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Evaluation of
Evaluation of behavioral biases behavioral
affecting investment decision biases

making of individual equity

investors by fuzzy analytic 297

hierarchy process Received 13 March 2019

Revised 12 May 2019
Accepted 8 August 2019
Jinesh Jain
Department of Commerce and Management,
Sri Aurobindo College of Commerce and Management, Ludhiana, India
Nidhi Walia
Department of Applied Management,
University School of Applied Management, Punjabi University, Patiala, India, and
Sanjay Gupta
Department of Commerce and Management,
Sri Aurobindo College of Commerce and Management, Ludhiana, India

Abstract
Purpose – Research in the area of behavioral finance has demonstrated that investors exhibit irrational behavior
while making investment decisions. Investor behavior usually deviates from logic and reason, and consequently,
investors exhibit various behavioral biases which impact their investment decisions. The purpose of this paper is
to rank the behavioral biases influencing the investment decision making of individual equity investors from the
state of Punjab, India. This research would provide valuable insight into the different behavioral biases to
investors and other participants of the capital market and help them in improving investment decisions.
Design/methodology/approach – The research is conducted on the individual equity investors of Punjab,
India. Fuzzy analytic hierarchy process was applied to rank the factors influencing the decision making of
individual equity investors of Punjab. The primary factors considered for the study are overconfidence bias,
representative bias, anchoring bias, availability bias, regret aversion bias, loss aversion bias, mental
accounting bias and herding bias.
Findings – The three most influential criteria were herding bias, loss aversion bias and overconfidence bias.
The five most influential sub-criteria were “I readily sell shares that have increased in value (C61),” “News
about the company (Newspapers, TV and magazines) affects my investment decision (C84),” “I invest each
element of my investment portfolio separately (C71)” and “I usually hold loosing stock for long time, expecting
trend reversal (C52).”
Research limitations/implications – Although sample survey conducted in the present study was based
on a limited sample selected from a particular area that truly represented the total population, it is considered
as the limitation of this study.
Practical implications – The outcome of this research provides investors with a better understanding of
behavioral biases that influence their decision making. This study provides them a guideline on different
behavioral biases that they should consider while making investment decisions.
Originality/value – The research model is based on the available literature on behavioral finance and the
research results and findings would add value to the existing knowledge base.
Keywords Investment decisions, Behavioural biases, Fuzzy analytical hierarchy process (F-AHP),
Irrational behaviour
Paper type Research paper

Introduction Review of Behavioral Finance

Over the past few decades, numerous contributions have been made by the devotees of Vol. 12 No. 3, 2020
pp. 297-314
traditional finance. One of such contributions is economic utility theory which assumes that © Emerald Publishing Limited
1940-5979
investors are rational in their decision making and they know how to get maximum satisfaction. DOI 10.1108/RBF-03-2019-0044
RBF Traditional finance is based on four pillars, namely, Arbitrage Pricing Process given by
12,3 Modigliani and Millar, Capital Asset Pricing Model given by Sharpe, Linter and Black,
Option Pricing theory given by Black, Scholes and Merton & Markowitz Principle
of Portfolio Management (Kumar and Goyal, 2015). Traditional finance assumes that
financial markets are informationally efficient; therefore, investors behave rationally, whereas in
reality investors tend to behave by following rule of thumbs instead of optimization. Research in
298 the area of Behavioral Finance has identified a lot of behaviors those are contradictive to
rationality. Generally, these behaviors are classified under the dimensions of cognitive bias and
bounded rationality. Bounded rationality states that decision making is based on imperfect
information, and it includes behaviors such as decision making based on heuristics,
procrastination and unequal weight to readily evident factors, which result from a lack of
readily accessible and complete information. Deviations from the assumptions of traditional
finance have led to creating doubt on the usefulness of the traditional finance. Traditional
finance has ignored the impact of human behavior on investment decisions. Actually, decision
making is a very complex process which involves identifying the various investment
alternatives and selecting the best out of them, using the available information with the help of
various models. Therefore, the anomalies of traditional finance have provoked the development
of behavioral finance.
Behavioral finance is a paradigm shift from traditional finance. The origin of behavioral
finance took place in the 1970s with the emergence of empirical studies. It takes into
consideration the role of psychology, emotions and cognitive errors in decision making.
Behavioral finance endeavors to recognize how emotions and cognitive errors effect
individual investors’ behavior. The theory of limited arbitrage shows that if irrational
traders cause deviations from a fundamental value, rational traders will often be powerless
to do anything about it. Decisions taken by the investors play an important role in shaping
the market trend, which ultimately affects the economy also. Even if the investors are well
aware about the latest information or they have done research or they have carried out the
fundamental and technical analysis before investing money, still they can behave
irrationally because of the fear which always prevails in the mind of investors with regard to
loss in the future. The study of behavioral finance improves the process of decision making.
The review of literature suggests that there are certain behavioral biases which influence
the investors’ decisions.

