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Psychological Tendencies in an Emerging Capital Market: A Study of

Individual Investors in India

Article  in  The Journal of Developing Areas · January 2014

DOI: 10.1353/jda.2014.0049

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The Psychological Tendencies of Individual Investors in India

AMEET PANDIT and KEN YEOH

Newcastle Business School, Northumbria University, UK

Abstract.

Recent findings in the finance and consumer behaviour literature have shown that investors’
investment decisions are likely to be affected by their psychological tendencies. The focus of this
paper is to understand how investors’ psychological tendencies influence purchase
postponement of shares. Furthermore, the moderating effects of product involvement on the
relationship between psychological tendencies and also purchase postponement are examined.
Using a survey research design, data was collected from Indian investors to empirically test the
model using moderated regression analysis. Our findings show that investor’s psychological
tendencies do significantly impact purchase postponement. Furthermore, a profile of Indian
retail investors is presented in the paper.

1. Introduction

This paper explores the behavioural tendencies of a key subgroup of investors in the Bombay

Stock Exchange (hereafter BSE), that is, individual retail investors. A better understanding of the

behavioural tendencies of Indian individual investors is highly relevant as they have significant

economic impact on both the BSE and the Indian economy1. In fact, the significance of individual

retail investors to the Bombay Stock Exchange is can be see clearly in the Indian government’s

initiatives that include (i) reserving 35% of all public share offerings specifically for this

investor subgroup and (ii) a 5% discount from the share offer price for these investors to attract

a larger number of them to participate in the market (The Times of India, 2010).

1
The authors have chosen the Bombay Stock Exchange because of its economic significance. BSE is not only
the oldest stock exchange in Asia but is also made up of the largest number of publicly-listed companies in the
world. India’s $1.3 trillion economy, on the other hand, is the 11th biggest in the world and is second only to
China in terms of growth (bbc.co.uk, 2010).
Our study is partly motivated by the fact that many aspects of individual investor behavior are

yet to be explored (Warneryd, 2001; Clark-Murphy and Soutar, 2004; Mayall, 2006). There have

been attempts by past empirical studies document a range of general individual investor

approaches or strategies, the majority of these studies have inferred individual investors’

decision processes from broad trading statistics, share price fluctuations and/or portfolio

simulations. (See, Daniel et al. (2002), Clark-Murphy and Soutar (2004), Dorn and Huberman

(2002, 2005), and Deaves et al. (2009). According to Wood and Zaichkowsky (2004), such

approaches are can be partly explained by the fact that firsthand access to individual investors

is extremely difficult to establish. Consistently, Vieru et al. (2006) highlighted the fact that

despite the heavy and prevalent increase in the number of individual investors investing

directly in the stock markets worldwide in recent years; we still know relatively little about

their actual trading behavior.

Furthermore, past empirical studies tend to have focused overwhelmingly upon individual

investors’ decision frameworks once they embark upon specific buying and selling strategies

Mayall (2006: 126). In contrast, this paper addresses the lesser known aspects of the individual

investor’s tendencies such as initial investment related motivations, influences and overall

stylistic practices namely, pre-purchase of shares.

In essence, our study contributes to the empirical literature by (i) soliciting first-hand responses

from a sample of actual Indian investors, (ii) exploring individual investors’ pre-purchase

decision-making frameworks and (iii) identifying a basic psychological profile of Indian

investors.

Consistent with empirical findings from the finance literature, extant studies within the

consumer behaviour literature have also shown that consumers’ financial and investment

decisions (i.e. share purchasing behaviour) is likely to be affected by internal behavioural

factors such as their psychological tendencies. In this regard, Hogarth et al. (1980) suggest that
it is pertinent to not only understand how consumers make decisions but also to understand

why consumers postpone purchase decisions. Investors may feel that if their purchase needs

are not met or satisfied by the current share purchase (Chang and Burke 2007), they may tend

to postpone or defer their purchase. Again, complementing findings in the consumer behavior

tradition, academic studies in the field of finance show that individual investors tend to

postpone their share purchases partly due to psychological tendencies such as fear and risk

aversion (Sultana, 2010). However, the consumer purchase postponement phenomenon has

received little attention in marketing and finance literature thus far (e.g. Dhar 1997a; Greenleaf

and Lehmann 1991; 1995; Hansen 1972). Our study is the first to explore this particular

phenomenon pre-purchase.

