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IJHMA
12,2
330
Received 4 October 2018
Revised 30 December 2018
Accepted 30 December 2018
International Journal of Housing
Markets and Analysis
Vol. 12 No. 2, 2019
pp. 330-348
© Emerald Publishing Limited
1753-8270
DOI 10.1108/IJHMA-10-2018-0075
Sub-optimal behavioural biases
and decision theory in real estate
The role of investment satisfaction and
evolutionary psychology
Richa Pandey and V. Mary Jessica
School of Management Studies, University of Hyderabad,
Hyderabad, Telangana, India
Abstract
Purpose – The purpose of this study is to explain the relationship between behavioural biases, investment
satisfaction and reinvestment intention considering the effect of evolutionary psychology. The study believes
that biases are not at all times bad; sometimes, biases can assist the individual investor to select the top course
of action and allow them to go for the less costly mistakes, thereby helping in achieving satisficing behaviour.
Design/methodology/approach – Data were collected using structured and a close-ended questionnaire
from a sample of 560 respondents by using multi-stage stratified sampling method. PLS-SEM was used for
preliminary validation of the questionnaire. Mediation model using the structural equation model (SEM) with
the help of AMOS 20 was used for the analyses. Pre-requisite assumptions for SEM were checked by using
sample characteristics. The study has three constructs with multiple items; hence, the instrument validation
was done by measuring the construct validity and reliability using Cronbach’s alpha, exploratory factor
analysis and confirmatory factor analysis with the help of SPSS 20 and AMOS 20.
Findings – The study confirms that behavioural biases influence investment decisions in the real estate
market. Further, investment satisfaction is found to have a significant and complementary partial mediating
effect. The positive mediating effect of investment satisfaction between behavioural biases and reinvestment
intention shows that biases are natural tendencies in response to limit to learning which can be explained by
evolutionary psychology.
Research limitations/implications – There are chances that the result obtained here is because of
myopic decision-making behaviour in which the long-time horizon is not considered and behavioural biases,
as well as evolutionary psychology, are adaptive, so the result may change in the long-time horizon, which
seeks further investigations. The study talked about the relationship between behavioural biases, investment
satisfaction and reinvestment intention; it will be interesting to bring some more constructs in this model, for
example, investment intention and reinvestment behaviour; this can deliver a more precise picture in this
regard.
Practical implications – Understanding such relationships will help in better clarity about the way
investment is made. The study confirms that market behaviour in the real estate market is sub-optimal, which
shows that there is an opportunity for attentive investors by trading and gathering on information. Real
estate practitioners can get clues from market anomalies and investor phenomena; understanding these may
suggest ways to use them in the market.
Social implications – Reforms in the housing sector do not only satisfy one of the basic needs but also
leads to holistic economic development. Besides direct contribution, it contributes to social capital.
Originality/value – The study extends the current knowledge base about the relationship between
behavioural biases, investment satisfaction and reinvestment intention. This study investigates the
behavioural biases influencing the real estate market investment decisions of non-professional investors
considering the effect of evolutionary psychology.
Keywords Behavioural biases, Adaptive market hypothesis, Evolutionary psychology,
Investment satisfaction, Mediation model, Reinvestment intention
Paper type Research paper
Introduction Sub-optimal
Whether the real estate market react correctly to the fundamental economic theory? behavioural
There is a large share of real estate price movements which the economic fundamentals
are unable to capture (Englund et al. 1999; Ciarlone, 2015). Real estate investors are neither
biases
rational robots nor are real estate markets the faultless machines assumed under efficient
market hypothesis (EMH). These show the embarrassing weaknesses of traditional finance
theories and suggests the presence of other factors affecting the real estate market. These
factors may be inherent imperfections in housing markets (Ciarlone, 2015); weak and 331
unreliable wealth effect (Campbell and Cocco, 2007); and presence of the behavioural biases
(Farlow, 2003; Pandey and Jessica, 2018; Salzman and Zwinkels, 2017). The most significant
critique revolves around the behaviour of market participants.
Standard finance theories consider behavioural biases as flaws which can lead to inferior
financial decisions (Brabazon, 2000; Lo, 2007) and are needed to be corrected. Unfortunately,
they are hard to shake (Tversky, 1995). There is a famous quote by H. Jackson Brown
“When you cannot change the direction of the wind – adjust your sails”. Same applies to
behavioural biases which are hard to change. So the required course of action is to make
some adjustment in them with a motive to achieve an optimal financial decision. It requires
understanding behavioural biases and financial decision relationships, which will help in
better comprehending “how and why the real estate investors do, the way they do?”
The purpose of the present study is to explain how the behavioural biases affect the
decision-making process of the real estate investors taking a case of an emerging market like
India. According to Olsen (2007), behavioural biases are not necessarily bad. Investment
behaviour of investors are not only dependent on correct knowledge, but fellow human
belief about reality also plays a crucial role in their judgement, so it can be said that they act
like “investment scientist” (Olsen, 1998). This type of decision attribute is rooted in
evolutionary psychology.