Conceptual framework of research model

Chandra (2016), in his book titled “Behavioural Finance,” has given three central themes of
behavioral finance: namely heuristics and biases, frame dependence, emotions,
self-attributes and inefficient markets. From these central themes of behavioral finance,
eight psychological biases have been considered for the study. These eight biases represent
the main criteria which impacts the individual investors’ decision making. Brief introduction
about behavioral biases selected for the study is as under.

Overconfidence bias
Overconfidence is a cognitive bias. Overconfidence is the tendency of people to overestimate
own skills, cognitive abilities and precision of information (DeBondt and Thaler, 1995) for
achieving his/her goals by underestimating the future uncertainties. Overconfident people
believe that their judgment is more reliable than others ( Jain et al., 2015).

Representative bias
This bias is also known as familiarity bias. When there is a lack of information, neural
connections in the brain process information using shortcuts, for achieving desired objectives.
Information is usually processed on the basis of past experience. Individuals buying a house, Evaluation of
usually compare the price with prices of other houses in a similar location for accessing the behavioral
risk of the property and future value of the investment. biases
Anchoring bias
It is the tendency of the investors to consider logically the irrelevant price level of the stock
as a base while taking their decision. Investors suffering from this bias have a tendency of 299
fixing the price for buying and selling of shares based on past information. This way
investors may actually be timing badly and thus may buy shares at a high price or may sell
shares at a low price. It may also happen that the price which is fixed by the investors for
buying or selling the security, which may not be reached, may result in missing good
investment opportunities.

Availability bias
In availability bias, a decision maker relies upon readily available knowledge, rather than
examining other alternatives ( Javed et al., 2017). When decision makers give preference to
the recent events and information they have come across, they are believed to be suffering
from availability bias. Recent events, which were personally observed, are usually more
memorable. This is because memorable events are likely to be more magnified and cause an
emotional reaction. Investor preferences are based on available information and as a result
of even irrelevant information sometimes influences the investment decision (Steen, 2002).
Investors suffering from this bias usually invest in local stocks and also prefer to invest in
stocks evaluated by experts.

Regret aversion bias

Regret aversion is a psychological bias, arising out of the excessive focus on feelings of
regret after coming to know that wrong decision has been taken, primarily for the reason
that the outcomes of the alternative are apparently better than the outcome of the decision
taken. The root cause of this type of bias is the tendency on the part of investors for not
admitting their mistakes. Investors suffering from this bias may avoid taking key actions
for the fear that what so ever decisions they make will be sub-optimal.

Loss aversion bias

Loss aversion bias is a verypowerful bias, demonstrated by the originators of behavioral
finance (Tversky and Kahneman, 1992). It refers to the tendency of people toward saving the
capital from reduction rather than focusing on increasing the capital. The central theme
behind this bias is that people react differently to the positive and negative changes in
the market value of the investments. Losses are twice powerful compared to the gains.
People suffering from this bias usually become risk averse after a prior loss and they sell
shares which have increased in value.

Mental accounting bias

It is a famous theory given by Richard Thaler. Mental accounting bias, also famous as
“two-pocket” theory, is a behavioral bias which occurs when individuals tend to treat each
element of their portfolio separately. Investments are divided into separate categories, based
on different parameters like the source of the money or the intent of the account.
Mental accounting bias attempts to describe the process whereby people code, classify and
assess economic outcomes.
RBF Herding bias
12,3 Herd bias represents the tendency on the part of investors to imitate the actions of a larger
group, without thinking independently whether those actions are rational or not. In several cases,
it has been observed that investors suffering from this bias do not make a decision at their own,
rather seek advice from brokers, friends, and colleagues for taking their investment decision.

300 Review of literature

Overconfidence bias
Overconfident investors overreact to the market information (Odean, 1999). Men exhibit
more confidence than women, as a result men get involved in excessive trading which leads
to less returns (Barber and Odean, 2001; Grinblatt and Keloharju, 2009; Statman et al., 2006).
Daniel et al. (1998) added to the existing literature by combining overconfidence bias and
self-attribution bias. He observed that byreacting toward private information, investors
become more overconfident. Zaidi and Tauni (2012) proved that past experience of the
investors impacts their behavior and gets reflected in overconfidence. Lim (2012) and Javed
et al. (2017) found that overconfidence bias has positive impact on investors’ decision
making which is inconsistent with the findings of (Kengatharan and Kengatharan, 2014)
who explored that overconfidence bias has negative impact on investors’ decision making.

