behavioural bises in fdm project

“BEHAVIOURAL BIASES IN

FINANCIAL DECISION MAKING”

NAME : POOJA GUPTA

REGISTRATION NO. : 201202417

NAME: POOJA GUPTA

REGISTRATION NO.: 201202417

SYMBIOSIS CENTRE OF DISTANCE

LEARNING

ACADEMIC YEAR: 2012-2014

1

DECLARATION

This is to declare that I, Pooja Gupta, have carried out this project work myself in partial

fulfilment of the Post-Graduation Diploma in Business Administration Program (Finance

Management) of SCDL.

The work is original, has not been copied from anywhere else and not been submitted to any

other University/Institute for an award of any degree/diploma.

Date : Signature :

Place : Delhi Name :Pooja Gupta

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CHAPTERISATIONS.No

.

Chapters Page No.

1. Introduction

2. Objective

3. Hypothesis

4. Research and Methodology

5. Analysis

6. Conclusion

7. Limitations of Study

8. Annexure

Bibliography

Questionnaire

List of Figures

List of Charts

List of Tables

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BEHAVIOURAL

BIASES IN

FINANCIAL

DECISION

MAKING

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CHAPTER-1

INTRODUCTION

5

INTRODUCTION

NEED & RATIONALE:-

The purpose of this study is to research Behavioural biases in financial decision making. How

different behavioural biases affect the investor’s financial decision making. With all the

studies done in this area, research findings have shown the following characteristics.

Rational decision making is coupled with a structured or reasonable thought process. The

choice to decide rationally can help the decision maker by making the knowledge involved

choice open and specific. The theory of rational choice starts with considering a set of

alternatives faced by the decision maker. Most analysts only consider a restricted set of

alternatives that contain the important or interesting difference among the alternatives. Mostly,

this is necessary because the full range of possible actions exceeds comprehension. Sanglier,

Metal (1994) show that if different investors receive the same information they will have their

own interpretation of this information. These various interpretations will lead to different

perception of the signals and therefore create differentiated behaviours. The established

various behaviours will influence the financial markets through the decision making of these

investors. Because they interpret the received information on their own way, each investor will

make another decision. Therefore behavioural factors are important in financial markets

because they influence the investors who make the financial decisions. In fact, according to

Spaniol and Bayen (2005), cognitive skills of investors are an additional constraint that

optimizes individuals’ financial decision making. Tversky and Kahneman (1981) find

experimental evidence on financial decision making under uncertainty that shows that people

do not behave as in traditional models. Because investors do not always behave as descripted

in traditional models there are many behavioral phenomena that influence the financial

markets. Kahneman and Tversky (1979) give a critique of expected utility theory as a

descriptive model of decision making under risk and develop an alternative model, which they

call prospect theory.

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Our study has Nine constructs, those are:-

1. PROSPECT THEORY

2. OVERCONFIDENCE

3. DISPOSITION EFFECT

4. NARROW FRAMING

5. HEURISTICS

6. REGRET AVERSION

7. COGNITIVE DISSONANCE

8. ANCHORING

9. MENTAL ACCOUNTING

1. PROSPECT THEORY

The prospect theory state that people make decisions based on the potential value of

losses and gains rather than the final outcome. Prospect theory is a behavioral economic

theory that describes decisions between various alternatives that involve risk. Their theory

says that people make decisions based on the potential value of losses and gains rather

than the final outcome and therefore will base decisions on perceived gains rather than

perceived losses.

2. OVERCONFIDENCE

Overconfidence is a second behavioural phenomenon. In the model of Daniel,

Hirshleifer and Subrahmanyam (2001), investors who are overconfident overrate signal

precision and overreact to private signals about payoffs of economic factors.

Consequently, mispricing of factor payoffs arise and all securities which cash flows are

provided from these factors. Therefore, mispricing occurs from investors’

misinterpretation of information about factor cash flow and reflects overreaction to cash

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flow news about fundamental factors. Daniel et al. (1998) state individuals exaggerated to

private signals when they are overconfident about those signals. If individuals correct their

confidence over time then their overreaction to private signals becomes more important

before changing. In this way there is a long-run overreaction and correction.

3. DISPOSITION EFFECT

Another important behavioral phenomenon is disposition effect. According to

Henderson (2012) there are various studies about the disposition effect that state investors

are unwilling to sell assets at a loss comparing to the price at which they purchase this

asset. Disposition effect is the tendency of an investor to sell winners too early and hold

losers too long. The study of Ammann, Ising and Kessler (2012) conclude that managers

who have a lower disposition effect invest more in larger equities with a higher trade

volume, a higher past performance and a higher risk-adjusted performance. However, the

economic environment and fund characteristics only account for a part amount of the

diversification in the disposition effect across mutual funds.

4. NARROW FRAMING

According to Bailey et al. (2011) narrow framing is the propensity of an investor to

select investments individually, instead of considering the broad impact on her portfolio.

Barberis and Huang (2004) state that narrow framing stand for the utility people receive

direct from the outcome of a specific option and not indirect through the contribution of

options to his total wealth. In this way people receive utility from the gamble’s result

instead of what would be justified by a concern for their overall wealth risk.

5. HEURISTICS

Heuristics stands for the tendency that individuals make judgments quickly. Heuristics

are strategies used to access complex problems and limit the explaining information.

Investors tend to make rules of thumb in order to process the information so that they can

make investment decisions. It is possible that investors have evaluated the information

objectively, but is difficult to ignore the emotional and cognitive errors involved in each

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step taken by the investor. It may lead to desired decisions, but most of the time it result in

unfavorable and poor decision outcomes.

6. REGRET AVERSION

Regret is the negative feeling which occurs after a bad choice. In investment context is

refers to the investor’s reaction at making a mistake. They joy of satisfaction and the pain

of regret is relevant to understand the behavioral impact on investment decisions. Because

people want to be satisfied and ward off regret they will realize profits and retard losses.

Investors are not allowed to admit their mistakes and feel regret because if they do, they

tend to avoid selling the stocks which decreased in value and sell the stocks they have

increased in value promptly. Zeelenberg, Beattie and de Vries (1996) state that regret

theory is an action-based theory. The utility of a choice option depends on the feelings

generated by the results of rejected options.

7. COGNITIVE DISSONANCE

Cognitive dissonance refers to the conflict caused by holding conflicting cognitions

simultaneously. This concept was introduced by the psychologist Festinger (1956).

Because the experience of dissonance is unpleasant, the person will strive to reduce it by

changing their beliefs. Later research shows that when people are confronted with new

information, they want to keep their current understanding of the world and reject or avoid

the new information. Or they convince themselves that there is no conflict at all. Cognitive

dissonance is considered as an explanation for attitude change, it is the mental conflict

investors have to deal with when they realize they made a mistake. Investors do not want

to change their decisions, so they persuade themselves that they made a rational decision.

8. ANCHORING

When investors need to make a decisions they often fail to do enough research because

there is just too much data to collect and analyses. Instead they proceed based on a single

figure or fact, while ignoring the important information. This irrational behavior is called

anchoring. Hoguet (2005) shows that when investors need to define a quantum investors

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will ‘anchor’ on the most recent information available. Therefore investors tend to under

react to new information. Sewell (2007) state that when a relevant value (an anchor) is

available, people make expectations by beginning from an initial value (an anchor), that is

adjusted to yield the final answer. It is possible that the anchor is proposed by the

formulation of the problem, or it can be the outcome of a specific computation. In both

ways adjustments are insufficient.