Literature survey and hypotheses development

Real estate market in India
Real estate sector in India is expected to reach a market size of US$1 trillion by 2030 from US
$120bn in 2017 and contribute 13 per cent of the country’s gross domestic product (GDP) by
2025, according to IBEF (India Brand Equity Foundation, 2018)[1]. Despite this impressive
profile, the sector lacks academic presence (Dwivedi, 2015). The diversity and complexity of the
real estate market, its linkages with the economy and the investment sphere has necessitated a
closer study on its dynamics in India (RBI, 2008, 2010; Pandey and Jessica, 2015). “A huge real
estate system in the country brimming with immense growth yet lacking dedicated
academe”(Das and Sharma, 2013, p. xxix).

Behavioural biases
Olsen (1998) describes behavioural finance as the application of psychological and economic
principles. It feels the gap between theory and practice (Renisa, 2015). “No matter how careful
you are, the one risk no investor can ever eliminate is the risk of being wrong. Investor’s
biggest enemy is he himself” (Graham et al. 2006, p. xii, 8). Investor’s rationality is confined
by emotional and cognitive factors (Tversky, 1995). When investors continuously depend on
these tools while decision making over time, they become systematic tendencies (biases) that
help the individuals in achieving their financial objectives. Eventually, investors go with
certain behavioural biases, often denoted to as fallacious cognitive illusions (Tversky, 1995),
although misleading, often remain captivating and tempting. These biases can be broadly
classified into heuristics and Prospect.
IJHMA “Heuristics are rules of thumb, or mental shortcuts, the human brain uses to solve
12,2 complex problems quickly” (Fuller, 1998). Daniel Kahneman and Amos Tversky in late 60s
and early 70s came out with much work regarding “Heuristics and Biases”. Tversky and
Kahneman (1974) described three general heuristics – representativeness, availability and
anchoring. Prospect theory was introduced by Daniel Kahneman and Amos Tversky in
1979 through their paper in Econometrica as “Prospect Theory: An Analysis of Decision
332 under Risk”. Again, came its widely used modified version as “cumulative prospect theory”
(Tversky and Kahneman, 1992). “A prospect is the Kahneman-Tversky name for a lottery.
Prospect theory resembles expected utility theory in that individuals are represented as
maximising a weighted sum of ‘utilities’, although the weights are not the same as
probabilities and the ‘utilities’ are determined by what they call a ‘value function’ rather than
a utility function” (Shiller, 1999).
Pandey and Jessica (2018) for similar kind of study in the Indian real estate market have
suggested for five-item scale. Four of the items belong to heuristics (anchoring – 2,
representativeness – 1 and availability bias – 1) and one belongs to prospect theory (regret
aversion). The biases used in the present study to measure the behavioural attitude of real
estate investors are:

anchoring bias, that is, setting value of the property on the basis of recent buying or
selling price and using property purchase price as reference point;

representativeness bias as past performance of the property plays a decisive role in
real estate investment;

availability bias as investing in local property; and

investors hold onto property that dives despite being assumed to soar (prospect
theory, regret aversion).

Evolutionary psychology
Evolutionary psychology deliberates biases as design features of the human mind which are
adaptive and conditioned by natural selection (Barkow et al. 1992); in this regard, positive
influence of otherwise fallacious and financially ruinous biases on investment decision makes
sense, as they have survival value (Olsen, 1998). The survival value here can be explained by
adaptive market hypothesis (AMH) by Lo (2004), which can be treated as a Darwinian
alternative to the efficient market hypothesis (EMH). According to him, behavioural biases
are not ill-advised but are sub-optimal. Fear and greed, around which behavioural biases
revolve (Wood, 1995), are the product of the evolutionary process and improve the
probability of survival (Lo, 2004; Lo et al. 2005; Tang, 2010). In a market coupled with a lot of
information asymmetry, because of “limits to learning” (Sahi et al. 2013) and costly
optimisation, investors are naturally restricted in their decision-making capabilities. So, they
resort to something called “satisficing”, named as bounded rationality by Simon (1955).
Simon’s concept of bounded rationality suffers from the criticism that “what determines the
point at which an individual stop optimising and reaches a satisfactory solution?” (Durlauf
and Blume, 2008, p. 789). According to Lo (2004), this cannot be answered analytically, but
through adaptive market hypothesis, which attributes trial and error and natural selection as
the determinants of such point at which the optimal behaviour is satisfactory.