Representative bias
Representativeness is the extent to which the situations and instances are similar to the
population (DeBondt and Thaler, 1995). Tversky and Kahneman (1983) stated that people
usually predict the future value of a script based on representativeness. Representativeness is
generally employed, while making judgments under uncertainty. This leads the investors to
analyze the companies on the basis of its characteristics like its management, products,
publicity and returns, and investment is generally centered on these characteristics (Onsomu,
2014). Representativeness can lead toward the biases in decision making because of the reason
that due to representativeness individuals tend to value more recent events and overlook
long-term events (Ritter, 2003). Individuals suffering from representative bias, sometimes refer
to very few samples, resulting into sample size neglect (Luu, 2014). Grether (1980) and Chen
et al. (2007) mentioned that representativeness bias is more prominent in unsophisticated
investors. Javed et al. (2017) found that representative bias is having positive significant
impact on perceived investment performance.

Loss aversion bias

Kahneman et al. (1991) explored that investors suffering from loss aversion bias generally take
irrational decisions. Female investors are comparatively more loss averse than male investors
(Hassan et al., 2014; Blavatskyy and Pogrebna, 2008). Loss aversion bias has positive significant
impact on investors’ decision making (Lim, 2012; Kengatharan and Kengatharan, 2014; Luu,
2014; Khan, 2017). Findings of the Bashir et al. (2013) are inconsistent with the previous findings.
He found that loss aversion bias is not having any impact on investors’ decision making.

Regret aversion bias

Odean (1999) analyzed 10,000 accounts at large brokerage houses and found that traders
support the regret aversion most often. Muermann and Volkman (2006) found that
regret-averse investors usually put their investments into defined contributed plans. Shefrin
and Statman (1985) contended that regret aversion stimulates investors to prefer stocks
which pay regular dividends. Kengatharan and Kengatharan (2014) and Luu (2014) found
that Regret aversion bias has positive significant impact on investors’ decision making (Lim
2012; Kengatharan and Kengatharan, 2014; Khan 2017).
Herding bias Evaluation of
Caparrelli et al. (2004) found that during volatile market conditions, investors are more behavioral
inclined towards herding behavior. Lee et al. (2004) stated that individual investors are more biases
prone to herd behavior in comparison to institutional investors. In an unpredictable market,
institutional investors herd more than individual investors (Dennis and Strickland, 2002).
Nofsinger and Sias (1999) found that herding by institutional investors’ affects stock prices
more often than herding by individuals. Herding bias is having positive significant impact 301
on investors decision making. (Kengatharan and Kengatharan, 2014) stated that out of
many variables of herding, choice of stock variable has low impact on individual investment
decision. Findings of Lim (2012) were found to be inconsistent with the previous studies,
indicating that herding has no impact on investors’ decision making.

Anchoring bias
Anchoring bias is also associated with representativeness because it states that the
investors’ decisions are based on recent experiences, and they are more optimistic during the
rising market trend and more pessimistic during the falling market trend (Waweru et al.,
2008). While making an investment, investors rely on anchors (initial reference point), e.g.
52 week low price of a share. Kristensen and Tommy (1997) established the hypothesis that
people use anchoring and adjustment process during negotiations for making counter
offers, and change in the reference point has an influence on these counter offers. Lee et al.
(2013) found that anchoring bias is more evident in females than males. The study
conducted by Kengatharan and Kengatharan (2014) found that anchoring has very high
impact on investors’ decision making.

Mental accounting bias

Mental accounting helps the investors in managing and organizing theirinvestment
portfolios in different accounts (Ritter, 2003) and it effects the assets prices significantly
(Barberis and Huang, 2001). Study conducted by Lee et al. (2013) found that mental
accounting bias is more evident in males in comparison to females. Investment decision
making is largely influenced by mental accounting (Chandra, 2008) and because of mental
accounting bias investors keep on holding the loosing stock and sell winning stocks
(Grinblatt and Han, 2005; Shefrin and Statman, 1985).

Availability bias
The availability heuristics states that events which can be easily recalled are supposed to
occur with higher probability. Investor preference changes as per available information and
consequently sometimes irrelevant information influences the decision making (Harris and
Raviv, 2005). Waweru et al. (2008) found that availability bias affects the decision making of
institutional investors. In a study conducted by Javed et al. (2017), it was found that
availability bias is having positive significant impact on perceived investment performance
which is against the findings of Khan (2017) and Rehan and Umer (2017) showing that
availability bias is negatively related to investment decision making.
The criteria and sub-criteria defined for the study are listed in Figure 1.