9. MENTAL ACCOUNTING

Thaler (1990) introduced the notion of mental accounting. In 1999 he notes that mental

accounting includes three components. The firs component of mental accounting consists

of how results are received and experienced, and after that how decisions are made and

then evaluated. The second part allocates the activities to specific accounts. It follows the

inflow and outflow of funds from the specific activities. The third component is about the

frequency with which account is evaluated. This can be daily, weekly, monthly or on

yearly basis. Every component of mental accounting reduces the economic principle of

substitutability. Consequence is that decision choices are influenced

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OBJECTIVES:-

To study the perception of respondents on Behavioral biases in financial decision making.

To study the relationship between different behavioral biases in financial decision making.

To study the differences in demographic variables pertaining to Behavioral biases in

financial decision making.

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HYPOTHESIS

H1

a) There exists a difference for confidence behavioral bias between male and female.

b) There exists a difference for prospect behavioural bias between male and female.

c) There exists a difference for mental accounting behavioral bias between male and

female.

d) There exists a difference for framing behavioral bias between male and female.

e) There exists a difference for cognitive dissonance behavioural bias between male and

female.

f) There exists a difference for heuristics behavioral bias between male and female.

g) There exists a difference for disposition and anchoring behavioral bias between male and

female.

H2:

a) There exists a difference for types of decision making between male and female.

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CHAPTER-2

RESEARCH AND

METHODOLOGY

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RESEARCH DESIGN AND METHODOLOGY

METHODOLOGY

a) Methodology used for Data Collection

It is a systematic approach of identifying the problem, collecting the information,

analyzing the information and providing alternate suggestions. Three type of project

research can be distinguished. Some research is exploratory, i.e., to gather preliminary data

to shed light on the real nature of the problem and suggest possible hypothesis on new

ideas. Some are descriptive, to ascertain certain magnitudes.

1. Defining the problem and research objective:

The research objective state that what information is needed to solve the problem.

Here the First and the foremost objective of our project is to analyzing the Behavioural

biases in financial decision making

2. Developing research plan

The research is the fundamental research, pure/basic research that emphasis on

behavioural biases of investors in making financial decision making. It is a

DESCRIPTIVE NON-EXPERIMENTAL research. It is a quantitative research done

with the help of questionnaires. Descriptive in nature, hence conclusions can be drawn. It

is a single cross sectional design where there is only one sample of respondents and

information is obtained from them only. Around 102 investors would taken up. We have

used a SYSTEMATIC SAMPLING design. We have used LIKERT’S 5 POINT SCALE

that is Strongly disagree to Strongly agree. On the other hand, the data is to be collected

by mailing the questionnaire to the prospective sample that is the investors who invest in

different sectors of investment.

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Defining the problem and

research objective

Developing research plan

Collection and Sources of Data

Sampling Plan

Analyze the collected information

Report research finding

Figure No-1: Methodology used for Data Collection

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3. Collection and Sources of Data:

To collect the data, relevant information is necessary as regards to the project; as a

result data was collected by using two ways:

Figure No-2: Sources of Data

Primary Data

In this the information is being possessed with first hand information, which is

new and fresh. The tools used by me for the primary data are as follow :

Questionnaire

Face-to-Face Interview

Observation

Secondary data

The information that is received with the help of Journals, Magazines, Books

etc.

References used from management books

Gathered information through World Wide Web (www).

Support and knowledge provided by Faculty and Company guide.

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SECONDARY DATA

PRIMARY DATA

4. Sampling Plan

We have used a SYSTEMATIC SAMPLING design.

Sampling unit: The prospective sample is Investor who invests in different sectors.

Sampling size: A survey was conducted for 102 respondents.

5. Analyse the collected information:

This involves converting raw material in to useful information. It involves

tabulation of data and using statically measures on them for developing frequency

distribution and calculating the averages and dispersions

6. Report research finding

This phase will mark the culmination of the marketing research efforts. The report with

the research finding is a formal written document.

b. Methodology used for Data Analysis Tools used for data analysis are Bar Chart and Pie Chart. Software tool which is used in the project is

Ms Excel

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CHAPTER-3

ANALYSIS AND CONCLUSION

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ANALYSIS

OVERCONFIDENCE

Statements MEAN STANDARD

DEVIATION

Thinking hard and for a long time about something gives

me little satisfaction

3.2647 0.9842

I trust my initial feelings about people 3.5294 0.9408

I prefer to do something that challenges my thinking

abilities rather than something that requires little thought

3.5098 0.9723

I believe in trusting my hunches 3.4705 0.8640

I prefer complex to simple problems 3.4803 0.9198

I try to avoid situations that require thinking in depth

about something

3.5588 0.9603

When it comes to trusting people, I can usually rely on

my "gut feelings"

3.5980 0.9570

My initial impressions of people are almost always right 3.5294 0.9303

I don't like to have to do a lot of thinking 3.5294 0.9303

I can usually feel when a person is right or wrong even if I

can't explain how I know

3.7254 0.9244

TABLE 1 :

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INTERPRETATION:

The analysis of table 1 shows the perception of respondents towards their own gut feelings,

confidence and their instincts. Most of the respondents, Trust their initial feeling about

people(Mean =3.5294 & Standard deviation= 0.9480), They are confident about their “Gut

Feeling” and “Hunches” (Mean =3.4705 & Standard deviation= 0.8640), They can usually feel

when person is right or wrong even if they cannot explain it(Mean =3.7254 & Standard

deviation= 0.9244), and They avoid situations which require depth thinking as it gives little

satisfaction to them(Mean =3.2647 & Standard deviation= 0.9842),. This shows the

overconfidence bias in the respondents Overconfidence refers to the habit of overestimating

own ability to perform in given tasks. People tend to be overconfident about own capabilities

and level of knowledge. Overconfidence has several forms, such as .better than

average., .optimism bias. and .setting too narrow confidence limits.

EXCESSIVE OPTIMISM/ OVERCONFIDENCE BIAS


DEVIATION

I am better than average drivers 3.8431 0.9924

I am a average driver 3.3235 1.0451

I am a below average driver 2.9117 1.1697

I think, I am an above average performer when it comes

to my job/collage

3.8627 0.7041

I have better athletic abilities in comparison to my peer

group age.

3.8137 0.7410

TABLE 2

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INTERPRETATION:

The above Table 2 shows whether overconfidence and excessive optimism exists in

respondents’ answers. For this few questions were asked in order to determine overconfidence

and excessive optimism. The respondents asked to categorize themselves into better than

average, average, and below average drivers. Most of the respondents replied that they are

better than average drivers with the Mean of 3.8431 and Standard Deviation 0.9924 while only

few respondents said they are worse or below average drivers, with the rest with Mean of

3.3235 & Standard Deviation of 1.0451 stating that they are average drivers. The another

question asked whether the respondents thinks he/she is an above average performer when it

comes to his/her job/school related activities, most of the respondents said yes they have better

athletic abilities and are above average performers when it comes to their job/collage/peer

group age. The above analysis shows that investors are overconfident and excessive optimism.

This is called as ‘better-than-average’ effect where investors may believe that they have better

skills than average skills.