Investment satisfaction
The word satisfaction originated from Latin words satis (enough) and facere (to do or make);
Oliver (1980, 2014, p. 6) describes it as a function of expectations and disconfirmation or “a
filling or fulfilment, perhaps up to a threshold of undesirable effects”. Financial satisfaction Sub-optimal
refers to satisfaction with one’s financial situation and position (Sahi, 2017). According to behavioural
Joo and Grable (2004), financial satisfaction comprises contentment with one’s material biases
(objective) and non-material (subjective) financial situation. There is no consent on the best
way to measure financial satisfaction. Some researchers have measured financial
satisfaction with a single item (Joo and Grable, 2004), while others have used multiple item
measures (Sahi, 2017; Saurabh and Nandan, 2018). The study considers satisfaction as the 333
summary – state of the psychological process resulting with overall investment experience
(Oliver, 2014, p. 7).

Reinvestment intention
Reinvestment in the real estate market can be compared to the repurchase intention concept,
which is usually used in marketing, here intent to repurchase the product is replaced by
intent to reinvest in the financial product (in this case real estate). Borrowing the definition
for repurchase intention from Fang et al. (2014), the study defines reinvestment intention as
the subjective probability that an individual will continue to invest in the real estate market.
Reinvestment intention in real estate is driven by the satisfaction gained by the investor
which may be attaining the financial and personal goal (Shim et al., 2008). Intention to
reinvest can be of two forms: the intention to again put (money) into real estate market and
the intention to involve in positive word-of-mouth (referral) (Zeithaml et al., 1996; Curtis
et al., 2011).

Research gap and research objective

There are few developments in the area of research as far as the relationship between
behavioural biases, and investment satisfaction is considered with some new research as, for
example, Lo (2004); Sahi (2017). Oliver and DeSarbo (1989); Anderson (1994) and Oliver (2014)
talked about the relationship between investment satisfaction and reinvestment intention.
Shim et al. (2008) have developed a model showing the relationship between behavioural
factors, investment satisfaction and reinvestment intention. They have used six behavioural
factors, namely, investment profitability, investment security, investment liquidity, statute
and regulation, investment location and investment well-being. They define real estate
behaviour as “actions involved in investing in real estate”. It will be more insightful when
the psychological biases which are the reasons for the actions involved in investing in real
estate would be enquired. So the present study borrows the definition of behavioural biases
from Pompian (2011) as “the systematic errors in judgement” which is in line with widely
accepted theories of investor behaviour, namely, heuristics and prospect theory. The paper
wants to study the relationships between behavioural biases, investment satisfaction and
reinvestment intention, given the existing behavioural theories and evolutionary psychology.
So the objective of the study is:
To identify the mediating impact of investment satisfaction between behavioural biases
and reinvestment intention relationship.
Behavioural research in the real estate market is mainly concentrated on “valuation
experts” (Waweru et al. 2014). The behaviour of other types of stakeholders are unexplored
(Black et al. 2003; Schulte, 2003). According to Statman (2014), normal people are not
rational, and they commit mistakes which are caused by behavioural biases. As the study is
intended to study the behavioural biases, and the retail investors are representative of
normal irrational investors, so they are the sample for this study.
IJHMA Hypotheses
12,2 Behavioural biases and reinvestment intention. Real estate markets in emerging economies
are very uncertain as they suffer from a lot of information asymmetry and lack of
transparency. In such type of uncertain markets, people generally resort to their common
sense, gut feeling or go by the rule of thumb for decision-making. Proper analysis of these
markets to make informed decisions is very costly, time taking and sometimes not possible.
334 So, going by the behavioural biases makes decision-making easier here. Moreover,
behavioural biases provide a defined set of criteria to solve the problems, so there exists a
positive relationship between behavioural biases and the decision of investment (Jordan,
2014; Bakar and Yi, 2016). Qureshi and Hunjra (2012) found out that there is a positive and
significant relationship between heuristic bias and investment decision. Further studies by
Bashir et al. (2013); Qadri and Shabbir (2014) also proved a positive relationship. The studies
seeking this relationship are related to stock market investment, this study is borrowing this
hypothesis from there and applying it to the real estate market. The study tried to find out
whether this is true for the real estate market or not, so the following hypothesis is made:

H1. Behavioural biases will have a positive and significant effect on reinvestment
intention.

Behavioural biases and investment satisfaction. Because of a higher level of market

inefficiency and information asymmetry real estate market serve as the fertile ground where
behavioural biases flourish and profoundly affect the decision-making process of investors.
When investors continuously depend on these tools while decision-making over time, they
become systematic tendencies (biases) that help the individuals in achieving their financial
objectives.
The past decisions made by the individual investor on the basis of the heuristics and biases lead
to outcomes that, when evaluated by the individual on the basis of their internal standards,
impact their financial satisfaction levels (Sahi, 2017).
To avoid regret, investors become alert, thoughtful and invest in more protected and
creditworthy properties which lead to better decision-making (Bailey and Kinerson, 2005;
Copur, 2015, p. 153). People rely on limited information to make decisions, which leads to
quick decisions and may add time value of money (Copur, 2015, p. 156). The study tries to
test this relationship with the help of the following hypothesis:

