Received: 16 June 2020 Revised: 3 August 2020 Accepted: 5 August 2020

DOI: 10.1002/pa.2360

ACADEMIC PAPER

Risk preferences for financial decisions: Do emotional

biases matter?

Ritika | Nawal Kishor

School of Management Studies, Indira Gandhi

National Open University, New Delhi, India
Correspondence
Ritika, School of Management Studies, Indira
Gandhi National Open University, 93, Maidan
Garhi Road, Maidan Garhi, New Delhi, Delhi
110068, India.
Email: ritikaaneja.aneja@gmail.com
The aim of this article is to evaluate the effect of emotional biases (namely over-
confidence bias, self-control bias, loss aversion bias, and regret aversion bias) on risk
preferences of individual investors. A structured questionnaire is developed by taking
excerpts from various existing studies to evaluate emotional biases and the construct
of risk preferences is adopted from “domain specific risk-taking scale” (DOSPERT).
The data are analyzed using structural equation modeling. The findings reveal that
overconfidence bias and self-control bias have significant positive relationship with
risk preferences, whereas with loss aversion bias and regret aversion bias, a signifi-
cant negative relationship of the risk preferences is found. The study contributes to
the existing literature by examining the effect of feelings and emotions on risk. The
findings of the study further confirm that risk is influenced by emotions and feelings.
The results of this study will be of great use to policy makers, investment consultants,
retail investors, regulators, and various other stakeholders associated with preparing
and suggesting investment strategies for their own or for others.

1 | I N T RO DU CT I O N value of possible gains and losses without considering the final

The standard finance is based on the assumption that investors take
all investment decisions rationally after analyzing all the available
information (Kumar & Goyal, 2015). It also assumes that the risk
preferences of the investors are according to the norms as described
by expected utility theory and mean variance analysis. It augments
that investors perceive their risk correctly and their risk preference
is not influenced by heuristics or behavioral biases. But behavioral
finance researchers view risk taking from a different angle as com-
pared to traditional finance researchers. The proponents of behav-
ioral finance have time and again showed that people employ
heuristics in taking decisions under situation of risk or uncertainty
(Antony, 2020; Barnes, 1984; Schwenk, 1984; Strong, 2007). Deci-
sions under risk and uncertainty in the field of behavioral finance are
examined with the help of prospect theory advocated by Kahneman
and Tversky (1979). This theory departs from the assumption of
complete rationality (as devised by classical economic theories) and
focuses on cognitive and emotional limitations of decision makers
(Edwards, 1995; Olsen, 1997; Ricciardi, 2005). According to this the-
ory, human beings are risk averse in case of profits and risk takers
regarding losses. They make financial decisions keeping in mind, the
outcome.
Investors employ various heuristics to evaluate the gains and
losses of their financial decisions. Empirical evidence suggests that
risk preferences of investors are affected by various emotions such as
anger, worry, and others (Campos-Vazquez & Cuilty, 2014; Kugler,
Connolly, & Ordóñez, 2012). But the role of emotional biases in decid-
ing the risk preferences of the investors is less known. Also, it is cru-
cial to understand about the emotional forces leading to biased
investment decisions. The present research aims to bridge this gap
related to the effect of emotional biases on risk. The study contributes
to the existing literature concerned with “risk as feeling hypothesis”
put forth by Loewenstein, Weber, Hsee, and Welch (2001).
2 | LI T E RA T U R E RE V I E W A N D
HY P O T H E S E S D EV E L O P M EN T
2.1 | Heterogeneity of risk
Risk is defined as the possibility of happening of undesirable events
(Sitkin & Pablo, 1992). Risk can be defined along various dimensions

