Investigating Indian Retail Investor Behavior through the lens of Prospect Theory
Keywords:prospect theory; indian retail investor; loss aversion; pandemic; recession; investor behaviour
The paper explores how prospect theory of loss aversion (Kahneman & Tversky 1979) can help explain retail investor behavior in India with respect to small-cap and mid-cap stocks during periods of crisis which may influence emotional sentiments as well as stock markets. Two distinctly separate periods were analyzed and compared: the Great Recession (2008-09) and the COVID-19 global pandemic (2020-21). A combination of qualitative and quantitative methods was used – a literature review of past studies, detailed interviews with experts, and cross-correlation analysis sentiment and market indices. Statistical correlation analysis of investor sentiment was done versus stock market index movement during the two time periods. Results indicate that positive sentiment and negative sentiment have immediate-term positive and negative relationship respectively with investor behavior, and how loss aversion was stronger during 2008 than 2020. Study also identifies differences in reference points between the two periods, which is consistent with prospect theory in terms of the role of reference point in determining degree of loss-aversion. Expert interviews identified multiple factors such as prior experience with market losses, governmental actions, younger demographics, easier market participation due to technology in 2020 caused the reference point to be different from 2008. Further research needed to understand why the sentiments have an immediate effect on investor behaviors but not in future periods. In contrast, movements in stock markets were seen to have both immediate and future period relationships with sentiment, which suggest some role of herding which needs to be further investigated in future studies.
References or Bibliography
Bhaduri, Saumitra N., and Siddharth D. Mahapatra. "Applying an Alternative Test of HERDING Behavior: A Case Study of the Indian Stock Market." Journal of Asian Economics 25 (2013): 43-52. Print.
Oliveira-Brochado, Ana. "Google Search Based Sentiment Indexes." IIMB Management Review 32.3 (2019): 325-35. Print.
Chandra, Abhijeet, and Ravinder Kumar. "Factors Influencing Indian Individual Investor Behavior: Survey Evidence." SSRN Electronic Journal (2012): 141-67. Print.
Dhall, Rosy, and Bhanwar Singh. "The COVID-19 Pandemic and Herding Behavior: Evidence FROM India’s Stock Market." Millennial Asia 11.3 (2020): 366-90. Print.
Dutta, Abhijit, Madhabendra Sinha, and Padmabati Gahan. "Perspective of the Behavior of Retail Investors: An Analysis with Indian Stock Market Data." Advances in Intelligent Systems and Computing (2019): 605-16. Print.
Hall, M. (2021, May 18). What is market efficiency? Investopedia. Retrieved December 8, 2021, from https://www.investopedia.com/insights/what-is-market-efficiency/.
Hirvonen, Tommy. "BEHAVIORAL FINANCE IN FINANCIAL CRISES: THE CASE OF COVID-19." Aalto University School of Business (2020): 1-77. Print.
Islam, I., and S. Verick. "The Great Recession Of 2008–09: Causes, Consequences and Policy Responses." From the Great Recession to Labour Market Recovery (2011): 19-52. Print.
Kahneman, Daniel, and Amos Tversky. "Prospect Theory: An Analysis of Decision under Risk." Econometrica 47.2 (1979): 263-92. Print.
KONSTANTINIDIS, A., KATARACHIA, A., BOROVAS, G., & VOUTSA, M. E. (2012). From Efficient Market Hypothesis To Behavioural Finance: Can Behavioural Finance Be The New Dominant Model For Investing? Scientific Bulletin - Economic Sciences, University of Pitesti, 11(2), 16–26.
Mushinada, Venkata Narasimha. "How Do Investors Behave in the Context of a Market CRASH? Evidence from India." International Journal of Emerging Markets 15.6 (2020): 1201-217. Print.
Ortmann, Regina, Matthias Pelster, and Sascha Tobias Wengerek. "COVID-19 and Investor Behavior." SSRN Electronic Journal 37 (2020). Print.
Poshakwale, Sunil, and Anandadeep Mandal. "Investor Behavior AND Herding: Evidence from the National Stock Exchange in India." Journal of Emerging Market Finance 13.2 (2014): 197-216. Print.
Shawn, L. K. J., & Stridsberg, D. (2015). Feeling the Market's Pulse with Google Trends. International Federation of Technical Analysts' Journal.
Vasileiou, Evangelos. "Behavioral Finance and Market Efficiency in the Time of the Covid-19 Pandemic: Does Fear Drive the Market?" International Review of Applied Economics 35.2 (2020): 224-41. Print.
WHO Director-General’s opening remarks at the media briefing on COVID19 - 11 March 2020 [Google Scholar]
Wikipedia contributors. "COVID-19 lockdown in India." Wikipedia, The Free Encyclopedia. Wikipedia, The Free Encyclopedia, 5 Dec. 2021. Web. 7 Dec. 2021.
How to Cite
Copyright (c) 2021 Aseem Singru; Zoey Chopra
This work is licensed under a Creative Commons Attribution-NonCommercial-ShareAlike 4.0 International License.
Copyright holder(s) granted JSR a perpetual, non-exclusive license to distriute & display this article.