Research methodology
In order to weight the criteria and sub-criteria identified in Figure 1, Fuzzy AHP is used.
Fuzzy AHP is a logical approach incorporating the concepts of fuzzy set theory and
hierarchical structure. Decision makers can express their inclinations by using verbal terms
or numerical values toward the significance of each criterion and sub-criterion (Ip et al.,
2012). The questionnaire was designed in the form of a pair-wise evaluation based on the
RBF I am Confident about my own ability to do better than others (C11)
12,3 Overconfidence I am Confident about time to entre in the market and exit from market (C12)
Bias I Possess Specific skills and experience for making investments (C13)
(C1)
I Possess Complete knowledge about various investment avenues (C14)
I am Satisfied regarding past investing decision making (C15)
302 I usually invest in familiar stocks (C21)
I evaluate Past Price trends for predicting future price (C22)
Representative
Bias I buy hot stocks and avoid stocks having poor performance in past (C23)
(C2)
I buy stocks on the basis of present performance (C24)
I buy the new equity offering of the same company, in which I have already
invested. (C25)
I usually rely on Past experience in the market for next investment (C31)
Anchoring I usually buy stocks, which have fallen considerably from previous closing or
Bias all time high (C32)
Behavioral biases affecting

(C3) I usually consider the purchase price of stock as reference point for trading
Investment Decision

(C33)
I usually forecast the future stock prices based on recent stock price (C34)

Availability I prefer local stocks over International Stocks (C41)

Bias I prefer to invest in stocks, evaluated by experts (C42)
(C4) My Investment decision depends on new information released regarding stock
(C43)
After booking profits, I usually feel I could have waited (C51)
Regret Aversion I usually hold loosing stock for long time, expecting trend reversal (C52)
(C5) I am in the habit of purchasing lottery tickets (C53)
I feel sorrow about holding losing stocks too long (C54)
Loss Aversion I readily sell shares that have increased in value (C61)
(C6) After a prior loss, I become more risk averse (C62).

Mental I invest each element of my investment portfolio separately (C71)

Accounting I invest for my retirement (C72)
(C7)
My investments are based on time horizon (C73)
Figure 1. I seek advice from brokers, while investing (C81)
A hierarchical My investment decision is based on recommendations given by famous
structure of Herding
analyst (C82)
behavioral biases (C8)
affecting the I seek opinion from my friends and colleagues (C83)
investment decision News about the company (Newspapers, TV and magazines) affects my
investment decision (C84)

hierarchical structure shown in Figure 1. The primary data have been collected through the
structured questionnaire from the individual equity investors, who reside in the state of
Punjab. Universe for the study is Punjab state and population for the study is individual
equity investors, who invest in the capital market. Data have been collected from 165
individual equity investors by applying the snow ball sampling method.

Fuzzy analytic hierarchy process (F-AHP)

Zadeh proposed the concept of fuzzy set theory in 1965. According to Zadeh (1965), the
concept of a fuzzy set provides an appropriate idea of departure from the structure of a
conceptual framework that parallels in many respects the structure used in the case of
ordinary sets but is more common than the latter and, possibly, may prove to have a much Evaluation of
broader scope of applicability, particularly in the fields of pattern classification and behavioral
information processing. Wu et al. (2008) stated that realistic environment fits to a fuzzy biases
environment, extending AHP to the fuzzy environment can overcome the deficiency of AHP
that cannot answer fuzzy problems. Fuzzy set theory applies for triangular fuzzy numbers, a
different class of fuzzy numbers that are distinctly denoted by three real numbers, expressed
as (l, m, u), where l, m, u represent the minimum, maximum amount, and maximum possible 303
values, respectively, which are often used to elucidate the fuzziness of the data evaluated, the
details of these numbers are given in Table I. When l ¼ m ¼ u, it is a non-fuzzy number (Chan
and Kumar, 2007). A tilde “~” will be placed above a symbol if the symbol represents a fuzzy
set. (Kaufmann and Gupta 1991) defined the membership function (as shown in Figure 2) mað xÞ
of triangular fuzzy numbers that are presented in the following equation:
8
< ðx – l Þ= ðm – l Þ; l px pm
>
mað
xÞ ¼ ðu – xÞ=ðu – mÞ; m px pu : (1)
>
: 0; otherwise