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MEASURE OVERCONFIDENCE BIAS BY PRESENTING A SCENARIO:-

YOU HAVE TO IMAGINE THAT YOU FAILED THE LAST TEST. YOU HAVE A

OPPORTUNITY TO REPLACE THE FAILING GRADE FROM THE LAST EXAM WITH

WHATEVER YOU WOULD GET ON THE NEXT EXAM KNOWING THAT YOU

WOULD HAVE VERY LITTLE TIME FOR STUDY AND A SMALL CHANCE THAT

YOUR GRADE ON THE NEXT EXAM WOULD BE HIGER.


DEVIATION

I will pass the exam. 3.4803 2.8627

I will fail the exam. 1.1056 1.1435

TABLE 3

INTERPRETATION:

The above Table 3 measured overconfidence bias by presenting the scenario. Most of the

respondents said ‘Yes’ they will pass the exam with the higher mean 3.4803 & standard

deviation 2.8627 as compare to respondents with low mean and standard deviation who said

‘No’ they might fail the exam. Therefore we concluded that respondents do tend to exhibit

overconfidence, even in situations where realistically, they cannot expect to perform well.

Given a very small chance of success, 2/3 of the respondents still answered with a ‘Yes’,

showing a high degree of overconfidence.

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RESPONDET PERCEPTION:-


DEVIATION

It is easy for me to find a job at close to my current salary if I

lost my current one.

3.7450 0.8638

It is difficult for me to find a job at close to my current salary if

I lost my current one.

3.1960 1.0627

TABLE 4

INTERPRETATION:

In the above table 4, it is attempted to quantify the perception respondents have about how

easy it would be to find a job at close to their current salary if they lost their current one. Most

of the respondents are moderately agree with the perception of finding a job at close to their

current salary if they lost their current one. Respondents having mean 3.7450 & standard

deviation 0.8638 found easy to find a job at close to their current salary whereas respondents

having mean of 3.1960 and standard deviation of 1.0627 found difficult to find a job at close

to their current salary.

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TO SEE IF THERE IS A PROPENSITY TO BE EXCESSIVELY OPTIMISTTIC AND

OVERCONFIDENCE EXTENDS INTO THE FIELD OF PERSONAL INVESTMENT.


DEVIATION

Good advice is the reason for my best investment decision 3.8529 0.9687

Strong market/fortunate timing is the reason for my best

investment decision

3.9313 0.9976

My own skills and intelligence is the reason for my best

investment decision

4.0490 0.8129

My luck is the reason for my best investment decision 3.8921 0.9109

When I invest in a new stock issue, I expect my investment

will give sure gain of 50% of my investment

3.9607 0.8074

When I invest in a new stock issue, I expect 0.5 probability to

gain 100% and 0.5 probability to loose 100%

3.5490 1.0774

TABLE 5

INTERPRETATION:

In Table 3 an investment related question were asked to see if there is a propensity to be

excessively optimistic and overconfident extends into the field of personal investments. The

question looked for the general reason for the best investment decision of the respondent with

the following choices: good advice, strong market/ fortunate timing, own skill and

intelligence, and luck. Most of the respondents agree with the statement that their own skills

and intelligence is the reason for the best investment decision, which gets the higher mean of

4.0490 & lower standard deviation of 0.8129, whereas other with lower mean &

comparatively higher standard deviation feels their luck, good advice and strong market/

fortunate timing are the reasons for their best investment decision. This overconfidence bias is

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also called as Miscalibration which states that people rate their capabilities and their prospects

higher than those of their peers. People have a tendency to be overly confident about own

capabilities and level of knowledge.

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PROSPECT THEORY:-

SITUATION 1

YOU HAVE RS. 1000 AND YOU MUST PICK ONE OF THE FOLLOWING CHOICES.

CHOICE A: YOU HAVE A 50%CHANCES OF GAINING RS. 1000 AND A 50%

CHANCES OF GAINING RS. 0

CHOICES B: YOU HAVE A 100% CHANCES OF GAINING RS. 500


DEVIATION

I will choose, choice A 3.0588 1.3036

I will choose, choice B 3.3137 1.3569

TABLE 6

SITUATION 2

YOU HAVE RS. 2000 AND YOU MUST PICK ONE OF THE FOLLOWING

CHOICES.CHOICE A: YOU HAVE A 50% CHANCES OF LOSSING RS. 1000 AND 50%

CHANCES OF LOSSING RS. 0

CHOICE B: YOU HAVE A 100% CHANCES OF LOSSING RS. 500


DEVIATION

I will choose, choice A 3.5294 1.1406

I will choose, choice B 2.9313 1.2527

TABLE 7

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INTERPRETATION:

The analysis of table 7 reveals that, the majority of respondents are ‘Risk Averse’ in Situation

‘1’ and ‘Risk Seekers’ in Situation ‘2’. In above table, Mean of the Choice ‘A’ is 3.0588 with

a Standard Deviation of 1.3036, whereas Mean of Choice ‘B’ is 3.3137 with a Standard

Deviation of 1.3569 in Situation ‘1’. In Situation ‘2’ Mean of the Choice ‘A’ is 3.5294 with a

Standard Deviation of 1.1406, whereas Mean of Choice ‘B’ is 2.9313 with a Standard

Deviation of 1.2527. The results of this study showed that an overwhelming majority of

respondents has chosen ‘B’ for Situation ‘1’ and ‘A’ for Situation ‘2’. The implication is that

respondents are willing to settle for a reasonable level of gains even if they have a reasonable

chance of earning more in Situation ‘1’, but are willing to engage in risk seeking behaviours

where they can limit their losses in Situation ‘2’. This shows the Prospect theory behavioural

bias, which state that people make decisions based on the potential value of losses and gains

rather than the final outcome and thus will base decisions on perceived gains rather than

perceived losses. When a person is given two equal choices, one expressed in possible gains

and the other in possible losses, people will choice the first one.

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MENTAL ACCOUNTING:-

SITUATION 1

IMAGIN THAT YOU HAVE DECIDED TO WATCH A MOVIE WORTH Rs.250 PER

TICKET. AS YOU ENTER THE THEATER, YOU DISCOVER THAT YOU LOST YOUR

Rs. 250. WOULD YOU STILL PAY Rs. 250 FOR A TICKET TO MOVIE.


DEVIATION

Yes, I will still pay Rs. 250 for a ticket 3.7647 0.8807

No, I will not pay Rs. 250 for a ticket 2.9705 1.1120

TABLE 8

SITUATION 2

IMAGIN THAT YOU HAVE DECIDED TO WATCH A MOVIE AND HAVE PAID RS.250

FOR TICKET. AS YOU ENTER THE THEATER, YOU DISCOVER THAT YOU HAVE

LOST THE TICKET. THE SEAT WAS NOT MARKED AND THE TICKET CAN NOT BE

RECOVERED. WOULD YOU PAY RS. 250 FOR ANOTHER TICKET.


DEVIATION

Yes, I will still buy another ticket 3.1666 1.0998

No, I will not buy another ticket 3.5392 0.9509

TABLE 9

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INTERPRETATION:

The analysis of Table 1 n Table 2 shows how results are received and experienced, and after

that how decisions are made and then evaluated. Two situations were given where nothing is

really different between the questions. A certain amount of money (Rs 250) has been

irretrievably lost, and the only decision respondents have to make is whether or not the movie

experience is worth Rs 250 to them. Whether or not the Rs 250 was lost in the form of cash or

in the form of a movie ticket is truly irrelevant. In Situation ‘1’ most of the respondents said

‘Yes’ they would buy the tickets whereas in Situation ‘2’ only few of the respondents said

‘Yes’ still they would buy another ticket. The difference in the responses is due to Mental

Accounting. Mental accounting is one of the method people use to make decision making

manageable.