J Public Affairs. 2020;e2360. wileyonlinelibrary.com/journal/pa © 2020 John Wiley & Sons Ltd 1 of 9
https://doi.org/10.1002/pa.2360
2 of 9
namely risk tolerance, risk propensity, risk-taking ability, risk prefer-
ence, risk attitude, and risk propensity. The terms such as risk propen-
sity, risk-taking ability, risk attitude, and risk preference are used
interchangeably in the academic literature (Baker & Ricciardi, 2014).
There is no universally accepted definition of risk preferences
(Baker & Ricciardi, 2014). Risk preference is generally defined as the
tendency of an individual to take or avoid risk (Sitkin & Pablo, 1992).
This concept illustrates what an individual chooses in between a risky
and a safer alternative. This differs from an individual to another indi-
vidual because what is “undesirable” can be different for different
individuals. The researchers of behavioral finance use risk preferences
to explain the financial and investment behavior.
Risk preference of the investors is difficult to generalize as it is
based upon various subjective and objective factors which affect the
judgments of individuals regarding various investment options and
financial services (Thaler & Johnson, 1990). The opinions and judg-
ments of human beings regarding financial decision making are shaped
by various factors such as family background, education, personal
understanding, profession, and others (Grable & Roszkowski, 2008;
Olsen, 2000; Olsen & Cox, 2001). Risk seekers prefer less safety mea-
sures (like keeping money for precautionary purpose) as compared to
risk averters (Sciortino, Huston, & Spencer, 1987). Risk preferences
vary from an individual to another individual and from one country to
another country (Weber & Hsee, 1998).
2.2 | Emotional biases and risk taking
The proponents of behavioral finance apply theories from psychology
and sociology to financial decisions (Kahneman & Tversky, 1979;
Ricciardi, 2008; Thaler & Johnson, 1990). Various studies have
explored the role of cognitive aspects on financial risk taking
(Edwards, 1995; Olsen, 1997; Ricciardi, 2005). But the effect of emo-
tions on investment decisions is less explored. A remarkable work in
this regard is “risk -as- feelings” hypothesis (Loewenstein et al., 2001)
in which the authors state that
Feelings play a much more prominent role in risk
decision-making than they are given credit for by the
cognitive-consequentialist tradition of judgment and
decision-making research.
Also, they argue that,
The decision-theoretic approach to decision-making
under risk has largely ignored the role played by emo-
tions… very little attention has been given to the
impact of emotions (p. 280)
Psychological researchers assert that “emotional reactions” occur
prior to “cognitive evaluations” (LeDoux, 1996; Zajonc, 1980). Judg-
ment and decision making is guided by perceptions which are framed
by emotional aspects (Damasio, 1994). Since behavioral biases effect
RITIKA AND KISHOR
the interpretation of information, it may affect the risk preferences of
the individuals (Barnes, 1984; Schwenk, 1984). Due to presence of
some behavioral biases, individuals mark down the uncertainty and
negative outcomes related to their decisions and thus underestimate
the associated risk (Cooper, Woo, & Dunkelberg, 1988; Shaver &
Scott, 1992).
The academic literature shows the effect of various emotions
(fear, happiness, surprise, disgust, and anger) on probability weighing
(Baker & Nofsinger, 2002; Fehr-Duda, Epper, Bruhin, &
Schubert, 2011; Kliger & Levy, 2008; Rottenstreich & Hsee, 2001).
Fear leads to higher risk aversion. Academic literature supports that
risk preferences of an investor are affected by external stimuli
(Bateman, Islam, Louviere, Satchell, & Thorp, 2011; Roszkowski &
Davey, 2010). For example, situations leading to pessimism (such as