F-AHP inserts the fuzzy concept to basic analytic hierarchy process (AHP), which was
established by Saaty, 1980. AHP is a method for multi-criteria decision making that helps
decision makers to select a choice between alternatives. The AHP mathematical model is a
technique that generated weighting significance (Gupta et al., 2018). An alternative of the
AHP, called FAHP, is applied in order to overcome the compensatory style and the

The inverse of
NPCM Fuzzy triangular fuzzy triangular
(Saaty scale) Linguistic scale for Importance scale scale

1 Criteria “i” and’ “j” are of equal importance (1, 1, 1) (1, 1, 1)

3 Criteria “I” is moderately more important than “j” (2, 3, 4) (1/4, 1/3, 1/2)
5 Criteria “i” is strongly more important than “j” (4, 5, 6) (1/6, 1/5, 1/4)
7 Criteria “i” is very strongly more important than “j” (6, 7, 8) (1/8, 1/7, 1/6)
9 Criteria “I” is absolutely more important than “j” (9, 9, 9) (1/9, 1/9, 1/9) Table I.
2 The intermittent values between two adjacent scales (1, 2, 3) (1/3, 1/2, 1) Linguistic terms and
4 (3, 4, 5) (1/5, 1/4, 1/3) the corresponding
6 (5, 6, 7) (1/7, 1/6, 1/5) triangular fuzzy
8 (7, 8, 9) (1/9, 1/8, 1/9) numbers

M l(y) M r(y)

Figure 2.
Triangular
membership function
x of fuzzy numbers
0 l m u
RBF incapability of the AHP in handling linguistic variables. F-AHP has become the projecting
12,3 tool for handling inaccuracy or ambiguity aiming at tractability, heftiness, and low-cost
solutions for real-world problems. According to Ip et al. (2012), human findings are often
ambiguous and unclear; therefore, the use of fuzzy analytical hierarchy process theory,
rather than precise numbers, enables us to capture decision-makers’ uncertainty. Kilincci
and Onal (2011) said that AHP does not include ambiguity for personal judgments; it has
304 been amended by benefiting from the fuzzy logic approach. In F-AHP, the pairwise
comparisons of both criteria and the sub-criteria are performed through the linguistic
variables, which are represented by triangular numbers (as shown in Table I). Kabir and
Hasin (2012) mentioned that it is difficult to reflect the decision makers’ ambiguous
preferences through crisp values. Therefore, the FAHP is suggested to relieve the vagueness
of the AHP method, where the fuzzy evaluations ratios are used.
According to Table I, linguistic terms and the corresponding triangular fuzzy numbers, if
the decision maker states “Criteria 1 (C1) is strongly more important than Criteria 2 (C2),”
then it takes the fuzzy triangular scale as (4, 5, 6). On the opposing, in the fuzzy pairwise
comparison matrix of the criteria, the evaluation of C2 to C1 will take the fuzzy triangular
scale as (1/6, 1/5, 1/4).
According to Kahraman et al. (2003), Ml(y) and Mr(y) indicate the left side symbol and the
right side symbol of a fuzzy number, respectively.
The algorithm for evaluating behavioral biases affecting investment decision by the
fuzzy analytical hierarchy process is summarized as follows:
• Step 1: define the evaluative behavioral biases criteria and sub-criteria for investment
decisions.
• Step 2: to develop a hierarchical structure, the decision makers are asked to determine
the relative weights of each criterion.
• Step 3: develop, normal pair-wise comparison matrix (NPCM) as per Saaty’s (1980)
scale by applying AHP for finding out the weights of each criterion and sub-criterion.
The NPCM is presented in Equation (2).
• Step 4: after setting up the order and normal pair-wise comparison matrices for all the
criteria, values for all the criterion are find out by using fuzzy AHP (as shown in
Equation (3)).
Normal Pair-Wise Comparison Matrix:
2 3
a11    a1n
6 ^ & ^ 7
4 5: (2)
a31    a3n
Fuzzy Pair-Wise Comparison Matrix:
2 3
a11l a11m a11u  a1nl a1nm a1nu
6 7
4 ^ & ^ 5: (3)
a31l a31m a31u    a3nl a3nm a3nu

• Step 5: if there is more than one decision maker, preferences of each decision maker
are consolidate as shown in the following equation:
n o 1X k n o
aij ¼ Mink akij ; bij ¼ bkij ; cij ¼ Maxk ckij : (4)
k k¼I
 • Step 6: the geometric mean of fuzzy comparison values of each criterion and Evaluation of
sub-criterion is calculated (Buckley, 1985) (as shown in the following equations): behavioral
~  A2
A1 ~  An
~ ¼ fl1  m1  u1g  fl2  m2  u2g  fln  mn  ung biases
¼ ðl1  l2  lnÞ; ðm1  m2  mnÞ; ðu1  u2  unÞ: (5)

ri~ ¼ ðl1  l2  l3Þ1=n ; ðm1  m2  m3Þn ; ðu1  u2  u3Þ1=n :