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DECISION MAKING PROCESS


DEVIATION

When I make decisions, I tend to rely on my intuition 3.9313 0.8236

I rarely make important decisions without consulting other

people

3.6666 0.9369

When I make a decision, it is more important for me to feel the

decision is right than to have a rational reason for it

3.8627 0.9753

I double check my information sources to be sure I have the

right facts before making decisions

3.9215 0.7131

I use the advice of other people in making my important

decisions

3.8039 1.0151

I put off making decisions because thinking about them makes

me uneasy

3.6960 1.0789

I make decisions in a logical and systematic way 3.9509 0.7882

When making decisions I do what feels natural at the moment 3.8039 0.9123

I generally make snap decisions 3.6372 0.9311

I like to have someone steer me in the right direction when I an

faced with important decisions

3.6960 0.9204

My decision making requires careful thought 3.7156 0.9160

When making a decision, I trust my inner feelings and

reactions

3.9215 0.7921

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When making a decision, I consider various options in terms of

a specified goal

3.7450 0.8864

I avoid making important decisions until the pressure is on 3.5882 0.9785

I often make impulsive decisions 3.6078 1.0355

When making decisions, I rely upon my instincts 3.7450 0.9614

I generally make decisions that feel right to me 3.9313 0.6488

I often need the assistance of other people when making

important decisions

3.8627 0.8088

I often make decisions on the spur of the moment 3.8921 0.6118

I postpone decision making whenever possible 3.7647 0.7730

I often put off making important decisions 3.6078 0.8692

If I have the support of others, it is easier for me to make

important decisions

3.8627 0.7317

I generally make important decisions at the last minute 3.6274 0.9001

I make quick decisions 3.8627 0.6299

TABLE 10

INTERPRETATION

The analysis of Table 10 shows different kinds of decision making styles. Some respondents

are intuitive in nature, few are consultative in nature, ethical, rational, impulsive, avoidance

etc. They act according to their Personal Information Factors: i.e. personal qualifications,

experiences, attitudes etc. Information Characteristics like information quality, quantity and

frequency Tasks and Process, standardized procedures or methods.

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NARROW FRAMING

SITUATION 1

IMAGIN THAT due to a factory closing 600 jobs were about to be lost. However, if

PROGRAM A : is adopted, 200 jobs will be saved.

PROGRAM B: is adopted, there is a 1/3 probability that 600 jobs will be saved and a 2/3

probability that none of the 600 jobs will be saved.


DEVIATION

I will choose, program A 3.5196 1.3839

I will choose, program B 2.7352 1.4887

TABLE 11

SITUATION 2

PROGRAM C: is adopted,400 people will lose their jobs.

PROGRAM D: is adopted, there is a 1/3 probability that nobody will lose their job and a 2/3

probability that 600 will lose their job.


DEVIATION

I will choose, program C 3.0686 1.4709

I will choose, program D 3.1274 1.4327

TABLE 12

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INTERPRETATION:

In table 11 &12, Though the problems are identical but framed in a different way which shows

that in Situation ‘1’, Most of the respondents have chosen program A, so they seems to be

“Risk Averse”. In situation ‘2’, Most of the respondents have chosen program D, and they

seems to be “Risk Seeking. Research shows that most people chose Program A in situation ‘1’

and ‘D’ in situation ‘2’, even though the two programs produce the same results. This result is

due to the framing bias. The framing bias is the tendency to consider risks about gains—

saving jobs–differently than risks pertaining to losses—losing jobs. Therefore it is encouraged

to frame decision questions in alternative ways in order to avoid this bias.

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HEURISTIC

SITUATION 1

Imagine that you were shown a picture of two people, person A and person B.

Person A is well-dressed, wearing a fancy watch, and has a briefcase in his hand.

Person B is wearing jeans and flip-flops, looks as if he just woke up, and is busy texting on

his cell phone.

Now predict who is more likely to show up on time for the local monthly donation meeting,

who would you choose?


DEVIATION

I will choose, person A 3.9313 0.8115

I will choose, person B 2.7647 1.2521

TABLE 13

INTERPRETATION:

The table 13 tells that most people have chosen person A, because based on past experiences

a part of the mental representation of person A is one that includes being on time for

meetings. Using the representativeness heuristic respondents were able to make a quick

decision with only a few pieces of available information. Being able to access past mental

representations is without a doubt advantageous, but by relying solely on the

representativeness heuristic to make decisions respondents sometimes sacrifice accuracy for

speed.

SITUATION 2

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A highly profitable software company is searching for its next CEO. They have narrowed

their search down to two candidates, one male and one female. This particular company has

never employed anyone but males in any of its leadership roles. Who would you predict they

will hire?


DEVIATION

Company will hire male CEO 4.0098 0.8616

Company will hire female CEO 2.7156 1.2135

TABLE 14

INTERPRETATION:

The above table14 shows the representativeness heuristic. Most of the respondent feels that

Company will hire male CEO which has mean of 4.0098 and standard deviation 0.8616.

Relying solely on the representativeness heuristic, this important decision will be influenced

by past experiences, and they are more inclined to select the male candidate. Limiting our

decisions to ones that fit with what our past experiences tell us something should look like

can stifle creativity and diversity. It is important to recognize that the representativeness

heuristic exists in all of us.

SITUATION 3


DEVIATION

There are more words that start with the letter ‘R’ 3.3235 1.1787

There are less words that start with the letter ‘R’ 3.1274 1.1575

There are more words that have 'r' as the third letter 3.6274 1.0892

There are less words that have 'r' as the third letter 3 1.0990

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TABLE 15

INTERPRETATION:

Few questions were asked in order to assess the extent to which respondents use familiarity to

make decisions. The first question asked if respondents were to select a random word from the

dictionary, would it be more probable they would have encountered a word that started with an

R compared to the 3rd letter in the word being the R. Most of us can recollect words that start

with an R faster than we can think about words that have R in the middle. Therefore, if most

respondents answered starts with R, then they would be making the mistake of recalling

familiar words. 48.57% of the total number of respondents answered that they would be more

probable to find a word that starts with R and 51.43% answered that R is the 3rd letter. The

statement “There are more words that have 'r' as the third letter” has higher Mean value which

is 3.6274 than the statement “There are more words that start with the letter ‘R’” with Mean

3.3235. Overall, the answers to this question showed that familiarity heuristic was not present

in investors.

36

Cognitive Dissonance


DEVIATION

If someone that you don't like does something nice for you, you

might reconcile that by convincing yourselves that she did the

nice thing just to make us feel guilty for not liking her.

4.1176 0.8359

If you know that smoking is bad, you might justify the fact that

you smoke by saying that, if smoking doesn't kill you,

something else will.

3.6666 0.9474

When I shop something, later on I regret my decision buying

that stuff.

3.3333 1.1717

TABLE 16

INTERPRETATION:

The above table 16 shows the Cognitive dissonance behavioral bias, which occurs when we

act in a way different from our beliefs. To deal with the uncomfortable feeling, we will either

change our actions to be in line with our beliefs or change our beliefs to match our actions.

Question were asked to respondents that “If someone that you don't like does something nice

for you, you might reconcile that by convincing yourselves that she did the nice thing just to

make us feel guilty for not liking her” or “if they know smoking is bad, they still might justify

the fact that they smoke by saying , if smoking doesn’t kill us something else will”, Most of

the respondents strongly agreed with these statements. This shows the cognitive dissonance in

investors. Cognitive dissonance is considered as an explanation for attitude change, it is the

mental conflict investors have to deal with when they realize they made a mistake. Investors

37

do not want to change their decisions, so they persuade themselves that they made a rational

decision.