Covid-19) may lead to a reduction in the risk tolerance of investors.
Fundamentally, the effect of emotions on risk preferences is evident
but still underrated (Chang, 2007). Studies suggest that people having
less emotional biases (ones who are emotionally stable) take decisions
on the basis of expected utility theory (Charupat, Deaves, Derouin,
Klotzle, & Miu, 2013).
2.2.1 | Overconfidence bias and risk taking
Overconfidence can be defined as supreme faith in one's own abilities
(Odean, 1998). Overconfidence stems from illusion of knowledge and
optimism (Russo & Schoemaker, 1992). Due to illusion of knowledge,
investors think themselves to be “better than average” in intelligence,
stock picking, and risk-taking abilities (Ricciardi & Simon, 2000;
Strong, 2007). They feel that due to their knowledge and abilities,
they can control the risk of their portfolio and can easily escape the
negative consequences arising due to their choices. Optimist investors
feel that only good will happen to them, leading them to underestima-
tion of costs and over stating of gains. So, they feel themselves to be
invulnerable to various risky situations. This bias leads to misinterpre-
tation and lower perception of risk by the investors (Barnes, 1984;
Nofsinger, 2017; Russo & Schoemaker, 1992). So, they take end up
taking more risk (Barber & Odean, 2001).
H1 Overconfident investors prefer to take more risks.
2.2.2 | Loss aversion bias
Traditional finance is based on expected utility and measures invest-
ment risk with the help of skewness and kurtosis (Olsen, 2000). But
the tenets of behavioral finance relate investment risk to perceived
risk and assume that investors are loss averse and they take less risk
in order to avoid the losses. Prospect theory rests on the assumption
of loss aversion, which refers to the tendency of people to avoid
losses (Kahneman & Tversky, 1979). People susceptible to this bias
give more importance to losses as compared to gains. Academic litera-
ture reports that losses bother the investors twice as compared to an
RITIKA AND KISHOR
equivalent gain (Kahneman & Tversky, 1979). Loss averse investors
avoid investing in portfolios with high risk in order to minimize the
probability of loss (Duxbury & Summers, 2004). Evidence also sug-
gests that emotions affect loss aversion thus affecting the risk toler-
ance (Dhar & Wertenbroch, 2000).
H2 Investors susceptible to loss aversion bias prefer to take less risk.
2.2.3 | Regret aversion bias
Academic literature shows that regret leads to negative emotions
(Fogel & Berry, 2006; Summers & Duxbury, 2012). The feeling of
regret stems from a bad outcome and the awareness that a better
outcome could have been achieved with a different choice (Fogel &
Berry, 2006). Regret aversion bias is a bias which states that people
avoid taking decisions in order to keep away from the regret of mak-
ing bad decisions (Connolly & Zeelenberg, 2002). Due to this bias,
people make very conservative investment choices due to the regret
associated with poor results on risky investment choices made in the
past (Pompian & Wood, 2006; Thaler & Johnson, 1990). Regret aver-
sion bias affects the foreign exchange risk (Steil, 1993).
H3 Investors susceptible to regret aversion bias take less risk.
2.2.4 | Self-control bias
Self-control bias is the behavioral propensity of investors to save less
for future in order to spend more today (Pompian & Wood, 2006).
According to traditional finance, rational investor takes all necessary
measures in order to fulfill their long-term objectives. But it has been
reported in the literature, people even after knowing that is necessary
for them, fail to save adequately for their long-term goals (such as for
retirement purposes; Pompian & Wood, 2006). Due to this bias, inves-
tors invest in more risky securities such as equity as compared to