H2. Behavioural biases will have a positive and significant effect on investment
satisfaction.
The mediating role of investment satisfaction between behavioural biases and reinvestment
intention relationship
Investment satisfaction is the causal result of behavioural biases and causal antecedent
of reinvestment intention, which establishes investment satisfaction as a mediating variable
between behavioural biases and reinvestment relationship. The significant positive
relationship between investment satisfaction and reinvestment intention is established by
the studies like Oliver and DeSarbo (1989); Anderson (1994) and Shim et al. (2008). The
relationship mentioned above is tested with the help of the following hypothesis:

H3. Investment satisfaction act as the mediating variable between behavioural biases
and reinvestment intention.
Conceptual model Sub-optimal
A conceptual model describing the relationships mentioned above is formulated (Figure 1), behavioural
along with the set of empirically testable hypotheses.
biases
Data, sample and methodology
Sampling
People in India, using real estate as an investment vehicle, are the target population for the 335
study. People who have invested in real estate to earn profit from it (i.e. buying a flat in an
apartment or building floors to rent) served as a sampling unit for the survey. People with
investment after 2008 were eligible for inclusion in the survey (although there was little
effect of the 2007-2008 financial crisis on the Indian real estate market, still to counter that).
In India, there is no source from where data about people who are investing in real estate can
be directly obtained. So, no sampling frame was available for the target population. Data
were collected using Multistage (three stages) stratified sampling. “Stratified samples are
samples within samples” where each stratum is “fairly homogeneous” (Patton, 1990, p. 174).
The first stage of stratification was done based on regions. The country was stratified by
four regions as in Table I (Division was same as it was used in census 2001). The sample
was collected from Calcutta (East and North-Eastern Region), Delhi (North and Central
Region), Hyderabad (Southern Region) and Mumbai (Western Region). These particular
cities share a more considerable amount of alternative investment in their particular regions
(RBI/NCAER Household Survey, 2011). At the second stage, each region was classified into
two locations (Table I). According to concepts of differential and absolute rent (Alonso,
1964), the location of the property and facilities provided there plays a vital role in deciding
the income the property will generate. According to Brueggeman and Fisher (2006) and
Dutta (2012), location plays an essential role in the pattern of real estate investment.
Information about urban and suburban areas of particular cities was collected from their

Figure 1.
Conceptual model

Stage Units Unit no. and names

First Region Four regions – North and central India, East and north-east India, Southern
India and Western India Table I.
Second Location Two types – Urban, and Suburban Three levels of
Third Property Type Two types – Apartments, and Rented Houses stratification
IJHMA respective urban development authorities. At the third stage, each location was further
12,2 stratified by two property types, that is, Apartments and Rented houses, as it was done in
the study by Levinson and Niemann (2004). Apartments and Rented houses differ in rent,
which is determined by standards of amenities, services and external factors (Sirmans et al.
1989).
At the lowest level of stratification, data were collected using purposive and snowball
336 sampling methods. The logic and power of purposeful sampling lie in selecting information-
rich cases for study in depth (Patton, 1990, p. 169). With a sample size >30 normal
distribution can be used as the approximation to the sampling distribution (Richard and
Rubin, 2002, p. 319), so the study used 35 (keeping some adjustment for the missing data) as
the sample size at the lowest level of data collection, a total sample size of 560 was used in
the study (Table II). Research done in the same type of field have used sample sizes of Shim
et al. (2008, p. 147), Waweru et al. (2014, p. 155) and Ngoc (2013, p. 188).

Design of measurements and questionnaire

Data were collected using structured and a close-ended questionnaire containing three
constructs – behavioural biases, investment satisfaction and reinvestment intention –
measured on 1 to 5 item Likert scale with 5 indicating “higher degree of agreement” and 1
indicating “lowest degree of agreement”. Questionnaires were self-administered.

Levels of stratification Sample size

North and central India

Urban
Apartments 35
Rented houses 35
Suburban
Apartments 35
Rented houses 35
East and north-east India
Urban
Apartments 35
Rented houses 35
Suburban
Apartments 35
Rented houses 35
Southern India
Urban
Apartments 35
Rented houses 35
Suburban
Apartments 35
Rented houses 35
Western India
Urban
Apartments 35
Rented houses 35
Suburban
Table II. Apartments 35
Sample size Rented houses 35
Measures for behavioural biases of real estate investors were adopted from Pandey and Sub-optimal
Jessica (2018), as the study talks about behavioural biases affecting the Indian real estate behavioural
investors decision. Five item scale, four of which belong to heuristics (anchoring – 2,
representativeness – 1 and availability bias – 1) and one belong to prospect theory (regret
biases
aversion) was used to measure the behavioural attitude of real estate investors.
Measures for investment satisfaction and reinvestment intention were adopted with
suitable modifications from Shim et al. (2008). The study considers three variants of the
satisfaction: satisfaction with the events that occur during investment, satisfaction with the
337
outcome and satisfaction with the level of satisfaction received (Oliver, 2014, p. 7). Table III
describes the constructs, items and the item acronyms used in the study.