DISPOSSITION EFFECT AND ANCHORING


DEVIATION

I sell my profitable shares too early 3.9117 0.8686

Only in some situations, I sell my profitable shares too early 3.6176 0.8792

I do not sell my profitable shares too early 3.2647 1.1162

Rarely, I sell my profitable shares too early 3.2843 1.0376

I keep holding my loser shares in excess. 3.8235 0.8834

I do not keep holding my loser shares in excess. 3.2647 1.1162

Rarely I keep holding my loser shares in excess. 3.3039 0.9625

TABLE 17

INTERPRETATION:

The above table 2 shows the perception of respondents to sell winners too early and hold

losers too long. Most of the respondents sell their profitable shares too early and keep on

holding their loser shares in excess as investors are unwilling to sell assets at a loss comparing

to the price at which they purchase the asset. This shows the disposition effect in investors.

Disposition effect is the tendency of an investor to sell winners too early and hold losers too

long. Most of the respondents agree with the statement that they sell profitable shares too early

which has mean 3.9117 and standard deviation 0.8686 and they keep on holding their losers

shares in excess which has mean 3.8325 and standard deviation is 0.8834.

38

1. a.) NULL HYPOTHESIS: There exists a difference for confidence bias between

male and female.

Group Statistics

GENDER N Mean Std. Deviation Std. Error Mean

@_OVERCONFIDENCE_BIASE__1.00 47 3.5243 .56001 .08169

2.00 55 3.6255 .29387 .03963

Independent Samples Test

Levene's Test for

Equality of

Variances

t-test for Equality of Means

F Sig. T DfSig. (2-

tailed)

Mean

Differen

ce

Std.

Error

Differen

ce

95% Confidence

Interval of the

Difference

Lower Upper

@_OVERCONFIDENC

E_BIASE__

Equal variances

assumed14.658 .000 -1.166 100 .246 -.10120 .08679 -.27339

-.0709

9

Equal variances not

assumed-1.115 67.035 .269 -.10120 .09079 -.28242

-.0800

2

TABLE 18

INTERPRETATION

For the purpose of testing hypothesis (1.a.), t-test for equality of variances has been applied.

Sig value of Levene’s test is0.00 (s=.000, p < 0.05), We can assume that the variance of two

groups are unequal. Therefore, the p-value is .269, we reject the null hypothesis. According to

39

the table, it can be seen that female respondents (m=3.6255) are more overconfident as

compared to male respondents (m=3.5243). This may be because female investors may believe

that they have better skills than average skills. They have the habit of overestimating own

ability to perform in given tasks. They tend to be overconfident about own capabilities and

level of knowledge. This study reveals that overconfidence bias impact on different level of

financial decision making.

1. b.) NULL HYPOTHESIS: There exists a difference for prospect theory bias between

male and female.

Group Statistics


PROSPECT_THEORY_BIASE1.00 47 3.0957 .47363 .06909

2.00 55 3.3045 .48518 .06542

40


Levene's

Test for

Equality of

Variances


F Sig. T Df

Sig.

(2-

tailed

)

Mean

Differenc

e

Std.

Error

Differenc

e

95%

Confidence

Interval of the

Difference

Lower Upper

PROSPECT_T

HEORY_BIAS

E

Equal variances

assumed

2.60710

7

.11

0

-

2.190100 .031 -.20880 .09533

-.3979

3

-.0196

7

Equal variances

not assumed

-

2.195

98.21

3.031 -.20880 .09515

-.3976

1

-.0199

9

TABLE 19

INTERPRETATION

For the purpose of testing hypothesis (1.b.), t-test for equality of variances has been applied.

Sig value of Levene’s test is 0.110 (s=.110, p < 0.05), We can assume that the variance of two

groups are equal. Therefore, the p-value is .031, we reject the null hypothesis. According to

the table, it can be seen that female respondents (m=3.3045) are more influenced by prospect

theory bias as compared to male respondents (m=3.0957). This may be because female

41

investors may make decisions based on the potential value of losses and gains rather than the

final outcome.

1. c.) NULL HYPOTHESIS: There exists a difference for mental accounting bias

between male and female.

Group Statistics


MENTAL_ACCOUNTING1.00 47 3.1702 .56652 .08263

2.00 55 3.5227 .40902 .05515

42


Levene's

Test for

Equality of

Variances


F Sig. T Df

Sig.

(2-

tailed)

Mean

Difference

Std. Error

Difference

95% Confidence

Interval of the

Difference

Lower Upper

MENTAL_AC

COUNTING

Equal variances

assumed2.125 .148

-

3.638100 .000 -.35251 .09690 -.54477 -.16026

Equal variances

not assumed

-

3.548

82.21

3.001 -.35251 .09935 -.55014 -.15488

Table 20

INTERPRETATION

The above table shows the testing hypothesis (1.c.), t-test for equality of variances has been

applied. Sig value of Levene’s test is .148 (s=.148, p < 0.05), Which means we can assume

that the variance of two groups are equal. Therefore, the p-value is .000. Therefore, we reject

the null hypothesis. It shows that there exists no difference for mental accounting bias between

male and female.

43

1. d.) NULL HYPOTHESIS: There exists a difference for narrow framing bias between

male and female.

Group Statistics


NARROW_FRAMING1.00 47 3.0266 .36577 .05335

2.00 55 3.1864 .46701 .06297

44


Levene's

Test for

Equality

of

Variances


F Sig. T Df

Sig.

(2-

tailed

)

Mean

Difference

Std. Error

Difference

95%

Confidence

Interval of the

Difference

Lower Upper

NARROW_FRAMI

NG

Equal

variances

assumed

5.48

1.021

-

1.899100 .060 -.15977 .08412

-.3266

5

-.0071

2

Equal

variances

not

assumed

-

1.936

99.29

1.056 -.15977 .08253

-.3235

3

-.0039

9

TABLE 21

INTERPRETATION

The above table shows the testing hypothesis (1.d.) i.e. t-test, for equality of variances has

been applied. Sig value of Levene’s test is .021 (s=.021, p < 0.05), Now, we can assume that

the variance of two groups are equal. Therefore, the p-value is .060. We reject the null 45

hypothesis. It shows that there exists no difference for narrow framing bias between male and

female.

1. e.) NULL HYPOTHESIS: There exists a difference for heuristics bias between male

and female.

Group Statistics


46

HEURISTIC1.00 47 3.1569 .43102 .06287

2.00 55 3.4455 .43685 .05890


Levene's

Test for

Equality of

Variances


F Sig. T DfSig. (2-

tailed)

Mean

Difference

Std. Error

Difference

95% Confidence

Interval of the

Difference

Lower Upper

HEURISTIC

Equal variances assumed 1.396 .240 -3.346 100 .001 -.28854 .08625 -.45965 -.11743

Equal variances not

assumed-3.349 97.926 .001 -.28854 .08615 -.45951 -.11757

TABLE 22

INTERPRETATION

The above table shows the analysis of testing hypothesis (1.e.) i.e. t-test, for equality of

variances has been applied. Sig value of Levene’s test is .240 (s=.240, p < 0.05). We can

assume that the variance of two groups are equal. Therefore, the p-value is .001. We reject the

47

null hypothesis. It shows that there exists no difference for narrow heuristic bias between male

and female.