bonds and debentures because they feel unable to control their
behavior. They take more risk in order to get more money for spend-
ing (Lusardi & Mitchell, 2007). Higher risk-taking behavior is associ-
ated with lower self-control (Samuels et al., 2004; White et al., 1994).
H4 Investors susceptible to self-control bias take more risk.
3 | M E TH O DO LO GY
3.1 | Instrument design and refinement
The purpose of the study is to evaluate the effect of emotional biases
on the risk preferences of individual investors. So, statements related
to various emotional biases in the study were taken from existing
studies and then modified and used for this study (Baker, Kumar,
Goyal, & Gaur, 2019; Jain, Walia, & Gupta, 2019; Pompian &
3 of 9
Wood, 2006; Prosad, Kapoor, & Sengupta, 2015; Weber, Blais, &
Betz, 2002). The statements were evaluated on a five-point Likert
scale extending from 1 (strongly disagree) to 5 (strongly agree).
Traditional finance takes into consideration the objective measures
of risk using stock beta, variance, standard deviation, and CAPM (capital
asset pricing model). Behavioral finance scholars measure subjective
(psychological) aspects of risk using various multidimensional variables.
When taking a decision under situation of risk, an investor looks upon
the measurement of financial risk as well as the indicators of behavioral
risk (Ricciardi, 2008). The measure of risk preference used in this study
is, “domain specific risk-taking scale (DOSPERT)” formulated by Weber
et al. (2002). DOSPERT is a measure which assesses the self-reported
risk-taking ability of individuals in five areas. The construct related with
investment risk taking was adopted from this scale to measure the risk
preferences of the investors. Participants were asked to rate the possi-
bility of engaging in the risk-taking behavior on a scale extending from
1 (extremely unlikely) to 5 (extremely likely). In order to check the con-
tent validity of the questionnaire, it was sent for pretesting to three
behavioral finance experts, two academicians and three experienced
investors. The reviewers were asked to report the flaws in the ques-
tionnaire. Minor revision was done in the questionnaire based on the
feedback from the reviewers.
3.2 | Data collection and methods used
To have a better perspective of the valuation process, research on
risk must focus on the individual decision makers (Cooley, 1977). So,
the current study is based on the individual investors investing in the
financial markets. All the respondents for the current study were indi-
vidual investors residing in Delhi. Data were collected from a sample
consisting of 720 investors selected using a combination of judgmen-
tal and snowball sampling technique from investors residing in Delhi
and having investment in financial markets. In the initial phase, pilot
study was conducted using responses from 60 investors and the reli-
ability and content validity of the instrument was assessed. In the next
and final phase, the responses were collected from 720 investors hav-
ing investment in financial markets. The data were collected in the
form of a field survey during the period from July 2019 to February
2020. The data were sorted and analyzed using the Statistical Package
for the Social Science (SPSS) 20 and AMOS 20 (Analysis of Moment
Structures) softwares. Table 1 shows the demographic profile of the
respondents. The results showed that most of the respondents were
males, aged 20–35 years, having postgraduation degree, a permanent
job, and income up to 5,00,000 rupees.
4 | RE SU LT S
This study employs SEM (structural equation modeling) to analyze the
effect of emotional biases on risk preferences of individual investors.
SEM is utilized here because of its privilege of concomitantly testing
all the variables hypothesized in the model (Westland, 2010).
4 of 9 RITIKA AND KISHOR