Wilcox (1999) argues that financial markets provide a rich environment to study consumer

behaviour. Moreover, there has been very little application of consumer behaviour theory or

research techniques in finance. The final contribution of our paper, therefore, is in its adoption

of individual investor-related psychological tendencies from both literature streams to

investigate the pre-purchase postponement phenomenon.

The remaining structure of our paper is as follows. Section 2 details the overall conceptual

framework that we have developed as well as the various elements/concepts within the model.

The hypotheses are also presented in this section. Section 4 deals with the paper’s research

methodology and a discussion of findings is provided in Section 5. Lastly, Section 6 concludes

the paper.

2. Literature Review

The focus is on individual investors in India as individual investors in such developing capital

markets are typically assumed to be mostly unsophisticated (Brennan, 1995; Quill, 2001) and

therefore, are most likely to exhibit the behavioral biases arising from psychological

tendencies/dispositions (Shapira and Venezia, 2001). Moreover, these biases are especially
pronounced in developing economy capital markets such as the BSE as such markets are highly

volatile and often poorly regulated. A good preliminary indication of the aptness of such

assumptions is the extensive anecdotal evidence documented in the popular press in terms of

how Indian individual investors’ investment-related behaviors are affected by psychological

biases.

“My portfolio of Rs 1 lakh is worth only Rs 40,000 now. How can I make any

fresh commitments?” asks Patel, a telecom executive working in Ahmedabad...

Thousands of small investors like Patel are in no hurry to return. “Investors

have burnt their fingers, so they are being extra cautious this time,” said

Aneesh Srivastava, chief investment officer at IDBI Federal Life Insurance.

“Had they not seen the Sensex plummet to 8,000-levels, the psychology would

have been very different...” Shah (2010: 1).

Past empirical studies within the behavioral finance tradition have investigated variations of

this phenomenon of “postponement”, as captured within the “disposition effect” bias post-

purchase (see, for example, Kumar and Lim, 2008; Dhar and Zhu, 2006; Odean, 1998, 1999;

Kahneman and Tversky, 1979; Barber and Odean, 2001). The disposition effect is defined as

investors’ tendency to sell winning shares too quickly and keeping losing shares for too long

(Shapira and Venezia, 2000). In effect, investors “postpone” the selling of loss-making shares (in

the sense that they hold them for longer) due to aversion to realizing actual losses (Kahneman

and Tversky, 1979). As mentioned earlier, the focus of our paper is on the postponement

phenomenon in a different stage of the share investment process as compared to past empirical

studies (Mayall, 2006), that is, the pre-purchase stage.

Such a tendency, if observed, goes against the conception of the rational investor in standard

finance (Hong and Stein, 1999; Shapira and Venezia, 2001, Nicolosi et al., 2004) where risk

appetites are simply matched with adequate levels of returns which lead to instant
purchase/not-to-purchase decisions rather than psychological bias-induced postponing of

purchase. This has important implications on the efficiency of developing capital markets and

the nature of investor participation in those markets. Our study also builds on earlier work by

Sultana (2010) who investigated the risk tolerance levels of Indian individual investors but not

subsequent impact of their observed risk preferences on other aspects of investment decision-

making. The findings of our paper has significant implications on developing capital markets in

terms of investment decision-making mechanics and efficiency which increases our

understanding of the nature of individual investor participation in such markets.

Since the weight of empirical evidence (see, for example, Subrahmanyam, 2007; Barberis and

Thaler, 2002; Daniel et al., 2002; Statman, 1999; Jackson, 2003; Shleifer, 2000) within the

behavioral finance literature are increasingly supportive of the view that certain observable

investor psychological biases and subsequent investment-related behaviors are both persistent

and systematic (e.g. risk propensity and the illusion of knowledge), this paper attempts to

explore and better understand the share purchase postponement phenomenon described

above.

Consumer purchase postponement has been defined as “the deliberate delay of a specific

purchase during which time consumers can compare alternatives, clarify their purchase goals

and evaluate any information gathered” (Chang and Burke 2007; Mitchell and Papavassiliou

1999). Greenleaf and Lehmann (1995) have conceptualized consumer purchase postponement

as the substantial time that elapses between the time that consumers recognize a need for a

product and the time they actually purchase it. In this study, consumer purchase postponement

is conceptualized as the delay of a purchase decision until some later point in time (Palan and

Wilkes 1997).