Pilot study
Data for the pilot study were collected from two cities of India (Hyderabad and Bengaluru)
with the help of a structured questionnaire through online and offline mode. A sample of 167
respondents participated in the study, after adjusting for the missing data final sample came
out to be 145. Because of the small sample size, PLS-SEM was used for preliminary validation
of the questionnaire. All the items loaded with significant loadings, that is, >0.6 (there was no
improvement in composite reliability by deleting the indicators) (Hair et al.2013, p. 113).
Table IV shows the results of construct reliability and validity for the pilot sample. Tests
for internal consistency reliability, that is, Cronbach’s alpha and composite reliability values
were more than 0.7, which is desired (Hair et al. 2006, p. 102). The construct validity measure
(AVE value) for investment satisfaction construct came out to on a slightly lower side, that
is, <0.5, (Hair et al. 2006, p. 103), but as other measures were satisfied and AVE being
stricter (Fornell and Larcker, 1981), the research proceeded forward.
Table V is showing the result for discriminant validity using Fornell–Larcker criterion.
As the AVE values are larger than the highest correlation with any other construct, it can be
said that constructs are truly distinct from each other (Hair et al. 2006, p. 104).

Sample characteristics
SPSS 20 was used to find out the sample characteristics. After adjusting for missing data, the
sample was reduced to 543 from 560. There were three univariate outliers (Z score > 6 3.29).

Constructs Items Item acronyms

Behavioural biases (BF) Past performance as an indicator of future BF1

Investment satisfaction (S)
Reinvestment intention (R)
performance (Representativeness)
Setting the value of the property based on the recent BF2
selling/buying price (Anchoring)
Avoiding selling property that has decreased in BF3
value (Regret aversion)
Preference of local property (Availability bias) BF4
Using the property purchase price as a reference BF5
point in trading (Anchoring)
Return rate meeting expectations S1
Return rate higher than average market return rate S2
Experience of real estate investment S3
Desirability to reinvest R1
Intention to reallocate part of asset into real estate R2 Table III.
investment Items and their
Recommend others to invest in real estate R3 notations
IJHMA All three outliers were removed, so the sample size after this was 540. There were no
12,2 multivariate outliers as all Mahalanobis distances were below the critical score 31.26 (11 df and
p < 0.001). Subscale for behavioural biases has been already checked for normality in the
previous section. Subscales for investment satisfaction and reinvestment intention are
approximately normally distributed with skewness 0.029 (S.E. = 0.105) and kurtosis 0.492
(S.E. = 0.210); skewness 0.188 (S.E. = 0.105) and kurtosis 0.688 (S.E. = 0.210) (Cramer and
338 Howitt, 2004; Doane and Seward, 2011). Skewness and kurtosis statistic divided by their
standard error is between z score 6 3.29 (p < 0.001, two-tailed test) (Tabachnick and Fidell,
2007). There were no cases of singularity and multicollinearity as all variables have SMC
(1 – Tolerance) closer to 0.00 (Tabachnick and Fidell, 2007).

Methodology
The proposed hypotheses were tested by using structural equation modelling (SEM) with
the help of Amos 20.0 software. The research model used in the study has three constructs
with multiple items; hence, before testing for the hypotheses, the instrument validation was
done by measuring the construct validity and reliability using Cronbach’s alpha,
exploratory factor analysis (EFA) and confirmatory factor analysis (CFA).

Data analysis results

The demographic profile of the 543 respondents, regarding their age, gender, qualification,
occupation and working experience is given in Table VI.
Most of the real estate investors have established (11-20 years of working experience)
and upcoming (31-50 years age groups) careers. So it can be inferred that people with
established and upcoming careers are potential real estate investors in India. Only 18 per
cent of total real estate investors are women; it shows the bitter reality of emerging
economies, where still women lag far behind men as far as asset ownership, control and
investment are considered (Madhura Swaminathan, 2013)[2]. As far as developed countries
like Australia is considered women possess about 47 per cent of all investment properties[3].

Instrument validation
Instrument validation was done using SPSS20 and AMOS 20 software. Construct validity
was checked by testing for: face validity, convergent validity and discriminant validity
(Hair et al. 2006). As the items used for measuring the constructs were borrowed from

Constructs Cronbach’s alpha rho_A Composite reliability Average Variance Extracted (AVE)
Table IV.
Construct reliability BF 0.91 0.92 0.91 0.67
and validity for pilot R 0.89 0.90 0.89 0.74
sample S 0.74 0.76 0.73 0.49