TABLE 1 Demographic profile of the respondents

Demographic characteristics Measures Frequency Valid percentage

Age 20 years–35 years 466 64.7
35 years–50 years 159 22.1
50 years–65 years 56 7.8
Above 65 years 39 5.4
Gender Male 535 74.3
Female 185 25.7
Marital status Married 395 54.9
Unmarried 325 45.1
Educational qualification Below graduation 12 1.7
Graduation 122 16.9
Postgraduation 472 65.6
Finance professional (CA, CFA, CMA, etc.) 114 15.8
Annual income (in Rs.) Up to 5 lakhs 275 38.2
5 lakhs–10 lakhs 256 35.6
10 lakhs−15 lakhs 88 12.2
15 lakhs–20 lakhs 45 6.3
Above 20 lakhs 56 7.8
Occupation Permanent employee 309 42.9
Business/self employed 150 20.8
Financial expert 38 5.3
Retired 223 31.0

4.1 | Measurement model
Cronbach's α {CA(α)} of each construct was used to evaluate the reli-
ability and internal consistency. The responses collected on negatively
worded items were coded reversely during the analysis. All constructs
achieved more than .70 value of Cronbach's α, thus justifying them-
selves to be used for basic research (Table 2; Nunnally &
Bernstein, 1967; Fornell & Larcker, 1981).
Confirmatory factor analysis was conducted on 21 variables. The
convergent validity of every factor is evaluated by using the values of
critical ratio (CR) and average variance explained (AVE). The CR and AVE
value of all the factors lie above 0.5 and 0.7, respectively, and hence, all
factors indicate convergent validity. All the items loaded significantly
with a factor loadings value of more than 0.6 (Bagozzi & Yi, 1988). These
results demonstrate the convergent validity of the measures used.
The discriminant validity of the factors is ascertained by using the
statistical toolkit furnished by Professor Gakingston. The values of
AVE, ASV (average shared variance), and MSV (maximum shared vari-
ance) of all the five constructs are compared. Since, for all the con-
structs, the value of AVE is higher than ASV as well as MSV, all
constructs have proven to possess discriminant validity (Hair, Black,
Babin, Anderson, & Tatham, 2006). The measurement model of the
study shows valid results for discriminant validity (Table 3).
Various indicators used to estimate the validity and reliability of
various constructs of the measurement model gave satisfactory
results. So, the developed constructs could be used to test the
hypothesized structural model.
The results of the measurement model indicate that the model is
valid and reliable. So, the developed constructs of this measurement
model could be used to check the structural model and the related
hypotheses.
4.2 | Structural model
Different indices of the measurement model used in the study pro-
vided different values as (CMIN/df) value of 2.680 (p < .05), compara-
tive fit index (CFI) = 0.969, normed fit index (NFI) = 0.918, goodness
of fit index (GFI) = 0.917, and root mean square error of approxima-
tion (RMSEA) = 0.087. The model successfully explained the changes
in risk preferences caused by emotional biases of individual investors.
Since all the measurement indices showed acceptable values, the
model is a good fit (Bagozzi & Yi, 1988).
According to the results, risk preferences showed a significant
negative relationship with loss aversion bias (β = −.53, t = −11.594;
p < .001) and regret aversion bias (β = −.13, t = −2.769, p < .01). So,
Hypotheses H2 and H3 are fully and strongly supported (Table 4). The
results also indicated that self-control bias (β = .30, t = 6.533,
p < .001) and overconfidence bias (β = .17, t = 3.691, p < .001) have a
significant positive relationship with risk preferences of individual
RITIKA AND KISHOR 5 of 9

investors. Thus, the Hypotheses H1 and H4 are supported by the theoretical base by examining the impact that various emotional
results. The results are presented in Table 4 and Figure 1. biases lay on the risk and uncertainty preferences of the individual
investors.
The results of the study are in line with the earlier studies show-
5 | DISCUSSION ing that emotional biases affect the risk preferences of individuals
(Ackert, Deaves, Miele, & Nguyen, 2019; Aspara & Tikkanen, 2008).
Building on the new field of behavioral economics and behavioral The outcome extracted from the current study demonstrates that
finance, the purpose of this article is to provide valuable insights into emotional biases namely “loss aversion bias,” “overconfidence bias,”
the impact of emotional biases in the behavioral decision making of “risk aversion bias,” and “self-control bias” influence the decision mak-
individual investors. Although there are some studies in the behavioral ing of Indian investors. The findings show that loss aversion bias is the
finance literature focusing on the effect of various emotions on the most important predictor of the risk preferences. The result is akin to
risk perception of investors, the current study tries to extend the the landmark theory of behavioral finance named as “prospect theory”
(Duxbury & Summers, 2004; Kahneman & Tversky, 1979; Sitkin &
Pablo, 1992). The findings illustrate that the preferences for risk of
the individual investors are most likely to be influenced by their atti-
TABLE 2 Results of measurement model tude of avoiding losses. Individual investors who want to avoid poten-
Construct Items Factor loadings Cronbach's α tial losses prefer to take less risk even in situations of probable gain.
The strong impulse of the investors to avoid losses leads them to
Overconfidence bias OC1 0.933 .96
dwell more on risk avoidance. Indian investors who can afford to lose
OC2a 0.937
and are willing to take financial risks would have favorable attitudes
OC3 0.953
toward investment and are more likely to invest.
OC4 0.950
Contrary to some of the previous studies stating that over-
Loss aversion bias LA1a 0.884 .873
confidence has no effect on risk preference on an individual basis
LA2 0.924 (Evans, Holcomb, & Chittenden, 1989; Houghton, Simon, Aquino, &
LA3 0.945 Goldberg, 2000), the findings demonstrate that overconfidence bias
LA4 0.928 has a significant positive relationship with risk preferences. This
Regret aversion bias RA1 0.687 .867 shows that due to having supreme faith in one's abilities and the out-
RA2 0.887 look that they can control the outcome of their investment decisions,
RA3 a
0.792 overconfident investors discount the unknown risks present in various
RA4 0.916 securities and thus, end up in taking more risk. The findings are in

