
Raffaella Barone, From Efficient Markets to Behavioral Finance, SSRN Electronic Journal
(2003).
Shelley E. Taylor & Jonathon D. Brown, Positive illusions and well-being revisited:
Separating fact from fiction., 116 Psychological Bulletin 21–27 (1994).
Tian Liang, Overconfidence and endogenous information acquisition, 3 China Finance
Review International 5–25 (2013).
Tian Liang, Overconfidence and endogenous information acquisition, 3 China Finance
Review International 5–25 (2013).

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Victor X. Wang & Betty (Bin) Xing, Battling Uncertainty: Corporate Disclosures of
COVID-19 in Earnings Conference Calls and Annual Reports, SSRN Electronic Journal
(2020).
Werner F.M De Bondt, A portrait of the individual investor, 42 European Economic Review
831–844 (1998).

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