The traditional focus in the decision-making literature has been on how consumers make a

choice from different alternatives (Bettman, Luce and Payne 1998; Dhar 1996; 1997b; Dhar and

Nowlis 2004). The manner in which a consumer makes a decision from different alternatives is
based on the notion of classical theory which suggests that consumer’s preferences are

complete and that the information processing is costless (Dhar 1997a). However, in the real

world, information on all the brands or products is either unavailable or impossible to process

(Dhar 1997a; Gunasti and Ross 2009). Consequently, consumers may choose to seek more

information about the share options available or search for other attractive alternatives (e.g.

mutual funds or other financial investment options) (Dhar 1996; 1997a; Dhar and Nowlis

2004). The rational theory of search suggests that the no-choice option is selected by consumers

when none of the alternatives are perceived to be attractive or when there are benefits for

further search (Karni and Schwarz 1977). As a result, consumers may decide to postpone their

purchase (Chang and Burke 2007; Dhar 1996; Dhar 1997b).

Another major reason for purchase postponement is based on regret theory (Zeelenberg 1999).

Regret theory suggests that consumers are motivated to avoid mistakes (Zeelenberg 1999) and

may experience aversion at the final moment of making a product choice (Dhar 1997b).

Consumers may avoid making a decision or may delay a purchase decision in order to avoid

future regret (e.g. Conchar et al. 2004). Consequently, this behavior allows a consumer to avoid

responsibility and regret related with making a poor decision (Dhar 1997a).

The risk reduction perspective suggests a majority of consumers perceive risks in most

purchase decisions (Cox 1967) and consumers seek to minimize risk and frequently engage in

risk-reduction behavior (Sääksjärvi and Lampinen 2005; Yeung and Morris 2006). These

consumers are often motivated to avoid making mistakes rather than maximizing utility

(Mitchell 1999) and prefer to defer or postponement purchases. This deferral or postponement

bias can also be attributed to loss aversion (Kahneman, Knetsch and Thaler 1991) which

suggest that consumers responses to potential losses are more extreme than responses to any

potential gains (Tversky and Kahneman 1986)

Essentially, our paper makes use of two well-researched psychological tendencies from the

behavioural finance literature that are hypothesized to influence share purchase postponement,
that is, illusion of knowledge and risk-propensity (see, for example, Daniel et al., 2002). On the

other hand, elaboration of the purchase postponement phenomenon is aided by established

theoretical work in the consumer behaviour literature (see Alba and Hutchinson, 2000).

3. Conceptual Framework

Based on a review of established literature in both behavioural finance and consumer behaviour

traditions, we have developed the following conceptual framework.

Conceptual Framework

Investor Preferences
-Consumer Involvement
-Degree of Diversification

H3, H4
Investor Psychological
Tendencies Purchase
Postponement
Illusion of Knowledge H1, H2
Risk Propensity

The general approach of our paper is similar to that of Dorn and Huberman (2005) in that a

sample of individual investors’ psychological tendencies/attributes are measured using stated

perceptions and self-assessment scales.

2.1 Risk Propensity

In the field of finance, the degree of risk taken is the primary consideration in all investment

decisions (Bernstein, 2007). There is a perceived trade-off between risk and return (Baker et al.,

1977). Hence, the greater the amount of risk that an investor is willing to take on, the greater is

the corresponding expected returns. Investors view this as compensation for taking on

additional risk.
Consistent with the focus on investors’ pre-purchase investment preferences, inclinations and

motivations; we examine Indian individual investors’ pre-investment (ex-ante) risk preferences

through their self-reported general risk attitude. This conception of risk is broadly similar to

that of Baker et al. (1977) and Cohn et al. (1975). Both Kapteyn and Teppa (2002) and Dorn and

Huberman (2005) suggest that risk-related measures based on subjective risk-related

statements (our approach in this paper, using risk-related constructs/statements adapted from

Baker et al., 1977) are better at explaining investor behaviour as compared to assumptions of

risk appetite based on objective attributes such as age, gender and income.

From the consumer behaviour perspective, Sitkin and Weingart (1995) conceptualized risk

propensity as an individual’s current tendency to take or avoid risks. Risk propensity is

considered to be an individual trait that can change over time and is an emergent property of

the decision maker (Sitkin and Weingart 1995). Past research has shown that the tendency to

take risks (i.e. risk propensity) is related causally to making riskier decisions (Brockhaus 1980).