RA5 0.893
RA6 0.788 TABLE 4 Results of structural model and hypotheses testing
Self- control bias SC1 0.896 .874
Path β t-Value Hypotheses Results
SC2a 0.908
OC ! RP 0.17 3.691* H1 Supported
SC3a 0.867
LA ! RP −0.53 −11.594* H2 Supported
SC4 0.890
RA ! RP −0.13 −2.769** H3 Supported
Risk preferences RP1 0.944 .882
SC ! RP 0.30 6.533* H4 Supported
RP2 0.949
RP3a 0.942 Abbreviations: LA, loss aversion bias; OC, overconfidence bias; RA, regret
aversion bias; RP, risk preferences; SC, self-control bias.
a *
The items were negative in sense and were reverse coded for the p < .001.
**
analysis. p < .01.

TABLE 3 Results of validity measures

Construct CR AVE MSV ASV Convergent validity Discriminant validity

Overconfidence bias 0.8895 0.6950 0.1552 0.0452 Yes Yes
Loss aversion bias 0.9706 0.8920 0.0188 0.0061 Yes Yes
Regret aversion bias 0.8603 0.5568 0.0441 0.0210 Yes Yes
Self-control bias 0.9557 0.8439 0.1552 0.0574 Yes Yes
Risk preferences 0.9693 0.9133 0.0114 0.0059 Yes Yes