1. f.) NULL HYPOTHESIS: There exists a difference for cognitive dissonance bias

between male and female

Group Statistics


48

Cognitive Dissonance1.00 47 3.6809 .73975 .10790

2.00 55 3.6945 .49269 .06643


Levene's Test

for Equality of

Variances


F Sig. T DfSig. (2-

tailed)

Mean

Difference

Std. Error

Difference

95% Confidence

Interval of the

Difference

Lower Upper

Cognitive

Dissonance

Equal variances

assumed6.597 .012 -.111 100 .921 -.01369 .12290 -.25753 -.23014

Equal variances not

assumed-.108 77.943 .914 -.01369 .12672 -.26597 -.23858

TABLE 23

INTERPRETATION

For the purpose of testing hypothesis (1.F.), t-test for equality of variances has been applied.



49

the table, it can be seen that female respondents (m=3.6945) are more influenced by prospect

theory bias as compared to male respondents (m=3.6809).

1. g.) NULL HYPOTHESIS: There exists a difference for disposition and anchoring

bias between male and female.

Group Statistics


50

DISPOSSITION_EFFECT_AND_

ANCHORING_

1.00 47 3.3739 .55692 .08124

2.00 55 3.6000 .56571 .07628


Levene's Test for

Equality of

Variances


F Sig. T DfSig. (2-

tailed)

Mean

Difference

Std. Error

Difference

95% Confidence

Interval of the

Difference

Lower Upper

DISPOSSITION_

EFFECT_AND_A

NCHORING_

Equal variances

assumed.329 .568 -2.027 100 .045 -.22614 .11157 -.44750 -.00478

Equal variances

not assumed-2.029 97.988 .045 -.22614 .11144 -.44728 -.00500

TABLE 23

INTERPRETATION

For the purpose of testing hypothesis (1.g.), t-test for equality of variances has been applied.



51

the table, it can be seen that male respondents (m=3.3739) are more influenced by disposition

effect and anchoring bias as compared to female respondents (m=3.3000). Male investor sell

winners too early and hold losers too long.

2 (a). NULL HYPOTHESIS: Their exists a difference for intuitive types of decision making

between male and female.

Group Statistics


52

INTUITIVE1.00 47 3.7819 .78991 .11522

2.00 55 3.9091 .45227 .06098


Levene's

Test for

Equality of

Variances


F Sig. T Df

Sig.

(2-

taile

d)

Mean

Differenc

e

Std.

Error

Differen

ce

95%

Confidence

Interval of the

Difference

Lower Upper

INTUITIVE

Equal variances

assumed7.920 .006 -1.106 100 .312 -.12718 .12523

-.3756

4

-.1212

9

Equal variances not

assumed-.976

70.69

5.333 -.12718 .13036

-.3871

4

-.1327

8

TABLE 25

INTERPRETATION

For the purpose of testing hypothesis (1.a.), t-test for equality of variances has been applied.

Sig value of Levene’s test is 0.006 (s=.006, p < 0.05), We can assume that the variance of two 53

groups are equal. Therefore, the p-value is .312, we reject the null hypothesis. It means there

exists no difference for intuitive decision making between male and female respondents.

2. (b). NULL HYPOTHESIS: Their exists a difference for consultative types of decision

making between male and female

54

Group Statistics


CONSULTATIVE1.00 47 3.7702 .69279 .10105

2.00 55 3.7855 .41607 .05610


Levene's

Test for

Equality of

Variances


F Sig. T DfSig. (2-

tailed)

Mean

Differenc

e

Std. Error

Differenc

e

95%

Confidence

Interval of the

Difference

Lower Upper

CONSULTATI

VE

Equal variances

assumed

6.77

3.011 -.137 100 .891 -.01524 .11136

-.2361

7

-.2056

9

Equal variances

not assumed-.132

72.8

33.895 -.01524 .11558

-.2456

1

-.2151

2

TABLE 26

INTERPRETATION

55

The above table shows testing hypothesis (1.b.), t-test for equality of variances has been

applied. Sig value of Levene’s test is 0.011 (s=.011, p < 0.05), We can assume that the

variance of two groups are equal. Therefore, the p-value is.891, we reject the null hypothesis.

It means there exists no relationship for consultative decision making between male and

female respondents. But we can see that female respondents (m=3.7702) are more consultative

in making decision as compare to male respondents (m=3.7855).

2 (C). NULL HYPOTHESIS: There exists a difference for ethical types of decision making

between male and female56

Group Statistics


ETHICAL1.00 47 3.8794 .68251 .09955

2.00 55 3.9273 .44763 .06036


Levene's

Test for

Equality of

Variances


F Sig. T Df

Sig.

(2-

tailed

)

Mean

Difference

Std. Error

Difference

95%

Confidence

Interval of the

Difference

Lower Upper

ETHICAL

Equal variances

assumed

10.12

0.002 -.424 100 .672 -.04784 .11280

-.2716

4-.17596

Equal variances

not assumed-.411

77.15

3.682 -.04784 .11642

-.2796

6-.18398

TABLE 27

57

INTERPRETATION

The above table shows testing hypothesis (1.C.), t-test for equality of variances has been



It means there exists no relationship for ethical decision making between male and female

respondents. But we can see that female respondents (m=3.7702) are more ethical in making

decision as compare to male respondents (m=3.7855).

58

2. (d). NULL HYPOTHESIS: There exists a difference for avoidance types of decision


Group Statistics


AVOIDANCE1.00 47 3.6064 .77974 .11374

2.00 55 3.7136 .56605 .07633


Levene's Test

for Equality of

Variances


F Sig. T dfSig. (2-

tailed)

Mean

Difference

Std. Error

Difference

95% Confidence

Interval of the

Difference

Lower Upper

AVOIDANCE

Equal variances

assumed3.718 .057 -.802 100 .424 -.10725 .13365 -.37242 -.15791

Equal variances not

assumed-.783 82.506 .456 -.10725 .13697 -.37971 -.16521

TABLE 28

59

INTERPRETATION

The above table shows testing hypothesis (1.d.), t-test for equality of variances has been



It means there exists no relationship for avoidance decision making between male and female

respondents.

60

2. (e). NULL HYPOTHESIS: There exists a difference for rational types of decision making

between male and female

Group Statistics


RATIONAL1.00 47 3.7801 .75590 .11026

2.00 55 3.8242 .47077 .06348


Levene's

Test for

Equality of

Variances


F Sig. T DfSig. (2-

tailed)

Mean

Differenc

e

Std. Error

Difference

95%

Confidence

Interval of the

Difference

Lower Upper

RATIONAL

Equal variances

assumed4.598 .034 -.359 100 .720 -.04410 .12286

-.2878

4

-.1996

4

Equal variances

not assumed-.347

74.56

9.730 -.04410 .12723

-.2975

7

-.2093

7

TABLE 28

61

INTERPRETATION

The above table shows testing hypothesis (1.e.), t-test for equality of variances has been



It means there exists no relationship for rational decision making between male and female

respondents.