1
(6)
305
• Step 7: according to Buckley (1985), to find the fuzzy weight of each criterion and
~ multiply each ðriÞ
sub-criterion ðwiÞ, ~ with the reverse vector (as shown in the
following equation):
~ ¼ ri~  ðr1
wi ~  r2
~  . . .::  rnÞ
~ 1 : (7)
• ~ are fuzzy triangular numbers, de-fuzzified them by using center of area
Step 8: ðwiÞ
(COA) method as shown in the following equation:

l W~ i þmW~ i þuW~ i
ðW iÞ ¼ : (8)
3
• Step 9: (Wi) obtained is a non-fuzzy number; therefore, it is to be normalized by the
following equation:

ðW i Þ
ðN wiÞ ¼ P : (9)
ðwiÞ
These nine steps are executed to find the normalized weights of both criteria and sub-
criteria. Then, by multiplying each sub-criterion weight with related criterion, the weight for
each alternative is calculated.

Research findings
After the assessment of pair-wise comparison matrix among the criteria of behavioral
biases, the fuzzy AHP method was implemented. The crisp values are converted to the fuzzy
pair-wise comparison matrix as shown in the calculation steps of Fuzzy AHP. According to
Step 5 (presented above), Tables II and III demonstrate the aggregate fuzzy pair-wise
comparison matrices related to criteria and sub-criteria.
Results of the present study are consistent with the available literature which suggests
that different behavioral biases impact the decision making of individual equity investors,
globally. Present research has applied fuzzy AHP to conclude the relative importance of
criteria affecting behavioral biases. With respect to the significance/weights for the criteria

Indicators C1 C2 C3 C4 C5 C6 C7 C8

C1 1, 1, 1 1/6, 43/8, 9 1/9, 7/4, 6 1/9, 3, 9 1/6, 1/7, 1/8 1/6, 17/7, 8 1/6, 43/8, 9 1/9, 33/7, 8
C2 1/9, 17/7, 6 1, 1, 1 1/9, 3/4, 3 1/4, 2/7, 1/4 1/9, 1/6, 1/6 1/4, 8/7, 4 1/6, 33/7, 8 1/9, 1/6, 1/6
C3 1/6, 6, 9 1/3, 31/6, 9 1, 1, 1 1/6, 27/8, 6 1/6, 1/7, 1/8 1/9, 7/5, 5 1/6, 1/6, 1/6 1/9, 1/6, 1/6 Table II.
C4 1/9, 40/7, 9 4, 11/3, 4 1/6, 5/2, 6 1, 1, 1 1/9, 1/6, 1/6 1/6, 1/7, 1/8 1/6, 27/8, 6 1/9, 12/5, 8 Aggregate fuzzy
C5 8, 7, 6 6, 19/3, 9 8, 7, 6 6, 19/3, 9 1, 1, 1 1/9, 1/9, 1/9 1/2, 25/9, 6 1/9, 1, 4 pairwise comparison
C6 1/8, 33/7, 6 1/4, 31/9, 4 1/5, 6, 9 8, 7, 6 9, 9, 9 1, 1, 1 1/6, 33/7, 8 1/6, 13/9, 5 matrix of various
C7 1/9, 17/7, 6 1/8, 17/7, 6 6, 17/3, 6 1/6, 5/2, 6 1/6, 7/6, 2 1/8, 17/7, 6 1, 1, 1 1/9, 1/8, 1/8 factors affecting
C8 1/8, 3, 9 6, 19/3, 9 6, 19/3, 9 1/8, 6, 9 1/4, 49/9, 9 1/5, 4, 6 8, 25/3, 9 1, 1, 1 investment decision
RBF level shown in Table IV, among the criteria of behavioral biases affecting
12,3 investment decision, “Herding” was ranked as highest (Weight ¼ 0.255), followed by
“Loss Aversion” (Weight ¼ 0.203), “Overconfidence Bias” (Weight ¼ 0.140), “Regret
Aversion” (Weight ¼ 0.127), “Mental Accounting” (Weight ¼ 0.099), “Availability Bias”
(Weight ¼ 0.077), “Anchoring Bias” (Weight ¼ 0.052) and “Representative Bias”
(Weight ¼ 0.046). The radar chart indicating the distribution of weight values for the
306 eight main behavioral biases is shown in Figure 3. Through arranging, each criterion and
sub-criterion were allotted a local weight, but to understand well the ranking of criteria and
sub-criteria, global significance and global ranking were calculated by multiplying each
sub-criterion weight with the leading criteria weight. Figure 4 represents that weight score
of sub-criteria of behavioral biases affecting the investment decision. According to the
global ranking of behavioral biases sub-criteria, decision makers considered “I readily sell
shares that have increased in value (C61),” “I seek advice from brokers, while investing
(C81),” and “News about the company (Newspapers, TV and magazines) affects my
investment decision (C84)” as the most important sub-criterion affecting investment
decisions. “I buy the new equity offering of the same company, in which I have already
invested (C25),” “I usually invest in familiar stocks (C21),” “I usually forecast the future stock
prices based on recent stock price (C34)” were observed as the least important behavioral
biases sub-criteria. The impact of different behavioral biases has been shown in terms of
percentage ranging from 0.33 to 17.50 percent. Separate colors have been used (Figure 4) in
order to differentiate one criterion from the other. I seek advice from brokers, while
investing (C81) ranked 2 in the global ranking whereas effect of News about the company
(Newspapers, TV and magazines) affects my investment decision (C84) ranked 3. Both of
these variables represent herding bias, which states that the investor’s do not think
independently while taking investment decision rather depend on the opinion of brokers
and news from various media. In the present study herding, overconfidence and loss
aversion bias have emerged as important behavioral biases impacting investors decision
making. In few studies, overconfidence bias has been ranked as (no. 1) behavioral bias
affecting investment decision (Antony and Joseph, 2017), whereas in the present study
herding bias has emerged as most influential behavioral bias (ranked no. 1) followed by
overconfidence (ranked no. 2) and loss aversion bias (ranked no. 3).