Greenleaf and Lehmann (1991; 1995) suggest that perceived risk is an important factor that in

influencing the likelihood of postponing potential purchases. In addition, investors who have

higher risk propensities attend to and weigh positive opportunities more heavily, thus

overestimating the probability of gain relative to the probability of loss (Sitkin and Weingart

1995). Therefore,

H1: The greater the risk propensity, the less likely investors will postpone purchases of shares.

2.2 Illusion of Knowledge

Illusion of knowledge is a relatively well-researched phenomenon in investor psychology. It

refers to the tendency for an investor to believe that the accuracy of his/her forecasts increases

with more information; that is, more information increase one’s knowledge about something

and improves one’s decisions (Nofsinger, 2008; Daniel et al., 2002). This is also consistent with

past empirical literature in consumer behaviour showing that illusion of knowledge is a

phenomenon that researchers regard as a stylized fact about human cognition (Alba and

Hutchinson, 2000).

Odean (1999) has suggested that evaluation of shares by individual investors can be a difficult

task, and it is mainly in such difficult activities that people tend to exhibit the greatest illusion of

knowledge. For instance, Schwartz (2004) suggests that the more information investors

possess, the better their accuracy of their purchasing decisions. Alba and Hutchinson (2000)

suggest that regardless of the relative amounts of information that investors actually possess,

they, on average, tend to think that they know more than they actually do. This suggests that

having more information can increase the perceived prediction accuracy of uncertain outcomes

(Hall et al., 2007). Put simply, self-perceived knowledge will have a negative impact on purchase

postponement. Therefore,

H2: The greater the self-perceived knowledge, the less likely investors will postpone purchases of

shares.

3.3 Consumer Involvement

The concept of consumer involvement can be considered as a motivational state that can be

used to understand consumers’ attitudes towards products and services (Guthrie and Kim

2009) and has been as one of the determinants of financial service purchases (see Wang et al.

2006). Consumer involvement can be used to understand the level of the product’s interest and

significance to the consumer (Guthrie and Kim 2009; Zaichkowsky 1985). Consumer

involvement can be described as a permutation of needs, values, interest and situational

variables (Guthrie and Kim 2009). Involvement has been conceptualised as an internal state

variable that indicates the amount of arousal, interest or drive evoked by a product class

(Dholakia, 2000; Bloch, 1981).

DeWulf et al. (2001) and Christy et al. (1996) imply that product involvement strengthens the

impact of the consumer’s perceived relationship. Furthermore, Gabbott and Hogg (1999) state

that product involvement is related to information-processing activities. This suggests that as

the consumer’s interest in shares increases, they are likely to gather more information about the

marketplace and different shares (Koufaris 2002). Consequently, they may feel that when

making purchase decisions, they have increased self-perceived knowledge about the share

market. Thus, they may perceive that they are more likely to have a positive share purchasing

experience and are less likely to postpone purchases of shares. Therefore:

H3: The greater the product involvement, the stronger the relationship between illusion of

knowledge and purchase postponement.

The risk propensity and involvement constructs incorporate the notion of importance of a

product or a service to the consumer (Bloch and Richins 1983). For instance, the perception of

risk makes the importance of share purchase relevant to the consumer (Dholakia 2001) and the

importance of the share purchase is an integral part of the involvement construct from its

conceptualisation (Guthrie and Kim 2009). As investors become more involved in the share

market, the notion of importance and relevance in regard to the share purchase increases.

Consequently, this may lead to the depth, complexity, and extensiveness of the cognitive and

behavioural processes during the share choice process to increase as well (Celsi and Olson

1988). As a result, the confidence that investors have in the purchase decision may also

increase as they may feel that they are a better judge of the marketplace, even though the share

purchase decisions are riskier. Therefore:

H4: The greater the product involvement, the weaker the relationship between risk propensity and

purchase postponement.

2.4 Degree of Diversification

Traditional finance theory recommends that investors hold a well-diversified portfolio,

preferably one that mirrors the composition of the market (Dorn and Huberman, 2005). The

logic behind such a recommendation is the effective spreading of risk. In terms of the actual

practices of individual investors, however, a number of empirical studies have found the

opposite inclination (Jackson, 2003; Dorn and Huberman, 2005; Blume and Friend, 1975). Put

simply, investors tend to under-diversify by typically holding only a few stocks in their

respective portfolios.