62

2. (f). NULL HYPOTHESIS: There exists a difference for impulsive types of decision


Group Statistics


IMPULSIVE1.00 47 3.5691 .75308 .10985

2.00 55 3.9045 .38637 .05210


Levene's

Test for

Equality of

Variances


F Sig. T DfSig. (2-

tailed)

Mean

Differenc

e

Std. Error

Difference

95%

Confidence

Interval of the

Difference

Lower Upper

IMPULSIV

E

Equal variances

assumed18.741 .000

-

2.889100 .005 -.33540 .11608

-.5657

0

-.1051

0

Equal variances

not assumed

-

2.759

66.17

0.007 -.33540 .12158

-.5781

2

-.0926

7

TABLE 29

63

INTERPRETATION

The above table shows testing hypothesis (1.f.), t-test for equality of variances has been



It means there exists no relationship for impulsive decision making between male and female

respondents. But we can see that female respondents (m=3.9045) are more impulsive in

making decision as compare to male respondents (m=3.5691).

64

CONCLUSION

To conclude all above, with the view point of the research design in which I have done

sampling design through questionnaire. Around 102 investors have had filled the

questionnaire according to their perceptions and experience that they have accumulated so

far in their lifetime. Finally and majorly the data has been collected by mailing the

questionnaire to the perspective sample i.e. the investors who invest in different sectors.

Modern theory of investors’ decision-making suggests that investors do not always act

rationally while making an investment decision. They deal with several cognitive and

psychological errors. These errors are called behavioural biases and are there in many

ways. I have discussed nine behavioural biases that occur in financial decision making.

The four behavioural phenomena that I highlighted are prospect theory, overconfidence,

disposition effect and narrow framing. These four behavioural phenomena have been

explained and studied by several economics. And for all these phenomena there is prove

that they influences financial decision making. The prospect theory state that people make

decisions based on the potential value of losses and gains rather than the final outcome and

thus will base decisions on perceived gains rather than perceived losses. Overconfidence

creates mispricing of factor payoffs and all securities whose cash flows are derived from

the overestimate signal precision. This ensures difficulties in the financial decision making

process. The phenomenon disposition effect is the tendency of an investor to sell winners

too early and hold losers too long. In this way investors gain losses instead of winners

which is not if favor for financial decision making. As mentioned before narrow framing is

the propensity of an investor to select investments individually, instead of considering the

broad impact on her portfolio. So the expected outcome is the individually outcome,

instead of the combined outcome what it should be.

65

The conclusion can be drawn that investors not always act in a ration manner due to the

cognitive and psychological errors they have to deal with. They are influence by

behavioural factors that are important in financial markets because they influence the

investors who make the financial decisions. Busenitz and Barney (1998) state that if the

environment is uncertain and complex, biases and heuristics can be an effective and

efficient aim to decision making. Under these circumstances a more comprehensive and

careful decision making is not possible. Biases and heuristics present an effective way to

estimate the appropriate decisions.

66

LIMITATION OF THE STUDY

In this research, researchers encountered a few limitations. The researchers solved the

Problems faced to make sure the research can be done in time.

The population size was limited to Delhi only.

The report has been accomplished with in a limited time frame. So, due to time and

resource constraints some important segment of population might have been missed out.

Respondents tend to be biased in answering the questionnaire provided by the researchers.

The views of investors may be different in different situations. This may lead to

inaccuracy and unreliability of the answer.

Many times it was very difficult to fill the questionnaire during peak hours because

questionnaire contained some sort of questions which required good amount of investors

feedback.

The responses of the respondents may not be accurate thinking that the management might

misuse the data.

The sample size does not reprent the total population

67

CHAPTER-5

REFEENCES AND ANNEXTURE

68

BIBLOGRAPHY

JOURNALS & TEXT BOOKS

Journal of Business & Economics Research – August 2008 Volume 6, Number 8,

Behavioral Bias Within The Decision Making Process

Behavioral biases in financial decision making, Maartje Marchand, 18 mei 2012

What facors affect behavior biases? Evidence from Turkish individual stock investors.

Understanding behavioral finance by Richard Deves & Lucy F. Ackert

WEBSITES

http://www.docstoc.com/docs/27165423/Decision-Making-Questionnaire

http://www.pathwayadvisors.com/web/investment_suitability_questionnaire.pdf

https://www.inkling.com/read/organizational-behavior-kreitner-kinicki-10th/chapter-

12/decision-making-biase

http://www.business2community.com/strategy/perspective-framing-effect-list-biases-

judgment-decision-making-part-5-0762330#SoGckeIsEeyHf5a5.99

http://education-portal.com/academy/lesson/representativeness-heuristic-examples-

definition-quiz.html#lesson

69

http://education-portal.com/academy/lesson/representativeness-heuristic-examples-definition-quiz.html#lesson

http://education-portal.com/academy/lesson/representativeness-heuristic-examples-definition-quiz.html#lesson

http://www.business2community.com/strategy/perspective-framing-effect-list-biases-judgment-decision-making-part-5-0762330#SoGckeIsEeyHf5a5.99

http://www.business2community.com/strategy/perspective-framing-effect-list-biases-judgment-decision-making-part-5-0762330#SoGckeIsEeyHf5a5.99

https://www.inkling.com/read/organizational-behavior-kreitner-kinicki-10th/chapter-12/decision-making-biase

https://www.inkling.com/read/organizational-behavior-kreitner-kinicki-10th/chapter-12/decision-making-biase

http://www.docstoc.com/docs/27165423/Decision-Making-Questionnaire

ANNEXURE 1

QUESTIONNAIRE:

PART A: DEMOGRAPHICS

1. Age: _________ years.

2. Gender: M F

3. Age: 21-25

26-30

30-Above

4. Place of Schooling: URBAN

RURAL

5. APPROXIMATE YEARLY INCOME:

UPTO 2 LAKHS

2-3 LAKHS

3-4 LAKHS

MORE THAN 470

6. In which sector you invest:

BANK FIXED DEPOSITS/LIFE INSURANCE

SHARES AND MUTUAL FUND

REAL ESTATE/PROPERTY

OTHERS

PART B

There is no right or wrong answer. Read the following statements and mark

the response according to your opinion.

THIS QUESTIONNAIRE IS A PART OF MASTERS THESIS AT HSE`

S.no. Statements Strongly

Disagree

Disagree Undecided Agree Strongly

Agree

1 Thinking hard and for a

long time about

something gives me

little satisfaction

2 I trust my initial

feelings about people

3 I prefer to do

something that 71

challenges my thinking

abilities rather than

something that requires

little thought

4 I believe in trusting my

hunches

5 I prefer complex to

simple problems

6 I try to avoid situations

that require thinking in

depth about something

7 When it comes to

trusting people, I can

usually rely on my "gut

feelings"

8 My initial impressions

of people are almost

always right

9 I don't like to have to

do a lot of thinking

10 I can usually feel when

a person is right or

wrong even if I can't

explain how I know

72

EXCESSIVE OPTIMISM/ OVERCONFIDENCE BIAS

1 I am better than

average drivers

2 I am a average driver

3 I am a below average

driver

4 I think, I am an above

average performer

when it comes to my

job/collage

5 I have better athletic

abilities in comparison

to my peer group age.

73

MEASURE OVERCONFIDENCE BIAS BY PRESENTING A SCENARIO:-

YOU HAVE TO IMAGIN THAT YOU FAILED THE LAST TEST. YOU HAVE A

OPPORTUNITY TO REPLACE THE FAILING GRADE FROM THE LAST EXAM WITH

WHATEVER YOU WOULD GET ON THE NEXT EXAM KNOWING THAT YOU

WOULD HAVE VERY LITTLE TIME FOR STUDY AND A SMALL CHANCE THAT

YOUR GRADE ON THE NEXT EXAM WOULD BE HIGER.