Constructs BF R S
Table V. BF 0.82
Discriminant validity R 0.48 0.86
for the pilot sample S 0.70 0.49 0.70
S. no. Category Respondents (No.) (%)
Sub-optimal
behavioural
1 Age biases
<30 years 34 6.26
31-40 years 275 50.64
41-50 years 146 26.89
50-60 years 53 9.76
>60 years 35 6.45 339
2 Gender
Male 445 81.95
Female 98 18.05
3 Qualification
No formal education 23 4.24
Up to secondary education 34 6.26
Intermediate 57 10.5
Graduate 297 54.7
Post Graduate and above 132 24.31
4 Occupation
Student 17 3.13
Homemaker 20 3.68
Businessman 147 27.07
Private-employee 235 43.28
Government-employee 89 16.39
Retired-person 35 6.45
5 Working Experience
< 5 years 37 6.81
5-10 years 78 14.36
11-20 years 326 60.04 Table VI.
>20 years 79 14.55 Demographic profile
No working experiences 23 4.24 of the sample

existing literature in the area, it satisfies the face validity criteria. Convergent validity was
tested with the help of both EFA and CFA.
With the Kaiser–Meyer–Olkin (KMO) value of 0.829, it can be said that data support
factor analysis, significant Bartlett’s Test of Sphericity shows that the correlation matrix
here is not identity matrix, which is required for factor analysis to be suitable (Hair et al.
2006; Tabachnick and Fidell, 2007) (Table VII). The extraction method used in EFA was
principal axis factoring (PAF), reason is the purpose of the study is to study the latent
structure of the set of variables, for which PAF is the appropriate extraction method
(Conway and Huffcutt, 2003; Treiblmaier and Filzmoser, 2010; Reio and Shuck, 2015).
Oblique rotation (Promax) was used, as it can be seen from factor correlation matrix
(Table VIII) that correlations between factors exceed 0.32, witnessing 10 per cent or more
overlap in variance among factors, which warrants oblique rotation (Conway and Huffcutt,
2003; Reio and Shuck, 2015). Moreover, factor correlation (Table VIII) are well within the

Kaiser-Meyer-Olkin measure of sampling adequacy. 0.828

Bartlett’s test of sphericity
Approx. Chi-square 1528.397 Table VII.
Df 55 KMO and Bartlett’s
Sig. 0.000 test result
IJHMA desirable limit, that is, # 0.7. The EFA results are shown in Table IX; all the items loadings
12,2 were more than 0.5 on their respective constructs and the cumulative variance explained by
three constructs together was 58.65 per cent indicating good convergent validity.
CFA was used to confirm the convergent validity (Table X) and test the discriminant
validity (Table X). For the model, the parsimonious fit index was achieved, as the value of
ChiSq/df for x 2 (41) = 93.180 is 2.273, which is less than 4 (Marsh and Hocevar, 1985).
340 Absolute Fit Index values, that is, Goodness of Fit Index (GFI) = 0.97 (>0.95), Adjusted
Goodness of Fit Index (AGFI) = 0.951 (>0.90), Root Mean Square Residual (RMR/RMSR) =
0.036 (<0.05), meet the criteria of Excellent fit (Joreskog and Sorbom, 1984; Tanaka and
Huba, 1985). Incremental Fit Index values, that is, Comparative Fit Index (CFI) = 0.965
(>0.90), Normed Fit Index (NFI) = 0.940 (>0.90), Tucker Lewis Index (TLI) = 0.953 (>0.90),
Incremental Fit Index (IFI) = 0.965 (>0.90) meet the criteria for good fit (Bentler, 1990;
Bentler and Bonett, 1980; Bollen, 1989). Parsimonious Fit Index value, that is, Root Mean
Square Error of Approximation (RMSEA) 0.049 (<0.08) is good (Browne and Cudeck, 1993;
MacCallum and Austin, 2000).
Factor loadings of the measurement items on their respective construct an average value
extracted (AVE) were used as the measures for convergent validity. All items have
significant factor loadings (> 0.5) (Fornell and Larcker, 1981). According to Fornell and
Larcker (1981), construct validity (AVE) less than 0.5 is questionable. It can be seen from
Table X that, out of the three constructs behavioural biases construct does not satisfy this
criterion. Fornell and Larcker (1981) describe AVE as a more conservative measure, they
further suggest that “from convergent reliability alone, the researcher may conclude that
convergent validity of the construct is adequate”. Discriminant validity of the constructs
was established by comparing the AVE and the squared inter-construct correlations, shown
in Table XI. It can be seen from the table that the AVEs are more than the squared inter-

Factor 1 2 3
Table VIII. 1 1.000 0.415 0.550
Factor correlation 2 0.415 1.000 0.514
matrix 3 0.550 0.514 1.000

Construct Item Factor loading Variance explained

Behavioural biases (BF) BF1 0.666 58.65%

BF2 0.522
BF3 0.581
BF4 0.606
BF5 0.538
Investment satisfaction (S) S1 0.754
S2 0.743
S3 0.605
Reinvestment intention (R) R1 0.785
Table IX. R2 0.606
EFA Results R3 0.710
construct correlations, which is the desired condition for the discriminant validity according Sub-optimal
to Fornell and Larcker (1981). behavioural
Construct reliability was established by using Cronbach’s a and composite reliability.
Table X shows the composite reliability of all the three constructs which are more than the
biases
desired value, that is, 0.6 (Fornell and Larcker, 1981). Cronbach’s a values (Table X), for all
the factors, are above the cut off value, that is, 0.7 (Hair et al. 2006), and for none of the items,
the value for Cronbach’s alpha when item deleted have increased the construct’s Cronbach’s 341
alpha. Ferketich et al. (1991) recommended that corrected item-total correlations should
range between 0.30 and 0.70 for a good scale, in the study they are within the prescribed
limit (Table X).