For the purposes of this study, the degree of diversification is conceptualized as the average

number of different companies’ shares that an individual investor holds in his/her portfolio. The

prediction is that the higher the degree of diversification, the lower the relative amounts of risk

taken by an individual investor when purchasing the shares of a particular company, as its

individual proportion compared to the overall share portfolio is presumed to be

correspondingly smaller as a general rule. Therefore:

H5: The greater the degree of diversification, the weaker the relationship between illusion of

knowledge and purchase postponement.

We hypothesize that the negative expected relationship between risk propensity and purchase

postponement becomes progressively stronger as an investor’s share portfolio becomes more

diversified. This is primarily due to the fact that, as an investor holds shares of an increasingly

broader range of companies, the relative amount of risk incurred by adding an additional tranche of

shares becomes smaller as a proportion of overall portfolio risk. Put simply, even excessive risk-

taking in purchasing additional shares will result in only a slight increase in overall portfolio risk. As a

consequence, investors are inclined to purchase rather than to postpone. Therefore:

H6: The greater the degree of diversification, the stronger the relationship between risk propensity

and purchase postponement.

 4. Methodology

3.1 Data Collection

This section discusses the procedures and processes used to examine the conceptual model.

The empirical context for this paper is the Indian stock exchange (i.e. BSE). The main criterion

for selecting this empirical context is to understand the Indian investor’s psychological

tendencies when purchasing shares.

Next, the paper presents a demographic profile (i.e. age and years of investment experience) of

an Indian investor based on their psychological tendencies. The sampling frame was a

commercially available database of Indian investors. Data was collected in the form of a

telephone survey. A survey-based research was employed for this paper to maximize the

generalizability of the results by effective sampling of the population (McGrath et al. 1982).

The questionnaire elicited information on their investment objectives, risk propensities and

perceptions, investment experience and perceived knowledge, demographic and socio-

economic status: the time required to fill out the questionnaire was estimated to be 15-20

minutes (see Appendix A for details).

3.2 Sample Description

After a pre-test was conducted using 20 Indian investors, a sample was recruited through a

research firm in India. As a result, 250 Indian investors responded to the survey. The

respondents were assured that their responses would be kept strictly confidential. Respondents

were also asked to assess the level of confidence when filling out the questionnaire. The average

response was ‘very confident’.

As our study’s respondents are drawn from a number of major brokerages rather than just a

single one, we contend that our empirical results are more robust and reliable. A multi-

brokerage research design is also ideal as Jackson (2003) has demonstrated that the systematic
actions of individual investors are highly correlated across unrelated brokerage firms in his

study of the behaviours of millions of individual investors in Australia. In fact, highly correlated

investment behaviour of individual investors have been documented by a number of other

studies such as Feng and Seasholes (2004), Barber et al. (2003) and Kumar and Lee (2006).

Within the sample itself, 87% or 219 respondents were female. The average age of the

respondents was from 26-35. The average income of the respondents was from US$472 to

US$788 per month with an average investment experience of 3-5 years. In addition, 95% of the

respondents were full-time employees and the remaining 5% were self-employed.

Measures

Quantitative data was collected using a telephone survey. Responses were measured using a

five-point Likert scale ranging from 1=strongly disagree to 5= strongly agree.

Psychological Tendencies

The measure for illusion of knowledge was adopted from Dorn and Huberman (2002). The scale

consists of one-item and item used is ‘I am more knowledgeable in share investments compared

to the average investor’. The measure for risk propensity was adopted from Dorn and

Huberman (2005) and consisted of two-items. The items are ‘ I am willing to take high risk in

exchange for high expected share returns’ and ‘ I feel comfortable investing in shares that are

considered risky’.

Dependent Variable

The purchase postponement scale was adapted from Walsh, Hennig-Thurau and Mitchell

(2007). The construct consisted of a 3-item scale. The items used for this scale are ‘ Sometimes

it is difficult to arrive at a decision when making a purchase’, ‘Sometimes when making a

purchase I delay the decision’ and ‘Sometimes I postpone a planned purchase at the last minute’.