1 I will pass the exam.

2 I will fail the exam.

RESPONDENT PERCEPTION:-

1 It is easy for me to

find a job at close to

my current salary if I


2 It is difficult for me to

find a job at close to

my current salary if I


74

TO SEE IF THERE IS A PROPENSITY TO BE EXCESSIVELY OPTIMISTTIC AND

OVERCONFIDENCE EXTENDS INTO TH EFIELD OF PERSONAL INVESTMENT.

1 Good advice is the reason

for my best investment

decision

2 Strong market/fortunate

timing is the reason for

my best investment

decision

3 My own skills and

intelligence is the reason

for my best investment

decision

4 My luck is the reason for

my best investment

decision

5 When I invest in a new

stock issue, I expect my

investment will give sure

gain of 50% of my

investment

6 When I invest in a new

75

stock issue, I expect 0.5

probability to gain 100%

and 0.5 probability to

lose 100%

PROSPECT THEORY:-

SITUATION 1


CHOICE A: YOU HAVE A 50%CHANCES OF GAINING RS. 1000 AND A 50%

CHANCES OF GAINING RS. 0

CHOICES B: YOU HAVE A 100% CHANCES OF GAINING RS. 500

1 I will choose, choice

A


B

SITUATION 2


CHOICE A: YOU HAVE A 50% CHANCES OF LOSSING RS. 1000 AND 50% CHANCES

OF LOSSING RS. 0

CHOICE B: YOU HAVE A 100% CHANCES OF LOSSING RS. 500


A


76

B

MENTAL ACCOUNTING:-

SITUATION 1

IMAGIN THAT YOU HAVE DECIDED TO WATCH A MOVIE WORTH Rs.250 PER

TICKET. AS YOU ENTER THE THEATER, YOU DISCOVER THAT YOU LOST YOUR

Rs. 250. WOULD YOU STILL PAY Rs. 250 FOR A TICKET TO MOVIE.

1 Yes, I will still pay Rs.

250 for a ticket

2 No, I will still pay Rs.

250 for a ticket

SITUATION 2

IMAGIN THAT YOU HAVE DECIDED TO WATCH A MOVIE AND HAVE PAID RS.250

FOR TICKET. AS YOU ENTER THE THEATER, YOU DISCOVER THAT YOU HAVE

LOST THE TICKET. THE SEAT WAS NOT MARKED AND THE TICKET CAN NOT BE

RECOVERED. WOULD YOU PAY RS. 250 FOR ANOTHER TICKET.

1 Yes, I will still buy

another ticket

2 No, I will still buy

another ticket

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DECISION MAKING PROCESS

1 When I make decisions, I tend

to rely on my intuition

INTUITIVE

2 I rarely make important

decisions without consulting

other people

CONSULTATIVE

3 When I make a decision, it is

more important for me to feel

the decision is right than to

have a rational reason for it

ETHICAL

4 I double check my

information sources to be sure

I have the right facts before

making decisions

ETHICAL

5 I use the advice of other

people in making my

important decisions

CONSULTATIVE

6 I put off making decisions

because thinking about them

makes me uneasy

AVOIDENCE

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7 I make decisions in a logical

and systematic way

RATIONAL

8 When making decisions I do

what feels natural at the

moment

INTUITIVE

9 I generally make snap

decisions

IMPULSIVE

10 I like to have someone steer

me in the right direction when

I an faced with important

decisions

CONSULTATIVE

11 My decision making requires

careful thought

RATIONAL

12 When making a decision, I

trust my inner feelings and

reactions

INTUITIVE

13 When making a decision, I

consider various options in

terms of a specified goal

RATIONAL

14 I avoid making important

decisions until the pressure is

on

AVOIDENCE

15 I often make impulsive

decisions

IMPULSIVE

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16 When making decisions, I rely

upon my instincts

INTUITIVE

17I generally make decisions

that feel right to me

ETHICAL

18 I often need the assistance of

other people when making

important decisions

CONSULTATIVE

19I often make decisions on the

spur of the moment

IMPULSIVE

20I postpone decision making

whenever possible

AVOIDENCE

21I often put off making

important decisions

AVOIDENCE

22 If I have the support of others,

it is easier for me to make

important decisions

CONSULTATIVE

23I generally make important

decisions at the last minute

IMPULSIVE

24

I make quick decisions

IMPULSIVE

80

NARROW FRAMING

SITUATION 1

IMAGIN THAT due to a factory closing 600 jobs were about to be lost. However, if

PROGRAM A : is adopted, 200 jobs will be saved.

PROGRAM B: is adopted, there is a 1/3 probability that 600 jobs will be saved and a 2/3

probability that none of the 600 jobs will be saved.

1 I will choose, program

A


B

SITUATION 2

PROGRAM C: is adopted, 400 people will lose their jobs.

PROGRAM D: is adopted, there is a 1/3 probability that nobody will lose their job and a 2/3

probability that 600 will lose their job.


C


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D

HEURISTIC

SITUATION 1

Imagine that you were shown a picture of two people, person A and person B.

Person A is well-dressed, wearing a fancy watch, and has a briefcase in his hand.

Person B is wearing jeans and flip-flops, looks as if he just woke up, and is busy texting on

his cell phone.

Now predict who is more likely to show up on time for the local monthly donation meeting,

who would you choose?

1 I will choose, person

A

2 I will choose, person B

SITUATION 2

A highly profitable software company is searching for its next CEO. They have narrowed

their search down to two candidates, one male and one female. This particular company has

never employed anyone but males in any of its leadership roles. Who would you predict they

will hire?

1 Company will hire

male CEO

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2 Company will hire

female CEO

SITUATION 3

1 There are more words

that start with the letter

‘R’

2 There are less words

that start with the letter

‘R’

3 There are more

words that have 'r' as

the third letter

4 There are less words

that have 'r' as the

third letter

83

Cognitive Dissonance

1 if someone that you don't like does

something nice for you, you might

reconcile that by convincing yourselves

that she did the nice thing just to make

us feel guilty for not liking her.

2 If you know that smoking is bad, you

might justify the fact that you smoke

by saying that, if smoking doesn't kill

you, something else will.

3 When I shop something, later on I

regret my decision buying that stuff.

4 I am doing a job and I have to deal

with very rude people. I am able to

control my emotions and still conduct

my job.

5 I am doing a job and I have to deal

with very rude people. Sometimes I

am not able to control my emotions

and still conduct my job.

84

DISPOSSITION EFFECT AND ANCHORING

1 I sell my profitable

shares too early

2 Only in some

situations, I sell my

profitable shares too

early

3 I do not sell my


early

4 Rarely, I sell my


early

5 I keep holding my

loser shares in

excess.

6 I do not keep holding

my loser shares in

excess.

7 Rarely I keep

holding my loser

shares in excess.

85

ANNEXURE 2: DEMOGRAPHICS CODINGS

1 MALE 47

2 FEMALE 55

1 URBAN 80

2 RURAL 22

1 21-25 17

2 26-30 55

3 ABOVE – 30 30

1 UPTO 2 LAKHS 0

2 2-3 LAKHS 11

3 3-4 LAKHS 66

4 MORE THAN 4 LAKHS 25

1 BANK FIXED DEPOSITS/LIFE INSURANC 34

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2 SHARES AND MUTUAL FUND 32

3 REAL ESTATE/PROPERTY 25

4 OTHERS 11

87

behavioural bises in fdm project

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