Hypotheses testing results

Hypothesised model was analysed by using AMOS 20. Hypothesised model is graphically
represented in Figure 2. Both global (model fit and R-square) and local model fit criteria
(p-value) were checked.
Model fit criteria for the model was checked first. ChiSq/df for x 2(9) = 178.336 is 4.14 (<5),
which is an acceptable level (Wheaton, Muthen, Alwin, and Summers, 1977). Absolute Fit
Index values, that is, Goodness of Fit Index (GFI) = 0.95 ( 0.95), Adjusted Goodness of Fit
Index (AGFI) = 0.92 (>0.90) meet the criteria of a good fit (Joreskog and Sorbom, 1984;
Tanaka and Huba, 1985). Incremental Fit Index values, that is, Comparative Fit Index
(CFI) = 0.91 (>0.90), Incremental Fit Index (IFI) = 0.91 (>0.90) meet the criteria for good fit
(Bentler and Bonett, 1980; Bollen, 1989; Bentler, 1990). Parsimonious Fit Index value, that is,
Root Mean Square Error of Approximation (RMSEA) 0.076 (<0.08) is good (Browne and
Cudeck, 1993; MacCallum and Austin, 2000). R square values for H1 and H2 are 0.413 and
0.353 which are large according to (Wheaton et al. 1977).

Factor Corrected item-total Cronbach’s a if

Construct Item loadings correlation item deleted AVE CR Cronbach’s a

BF BF1 0.614 0.503 0.668 0.345 0.724 0.722

BF2 0.551 0.452 0.686
BF3 0.623 0.503 0.666
BF4 0.589 0.494 0.673
BF5 0.557 0.461 0.683
S S1 0.767 0.617 0.643 0.514 0.76 0.758
Table X.
S2 0.697 0.588 0.676
S3 0.685 0.56 0.709 Convergent validity
R R1 0.712 0.598 0.646 0.502 0.751 0.751 and composite
R2 0.705 0.559 0.69 reliability and
R3 0.708 0.58 0.667 Cronbach’s alpha

Constructs BF S R

BF 0.345
S 0.333 0.502 Table XI.
R 0.189 0.300 0.514 Discriminant validity
IJHMA The hypothesised model for the interrelationship between the constructs was checked using
12,2 SEM technique using AMOS 20. The hypothesised path used for H1 and H2 are shown in
Table XII. The result of the hypotheses testing is shown in Table XII.
Table XII shows that both the hypotheses are supported at a significance level of 0.001
level, which shows there exists a significant positive relationship between behavioural
biases and reinvestment intention and; behavioural biases and investment satisfaction.
342 H3 is “Investment satisfaction act as the mediating variable between behavioural biases
and reinvestment intention”. The three conditions for proceeding with mediating effect as
given by (Baron and Kenny, 1986) are:
(1) There should be a significant relationship between the independent variable
(behavioural biases) and mediating variable (investment satisfaction) (see H2,
Table XII).
(2) There should be a significant relationship between the independent variable
(behavioural biases) and the dependent variable (reinvestment intention) (see H1,
Table XII).
(3) The direct effect of the independent variable (behavioural biases) on the dependent
variable (reinvestment intention) will either become insignificant or will shrink
because of the presence of a mediator (Figure 2 and Table XIII).

Further, the significance of the indirect path was checked by Sobel’s test. Z statistic for
Sobel’s test came out to be 5.1059. It is significant at 0.01 level of significance. After using
bootstrap, it was found that the standardised indirect (mediated) effect of behavioural biases
on reinvestment intention is significantly different from zero at the 0.001 level (p = 0.001
two-tailed). As the indirect path is significant, so it can be said that there is mediation (Zhao
et al. 2010, p. 82). From the Table XIII, it can be seen that both paths- direct and indirect are
significant and direction is also the same, so it can be inferred that there is significant and
complementary partial mediation.

Figure 2.
Hypothesised model

Result – Hypothesis
Hypothesis no. Hypothesised path Estimate SE CR p-values supported?