Moderator Variables
Two moderator variables were employed in this paper. The product involvement was adopted

from Zaichkowsky (1994) and consisted of 5-items. This construct was deemed reliable

(α=.847). The items used for this construct were ‘very important...not at all important’,

‘boring...interesting’, ‘relevant...irrelevant’, exciting..unexciting’, ‘appealing..unappealing’. The

degree of diversification was measured on the basis of the average number of different

companies’ shares that an investor holds within his or her share portfolio. The first category

was 0-15 companies’ shares and the second category was more than 15 companies’ shares in

the portfolio.

3.3 Measure Validation Process

Data screening was conducted to remove outliers. As there were fewer than 20 missing cases,

mean substitution was carried out to replace the missing values. After data collection, normality

tests were run to ensure that all resulting statistical tests are valid. The skewness and kurtosis

values were within the critical values of ± 1.96 (corresponds to a 0.05 error level) indicating

normally distributed data (Hair et al. 2006). Next, each measure was examined for low item-to-

total correlation (Churchill 1979) to identify items that did not belong to a specific construct

(Wathne and Heide 2004). The items that were deleted were compared with the original

conceptual definition and care was taken to ensure that domain of the construct was not

significantly changed as initially conceptualized by deleting the items (Wathne and Heide 2004).

The Pearson correlation measure was used to presence of multicollinearity between variables

(Hair et al. 2006). A correlation greater than +.90 and less than -.90 indicates high collinearity

(Hair et al. 2006). Table 2 indicates that there is no evidence of multicollinearity within the data.

Table 2: Pearson Correlation Matrix (two-tail test)

1 2 3
1. Illusion of Knowledge 1.00 -.409** .313**
2. Risk Propensity -.409** 1.00 .294**
3. Product Involvement .313** .294** 1.00
** Significant at the 0.01 level
Factor analysis with VARIMAX rotation was used to assess discriminant and convergent validity

with a threshold factor loading of 0.5 (Lian and Lin 2008). The results indicated that the

constructs had acceptable instrument validity.

Finally, exploratory factor analysis was performed in the first instance to assess convergent and

discriminant validity. Reliability assessments were conducted to reduce measurement error

(Hair et al. 2006) and Cronbach’s alpha (α) was used. The reliability assessments for the

following constructs are: risk propensity (0.914) product involvement (0.847) and purchase

postponement (.779). The results indicate that the Cronbach’s alpha exceeded the 0.7 level

which indicates acceptable levels of reliability (Fornell and Larcker 1981)

Control Variables

In order to isolate the impact of the principle variables of interest we chose to control for the

influence of four variables that have been shown to affect how investors purchase shares

(Barber and Odean 2001; Deaves et al., 2009). Barber and Odean (2001) suggests that men

trade forty-five percent more than women. Furthermore, Dorn and Huberman (2005) indicate

investors who perceive themselves to be more knowledgeable in the stock markets as compared

to other investors are males, earn a higher income and are better educated. Therefore, gender,

income, years of investment experience (YIE) and age were used as control variables.

Multiple Regression Analysis

Stage 1 regression examined the influence of psychological tendencies on purchase

postponement of shares. Specifically, the regression examined the impact of illusion of

knowledge and risk propensity on purchase postponement of shares. Table 3 lists the details of

the results. The results indicate that illusion of knowledge (ß=--.174, p<0.01) is not significantly

related to purchase postponement providing no support for H1. However, the results indicate

that risk propensity (ß=--1.088, p<0.1) is negatively related to purchase postponement, which

provides support for H2.

Stage 2 regressions were concerned with the moderation effects of degree of diversification and

product involvement on the relationship between psychological tendencies and purchase

postponement. Table 3 lists the details of the results. Hypothesis H3 predicted that consumer

involvement would strengthen the negative relationship between illusion of knowledge and

purchase postponement. The results indicate that the interaction effect of consumer

involvement with illusion of knowledge (ß=-.372, p<0.01) was significant, thus providing

support for H3. Hypothesis H4 predicted that consumer involvement would strengthen the

negative relationship between risk propensity and purchase postponement. The results indicate

that the interaction effect of consumer involvement with risk propensity (ß=.297, p<0.01) was

significant, thus providing support for H4.