Conclusion
Unlike previous studies, this study has used inter-disciplinary approach for evaluating
behavioral biases. Present study has adopted the MCDM technique for evaluating the
behavioral biases affecting investment decisions. Fuzzy AHP has been applied for evaluating
behavioral biases affecting individual equity investor’s decision making. By integrating the
relevant literature review, 23 indicators were selected as being suitable for the behavioral
biases affecting equity investor’s decision making that were grouped into eight behavioral
biases, namely, overconfidence bias, representative bias, anchoring bias, availability bias,
regret aversion bias, loss aversion bias, mental accounting bias and herding bias. Results of
the fuzzy AHP revealed that herding bias, loss aversion bias, overconfidence bias, and the

Table III. Indicators C1 C2 C3 C4 C5

Aggregate fuzzy
pairwise comparison C1 1, 1, 1 1/6, 17/7, 8 1/9, 1/7, 1/6 1/6, 1/6, 1/6 1/9, 33/7, 8
matrix of various C2 1/8, 33/7, 6 1, 1, 1 1/9, 33/7, 8 1/6, 27/8, 6 1/6, 4, 8
aspects of C3 6, 7, 9 1/8, 3, 9 1, 1, 1 4, 17/8, 8 4, 20/3, 9
overconfidence C4 6, 17/3, 6 1/6, 5/2, 6 1/8, 1/6, 1/4 1, 1, 1 6, 7, 8
bias (C1) C5 1/8, 3, 9 1/8, 22/9, 6 1/9, 1/6, 1/4 1/8, 1/7, 1/6 1, 1, 1
 Local significance Local significance of Global significance
Evaluation of
of criteria level sub-criteria level of sub-criteria level behavioral
Criteria/sub-criteria (ranking) (ranking) (ranking) biases
Overconfidence Bias (C1) 0.140 (3)
I am confident about my own ability to
do better than others (C11) 0.075 (5) 0.010 (22)
I am confident about time to entre in the 307
market and exit from market (C12) 0.303 (2) 0.042 (9)
I possess specific skills and experience
for making investments (C13) 0.382 (1) 0.053 (6)
I possess complete knowledge about
various investment avenues (C14) 0.164 (3) 0.023 (13)
I am satisfied regarding past investing
decision making (C15) 0.076 (4) 0.011 (20)
Representative Bias (C2) 0.046 (8)
I usually invest in familiar stocks (C21) 0.075 (5) 0.003 (29)
I evaluate past price trends for
predicting future price (C22) 0.524 (1) 0.024 (12)
I buy hot stocks and avoid stocks having
poor performance in past (C23) 0.090 (3) 0.004 (27)
I buy stocks on the basis of present
performance (C24) 0.227 (2) 0.011 (21)
I buy the new equity offering of the same
company, in which I have already
invested (C25) 0.084 (4) 0.004 (28)
Anchoring Bias (C3) 0.052 (7)
I usually rely on Past experience in the
market for next investment (C31) 0.109 (3) 0.006 (26)
I usually buy stocks, which have fallen
considerably from previous closing or all
time high (C32) 0.417 (1) 0.022 (14)
I usually consider the purchase price of
stock as reference point for trading (C33) 0.410 (2) 0.021 (16)
I usually forecast the future stock prices
based on recent stock price (C34) 0.064 (4) 0.003 (30)
Availability Bias (C4) 0.077 (6)
I prefer local stocks over International
Stocks (C41) 0.160 (3) 0.012 (19)
I Prefer to invest in stocks, evaluated by
experts (C42) 0.590 (1) 0.045 (8)
My Investment decision depends on new
information released regarding stock (C43) 0.251 (2) 0.019 (18)
Regret Aversion (C5) 0.127 (4)
After booking profits, I usually feel I
could have waited (C51) 0.168 (3) 0.021 (17)
I usually hold loosing stock for long time,
expecting trend reversal (C52) 0.552 (1) 0.070 (5)
I am in the habit of purchasing lottery
tickets (C53) 0.072 (4) 0.009 (24)
I feel sorrow about holding losing stocks
too long (C54) 0.208 (2) 0.026 (11)
Loss Aversion (C6) 0.203 (2) Table IV.
I readily sell shares that have increased Relative importance of
in value (C61) 0.862 (1) 0.175 (1) criteria and sub-
criteria of behavioral
biases affecting the
(continued ) investment decision
RBF Local significance Local significance of Global significance
12,3 of criteria level sub-criteria level of sub-criteria level
Criteria/sub-criteria (ranking) (ranking) (ranking)