H1 Behavioural biases ! 0.359 0.04 8.932 *** Yes at 0.001 level of sig.
Reinvestment intension
H2 Behavioural biases ! 0.434 0.036 11.97 *** Yes at 0.001 level of sig.
Table XII. Investment satisfaction
Hypothesis testing
results Note: ***Significant at 0.1 percent level
Discussion Sub-optimal
The turmoil caused to the real estate market because of the subprime crisis shows the limitations behavioural
of monetary and fiscal policy measures to tackle this market. After crisis literature documents the
inability of traditional finance theories in describing the movement of real estate market prices, it
biases
casts reasonable doubt on their capabilities and paves the way for an explanation of such
anomalies by using principles of behavioural finance and evolutionary psychology. The study
believes that biases are not at all times bad; sometimes, biases can assist the individual investor
to select the top course of action from the numerous possibilities and allow them to go for the less
343
costly mistakes, thereby helping in achieving satisficing behaviour. The study confirms that
behavioural biases influence investment decisions in the Property market.
Further, investment satisfaction is found to have a significant and complementary
partial mediating effect. The adoption of the hypotheses mentioned above shows that
because of costly optimisation and limited ability to process the information, the investors
resort to biases while making decisions which serve as a saving face against their innate
weaknesses. The positive mediating effect of investment satisfaction between behavioural
biases and reinvestment shows that biases are “natural tendencies” (Montier, 2002) in
response to “limit to learning” (Sahi et al. 2013) which can be explained by evolutionary
psychology (Lo, 2004). The results go by Jordan (2014); Bakar and Yi (2016) and Sahi (2017).
Adaptive market hypothesis (AMH), which derives its root from evolutionary psychology,
explains the positive effect of otherwise ruinous biases on investment satisfaction and
reinvestment intention as a result of evolutionary forces which is to enhance the survival
probability. Survival here refers to resorting with a minimally acceptable solution, that is,
satisficing in the words of (Simon, 1955). While commenting on such relationships, the study
cautions that the problem may arise when biases are applied beyond their range, which may
lead to error in judgement as mentioned by (Olsen, 1998). To minimise the error, one should
always keep in mind “margin of safety - never overpaying, no matter how exciting an
investment seems to be” (Graham et al. 2006, p. viii).

Implications
The study extends the current knowledge base about the relationship between behavioural
biases, investment satisfaction and reinvestment intention. This study investigates the
behavioural biases influencing the real estate market investment decisions of non-
professional investors, which it considers more insightful as they are more prone to
exhibiting behavioural biases because of their limited knowledge base and resources.
Understanding such relationships will help in better clarity about the way investment is
made. The study confirms that market behaviour in real estate market is sub-optimal, which
shows that there is an opportunity for attentive investors by trading and gathering on
information, as rightly mentioned by Warren buffet in Graham et al. (2006, p. ix). Real estate

Hypothesised path Estimate SE CR p-values

Behavioural biases ! Investment satisfaction 0.434 0.036 12.038 ***

Investment satisfaction ! Reinvestment intention 0.472 0.077 6.153 ***
Behavioural biases ! Reinvestment intension 0.150 0.049 3.035 0.002 hypothesis
accepted at 0.01
level Table XIII.
Result for mediating
Note: ***Significant at 0.1 percent level effect
IJHMA practitioners can get clues from market anomalies and investor phenomena, understanding
12,2 these may suggest ways to use them in the market, e.g. one need to cater investors with good
enough solutions which can satisfy them instead of wasting time and money for an optimal
solution; positive property attributes can easily lure investors. The contribution is made to
the lacking research on real estate market dynamics in emerging countries like India.
Reforms in the housing sector do not only satisfy one of the basic needs but also leads to
344 holistic economic development. Besides direct contribution, it contributes to social capital.

Limitations and suggestions for future research

The sample used in the study is from an emerging economy, that is, India. The validity of the
results obtained in other economies (e.g. developed economies) needs further analyses. The
result obtained here confirms the effect of evolutionary psychology on behavioural biases
and decision-making; the area of concern arises from two facets of evolutionary psychology
as discussed by (Olsen, 1998): these are often formed during decision process and are
adaptive. These facets pose questions like there are chances that the result obtained here is
because of myopic decision-making behaviour in which the long-time horizon is not
considered, and it being adaptive may change in the long-time horizon, which seeks further
investigations. Although exploring the relationship between behavioural biases and
investment satisfaction is important, finding the factors that determine financial satisfaction
can be expanded beyond the testing of purely psychological factors. Grable (2000) and Joo
and Grable (2004) have examined demographic, socioeconomic and attitudinal characteristics
that may be used as the determinants for financial success. The study talked about the
relationship between behavioural biases, investment satisfaction and reinvestment intention.
It will be interesting to bring some more constructs in this model, for example, investment
intention; reinvestment behaviour; it can deliver a more precise picture in this regard. This
study offers further insights into investor behaviour which can be used in future research.

Notes
1. Available at: www.ibef.org/industry/real-estate-india.aspx
2. Available at: www.mospi.gov.in/sites/default/files/reports_and_publication/technical_paper/
Them_paper_Gender.pdf
3. Australian Taxation Office (ATO), 2017.

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Corresponding author
Richa Pandey can be contacted at: richa31.cimp@gmail.com

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