Hypothesis H5 predicted that the degree of diversification would weaken the negative

relationship between illusion of knowledge and purchase postponement. The results indicate

that the interaction effect degree of diversification with illusion of knowledge (ß=-.307, p<0.05)

was significant, thus providing support for H5. Hypothesis H6 predicted that the degree of

diversification would strengthen the negative relationship between risk propensity and

purchase postponement. The results indicate that the interaction effect of degree of

diversification on risk propensity (ß=-.944, p<0.1) was significant, thus providing support for

H6.

Table 3: Hierarchical Moderated Regression for the impact of Investor Psychological Tendencies
Variables Hypothesis Standardized Coefficients t-values
Control Variables
Age -.410 -7.939
Gender .468 8.117
Income -.147 -3.394
YIE .161 2.612
Direct Effects
IK H1 -.174 -.909
RP H2 -1.088* -1.605*
Interaction terms
IK_PINV H3 .372 3.460***
RP_PINV H4 .297 4.601***
IK_DI H5 -.307 -1.642**
RP_DI H6 .944** 1.404*
F= 54.468***
Adjusted R²= .714
*p< 0.1 (one tailed test); ** p<0.05 (one tailed test); *** p<.0.01 (one tailed test)
The ANOVA was concerned with presenting a profile of an Indian investor in terms of the age

and years of investment experience. Table 4 presents the mean numbers of individual investor

ages and the results of an analysis of variance (ANOVA) predicting responses in terms of age

and illusion of knowledge and risk propensity. The results indicate that main effect for the

investor age shows that the groups did differ from each other significantly for both illusion of

knowledge (F = 15.186** p < .05) and risk propensity (F = 22.116*** p < .01). The analysis of the

means indicate that the 56-65 age group (M= 5.00) has the highest illusion of knowledge

compared to the 36-45 age group (M= 3.7162) which has the lowest illusion of knowledge.

Furthermore, the analysis of the means of the age groups indicate that the 36-45 age group (M=

4.3649) has the highest risk propensity compared to the 56-65 age group (M=2.500) which has

the lowest risk propensity.

Table 4: ANOVA results for Impact of Illusion of Knowledge on Age

Means ANOVA
18-25 26-35 36-45 46-55 56-65 F-value
Illusion of Knowledge 4.00 4.2596 3.7162 4.7273 5.00 15.186**
Risk Propensity 2.6293 3.1538 4.3649 2.6818 2.500 22.116***
*p< 0.1 (one tailed test); ** p<0.05 (one tailed test); *** p<.0.01 (one tailed test)

Table 5 presents the mean numbers of individual investor years of investment experience (YIE)

and the results of an analysis of variance (ANOVA) predicting responses in terms of YIE and

illusion of knowledge and risk propensity. The results indicate that main effect for the YIE

shows that the groups did differ from each other significantly for both illusion of knowledge (F =

3.450** p < .05) and risk propensity (F = 43.238*** p < .01). The analysis of the means indicate

that the group who has 6-8 YIE (M= 4.2162) has the highest illusion of knowledge compared the

group who has 9-11 YIE (M= 3.5455) which has the lowest illusion of knowledge. Furthermore,

the analysis of the means of the groups indicate that the 0-2 YIE group (M= 2.6026) has the
lowest risk propensity compared to the 56-65 age group (M=5.00) which has the highest risk

propensity.

Table 5: ANOVA results for Impact of Illusion of Knowledge on YIE

Means ANOVA
0-2 3-5 6-8 9-11 12-15 F-value
Illusion of Knowledge 3.9872 4.1786 4.2162 3.5455 4.00 3.450**
Risk Propensity 2.6026 2.9643 3.8108 4.3182 5.00 43.238***
*p< 0.1 (one tailed test); ** p<0.05 (one tailed test); *** p<.0.01 (one tailed test)

4.0 Discussion

There are a number of findings arising from our empirical research that merit discussion. These

pertain to the influence of individual investors’ psychological tendencies on their share

purchasing behaviour. To re-iterate, this paper examined whether illusion of knowledge and

risk propensity significantly influences the tendency to postpone purchasing of shares. In

addition, the impacts of moderating effects of product involvement and degree of diversification

on the psychological tendency-postponement relationships were explored.

First, results show that the influence of illusion of knowledge on purchase postponement (H1) is

insignificant. This finding contrasts with the predictions by Odean (1999), Schwartz (2004) and

Alba and Hutchinson (2000) where illusion of knowledge increases significantly as investors

gather more information regarding potential share purchases.