Abbreviations: ASV, average shared variance; AVE, average variance explained; CR, critical ratio; MSV, maximum shared variance.
6 of 9
F I G U R E 1 Structural model analysis. LA, loss aversion bias; OC,
overconfidence bias; RA, regret aversion; RP, risk preferences; SC,
self-control bias
conformity with (Gilovich & Douglas, 1986; Harris, 1996; Kilka &
Weber, 2000; Sitkin & Weingart, 1995; Sjöberg, 2003).
Regret aversion bias showed a negative significance on the risk
preferences. This shows that the investors who might have made
losses in the past, feel afraid to make bold investment decisions. They
favor clinging on to less risky securities to circumvent the regret of
making bad investment decisions. Even if they are investing in stocks,
they would prefer to invest in stocks of familiar companies or of the
companies that are designated as good ones. The findings are in con-
firmation to (Grable, Lytton, & O'Neill, 2004; Harlow & Brown, 1990;
Loomes & Sugden, 1982).
Similar to the previous studies (Pompian & Wood, 2006), the
results of this study showed self-control bias to be a significantly
influencing factor for risk preferences. This outcome shows that inves-
tors susceptible to this bias cannot control their own behavior and end
up investing in too risky securities. Also, since the investors having self-
control bias start saving late for their goals, they tend to take higher risk
in order to make up for the lost time. The findings of this study contrib-
ute to the existing literature stating that risk is affected by feelings and
emotions (Eisenberg et al., 1995; Hsee & Weber, 1997; Loewenstein
et al., 2001) and is basically a trade-off between greed and fear.
6 | C O N CL U S I O N A ND I M P LI C A TI O N S
While making decisions under uncertainty and risk, emotions play a
significant role (Mellers, Schwartz, & Ritov, 1999; Slovic, Finucane,
Peters, & MacGregor, 2002). Risk preferences of the investors are
affected by various judgmental biases (Ricciardi, 2008). People need
to keep a check on their emotional biases in order to maximize their
outcomes. Finance professionals and money managers need to be
aware about these biases since they affect the perception of public
and their observed response (Furnival, 2002). The research will prove
to be beneficial for policymakers who aim to motivate people to
invest. They get an insight that only cognitive ability will not ensure
success, emotional ability is also important along with it. The policy
makers need to understand that “one size fits all” does not work. For
RITIKA AND KISHOR
developing appropriate policies, the policy makers should try to
understand the behavior of individual investors. By understanding the
limitations of human beings, the policy maker would be able to
develop better policies as compared to the policies framed by keeping
in mind the assumptions of traditional finance. The results of this
study will be of great use to investment consultants, retail investors,
policy makers, regulators, and various other stakeholders associated
with preparing and suggesting investment strategies for their own or
for others. A better understanding of risk preferences and emotional
biases enhances the practitioners' ability to understand the preferences
of various clients and devise for them customized recommendations
about the investment products and strategies (Birkenmaier, Sherraden,
Jacobson Frey, Callahan, & Santiago, 2016). Making assessments about
the risk tolerance is not only an individual's own job; the advisors and
policy makers are also required to understand and interpret investors'
behavior. The effect of emotions is important to understand because
the advisors know that it is difficult to deal with emotional clients. Bet-
ter recognition of the client's preferences will prepare the advisor in
advance to deal with various irrationalities that can pop up.
7 | LIM I TAT I ONS A ND FUTU RE SCOPE
However, there are various potential limitations of this study. Only
the most relevant biases related to risk preferences were taken for
the study. The other emotional biases which can have an impact can
also be tested in the future studies to gain a better understanding.
Although this study used the investors residing in Delhi as the respon-
dent base, the results of this study can also be tested in various geog-
raphies as a theoretical model.
OR CID
Ritika https://orcid.org/0000-0002-5742-1872
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RITIKA AND KISHOR 9 of 9

APPENDIX: INSTRU MENT FOR DATA COLLECTION

Construct Measurement variables Sources

Overconfidence bias O1: I am confident of my ability to make investment decisions better than others Prosad et al. (2015); Baker et al. (2019)
O2: I cannot predict future prices of my investments better than othersa
O3: I always feel optimistic about the future returns of my investments
O4: I have complete knowledge of various types of investments
Loss aversion bias LA1: I do not avoid an investment when I fear the lossa Baker et al. (2019); Jain et al. (2019)
LA2: Loss of Rs. 1,000 is more painful than happiness of Rs. 1,000 profit
LA3: I never sell an investment at a loss with an expectation that it will
eventually improve
LA4: I avoid taking decisions with the fear of incurring losses
Regret aversion bias RA1: I regret when I miss an opportunity of getting good returns Baker et al. (2019); Prosad et al. (2015)
RA2: I avoid investing in profitable assets if I had incurred losses in similar
investments in the past
RA3: Holding loss-making investments for longer time is more painful than
disposing profitable investments early
RA4: I changed my investment decisions in light of the wrong decisions I had
made earlier
RA5: I became risk seeking because I have made profits in the past
RA6: I became risk averse because I have incurred losses in the past
Self-control bias SC1: I lack the self-discipline required to fulfill my long-term saving objectives Pompian and Wood (2006)
SC2: I am able to achieve my saving and investment goalsa
SC3: I easily stick to difficult saving objectives once I decidea
SC4: It is very difficult for me to keep up my saving goals
Risk preferences RP1: Investing 10% of your annual income in blue chip stocks Weber et al. (2002)
RP2: Investing 10% of your annual income in very speculative stocks
RP3: Investing 10% of your annual income in government bonds
a
The items were negative in sense and were reverse coded for the analysis.