After a prior loss, I become more risk

averse (C62) 0.138 (2) 0.028 (10)
Mental Accounting (C7) 0.099 (5)
308 I invest each element of my investment
portfolio separately (C71) 0.714 (1) 0.071 (4)
I invest for my retirement (C72) 0.218 (2) 0.022 (15)
My investments are based on time
horizon (C73) 0.069 (3) 0.007 (25)
Herding (C8) 0.255 (1)
I seek advice from brokers, while
investing (C81) 0.446 (1) 0.114 (2)
My investment decision is based on
recommendations given by famous
analyst (C82) 0.200 (3) 0.051 (7)
I seek opinion from my friends and
colleagues (C83) 0.038 (4) 0.010 (23)
News about the company (Newspapers,
TV and magazines) affects my
investment decision (C84) 0.316 (2) 0.081 (3)
Notes: Local significance refers to the decision with respect to a single criterion. Global significance means
Table IV. the multiplication by the relative significance of the criteria

Behavioral Biases Weight Values

Overconfidence
Bias
0.140
0.300
Herding 0.250 Representative
0.255 0.200 Bias
0.046
0.150
0.100
Mental 0.050
Accounting 0.000 Anchoring Bias Weight Value
0.099 0.052

Figure 3.
The radar chart Availability
Loss Aversion
Bias
indicating the 0.203
0.077
distribution of
weight values Regret Aversion
0.127

regret aversion are the most important criteria that affects the decision making of individual
equity investors. Results of the study can benefit the equity market participants and other
decision makers while taking an investment decision.

Limitation and scope for further research

This study has been conducted in the state of Punjab that is mainly dominated by
the business class. The result may vary if conducted in a different geographical area.
 Hierarchical Structure of behavioral biases affecting the investment decision Evaluation of
C34 0.33% behavioral
C21 0.35% biases
C25 0.39%
C23 0.42%
C31 0.57%
C73 0.68% 309
C53 0.91%
C83 0.96%
C11 1.05%
C24 1.05%
C15 1.06%
C41 1.23%
C43 1.93%
C51 2.13%
C33 2.13%
C72 2.16%
C32 2.17%
C14 2.30%
C22 2.43%
C54 2.65%
C62 2.81%
C12 4.24%
C42 4.55%
C82 5.12%
C13 5.34%
C52 7.01% Figure 4.
C71 7.08% Global significance of
C84 8.08% sub-criteria of
C81 11.39% behavioral biases
affecting the
C61 17.50% investment decision
0.00% 5.00% 10.00% 15.00% 20.00%

This research has also been confined to the eight behavioral biases affecting investor’s
decision making. The scope of the study can be enhanced by taking more behavioral biases
and expanding the geographical area beyond the state of Punjab. Another limitation of this
study was the use of a snow ball sampling approach for data collection.

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Sanjay Gupta can be contacted at: [email protected]

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