The illusion of knowledge-postponement relationship, however, is found to be significant when

the moderating effects of (i) product involvement (H3) and (ii) degree of diversification (H5);

are considered concurrently. Empirical results show that the greater the illusion of knowledge,

the less likely investors are to postpone the purchase of shares and such a tendency increases as

these investors become more motivated in share purchasing (H3). Hence, as both interest in,

and significance of share purchasing increases; the amount of arousal, interest and drive (Bloch
1986; Dholakia, 2001) evoked triggers a more positive share purchasing experience making

postponement less likely. Considering the findings reported for both H1 and H3, Indian

investors seem to be less affected by the mere accumulation of information relevant to share

purchasing, but are instead influenced more by the amounts of motivational attachment

developed for such purchases.

In addition, the results suggest that Indian investors in the highest age bracket have the highest

illusion of knowledge perception compared to other investors. This could primarily be due to

the amount of time they have spent studying the marketplace and the dealings within the

marketplace. Furthermore, this could be attributed to the life experiences that they may have

had. However, the results also suggest that investors who have invested for 6-8 years are more

likely to have the highest illusion of knowledge compared to other Indian investors.

Understandably, the investors in the lowest years of investment bracket had the lowest illusion

of knowledge as these investors would still be learning about trading in the stock market.

However, the investors who had 9-11 and 12-15 years of investment experience had lower

illusion of knowledge perceptions than investors in the 6-8 years bracket. A possible

explanation for this result is that investors who had more years of investment experience have

learnt more from their investment experience and may have a more realistic view of the share

and the marketplace.

As mentioned earlier, it is found that as an Indian investor’s portfolio of shares becomes more

diversified, the influence of his/her illusion of knowledge bias in discouraging purchase

postponement (H5) becomes progressively weaker. Therefore, we contend that investors

increasingly realize the limitations of their individual information processing capacities due to

bounded rationality (Brennan, 1995; Tversky and Kahneman, 1981) where it is not practically

possible for them consider all publicly available information (Dhar, 1997a; Gunasti and Ross,

2009. This realization is likely to become increasingly pronounced as they evaluate a more

extensive range of shares with different intrinsic characteristics, as reflected in the diversified
nature of their respective portfolios. A supporting explanation for H5 is in relation to risk

diversification. Specifically, as an investor’s portfolio of shares becomes more diversified, the

proportional risk taken by purchasing additional shares becomes progressively lower.

Next, empirical findings demonstrated that the greater an Indian investor’s risk propensity, the

less likely he/she will postpone purchases of shares (H2). As argued by Sitkin and Weingart

(1995), investors with higher inherent risk propensities are more inclined to weigh positive

opportunities more heavily, thus overestimating the probability of gain relative to the

probability of loss. In turn, this induces them purchase rather than to postpone.

The risk propensity-postponement relationship is found to be significantly influenced by

moderating effects of (i) product involvement (H4) and (ii) degree of diversification (H6). In

relation to the effects of product involvement, investors with higher degrees of motivational

attachment are relatively less affected by their risk propensities to not postpone purchase (H4).

Perhaps the degree of attachment is related to the amounts of time, resources and attention

paid to evaluation of shares thus making purchasing decisions a longer process. Furthermore,

the results suggest that investors in the 56-65 had the lowest risk propensity compared to the

other age brackets and less likely to take risks in the stock market. This could be due to the fact

that investors in this age bracket may likely to be pensions or a pensioner and thus unwilling to

make risky choices. Furthermore, they are likely to weigh negative outcomes more heavily than

positive outcomes. The results also indicated that investors in the 36-45 age bracket are likely

to take more risks as they may have the income to take more risks and seek higher gains.

Furthermore, results show that investors with higher years of investment experience are likely

to take more risks. This could be attributed to the amount of experience that they have had with

the stock market trades and thus would be comfortable with making riskier decisions.

Lastly, our study found that the risk propensity-postponement relationship becomes more

pronounced as the degree of share portfolio diversification increases. This is because as an

investor’s portfolio of shares becomes more diversified, the proportional risk taken by
purchasing additional shares becomes progressively lower. Hence, Indian investors with higher

risk propensities are even more inclined to purchase as the overall impact of potential

significant losses arising from the purchase will only affect a small proportion of the value of

his/her overall share portfolio.

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