Individuals have to achieve financial goals at different stages of life for which personal financial planning plays a
very important role. To achieve these financial goals, individuals invest in different investment avenues.
Achievement of financial goals depends on selection of proper investment avenue. As per traditional finance
investors are considered as rational, unbiased and consistent who make optimal investment decision without the
effect of emotions. Though, emotions influence their decisions causing them to behave irrationally. Behavioral
finance explains the irrational behavior of investors. The current study presents the Investment pattern of 100
Individuals in the city of Mumbai and presents the issues in Behavioral Finance. The study analyses whether past
events in life influence investment decisions and the association of age of an individual & influence of past
events in life on investment decisions.
1.0 Introduction
Financial Planning is the process whereby an individual moves towards meeting personal and financial goals through the development and implementation of a comprehensive financial plan. Financial planning is not a static concept; it is an on-going process as it is related to the changing requirements of clients. Financial planning is deciding a comprehensive plan to achieve the financial goals, which are concerned with maximization of wealth. It is a process, which gives direction to financial decisions. It is also considered as a process of meeting goals in life through proper management of finance. Life goals can be purchase of a house, arranging funds for marriage, financing of children's education, planning for retirement etc. Financial planning brings solution to all these financial problems. It is the way of managing the earnings and savings in such a manner that one becomes financially independent. Financial planning can start at any age. Earlier one does better it is.
Wise investment decision is absolutely necessary to achieve the desired financial goals. Investment decisions taken abruptly may lead to heavy financial losses and such decisions cannot achieve desired financial goals. To maximize return on investment various established theories in finance may be used by an individual to take investment decision. The investment decision may be done by doing fundamental analysis about the investment, analyzing various risk factors, expected return, appreciation on investment, time frame, liquidity, safety and overall economic condition. Even after doing initial study regarding investment avenues, the investments does not achieve the desired returns which results in delay in achieving the chosen financial goals or failure in achieving the looked-for financial goals. This may be due to error in judgment of investment decisions, as investment decisions may be influenced by emotions. Behavioral finance explains the irrational behavior of investors (Phung, 2008). The current study presents the Investment pattern of 100 Individuals in the city of Mumbai and presents the issues in Behavioral Finance. The study analyses whether past events in life influence investment decisions and the association of age of an individual & influence of past events in life on investment decisions.
2.0 Conceptual framework and Literature Review
Ample of the literature makes available the evidence of how emotions and behavior of individuals affect investment decisions of individuals. Homo economics is a simple model of human behavior stated that humans are perfectly rational in their economic decision (Simon, 1955). Though, many psychologist believe that human are not perfectly rational and human behavior is less ruled by rationality than biased emotions (Michael Pompain, 2006). It was also highlighted that there seems to be certain degree of correlation between the behavioral finance theory factors and individual investor's behavior towards investment (Anna A Merikas 2000). Investors perception over various investment avenues was also emphasized (N. Geetha and M. Ramesh, 2012). In 1980's a new field was emerged known as behavioral Finance that combines the psychological and behavioral theories with traditional financial theories to provide the explanations of why people make irrational decisions (Phung, 2008). Kahneman and Tvesky contribute a lot in the field of behavioral finance with their work on prospect theory. Behavioral finance explains the cognitive and emotional factors that influence the decision making process of individual, groups and organisations (Ricciardi & Simon, 2011). Past experiences can impact future decision making and past decisions influence the decisions people make in the future (Juliusson, Karlsson, and Garling, 2005). From the above available literature on behavioral finance and investment decisions, it is quite understood that behavioral finance has a major impact on people's everyday decision regarding investments but few research is done on influence of past experiences on investment decision making. Therefore, examining the subject is essential in order to understand the changing world of investment.
3.0 Objective of the study
Objective of the study are as follows:
4.0 Research Methodology
4.1 Research Design
The study was exploratory. It was conducted to find influence of past events in life on investment decisions.
4.2 Hypothesis
There were two suggested hypothesis for the study as follows:
1) Influence of past events in life on investment decisions
Ho: There is no influence of past events in life on investment decisions of an individual.
Ha: There is influence of past events in life on investment decisions of an individual.
2) Association between age of an individual and influence of past events in life on investment decisions of
Ho: There is no significant relationship between age and influence of past events in life on investment decisions of individuals.
Ha: There is significant relationship between age and influence of past events in life on investment decisions of individuals.
The hypothesis was tested by using inferential statistical technique.
4.3 Sources of Information Primary data
Primary data was collected through questionnaire.
Secondary data
Data from secondary sources such as books and journals played a major part as a point of reference for the study.
4.4 Target Population and sample size
Target population was individual investors with sample size of 100 respondents and all the respondents were randomly selected from Mumbai. The questionnaire was distributed to 107 individuals out of which, 7 were discarded for blank responses and the balance 100 were used for data analysis.
4.5 Data Analysis
The data analysis was done by using descriptive statistics and inferential statistical technique: testing of hypothesis was done by Chi-square test.
5.0 Research Findings and Interpretations
5.1 Age Group
The age of individuals was divided into three categories. The “young age” category had respondents from 18 years to 39 years, the “middle age” category had respondents from 40 years to 55 years and the “old age” category had respondents above age of 56years. Table 1.1 shows responses for age categories. The total respondents in young age category were 50, the total respondents in middle age category were 44 and total respondents in old age category were 6. Hence, 50% of the respondents were young age, 44% of the respondents were middle age and only 6% of the respondents were old age.
5.2 Investment decisions are influenced by past events in life
Table 1.2 shows responses to the statement “Investment decisions are influenced by past events in life”. Past events in life are incidents that have had great impact in individual investor's life like heavy loss in particular Investment Avenue in past, mistakes committed in the past regarding investments, financial drain in the past due to heavy responsibilities, education and so on. Past events meaning was explained to each respondent while filling the questionnaire and responses were received as shown in the table. 9 responses were for option strongly agree, 54 responses were for option agree, 11 responses were for option Neutral, 19 responses were for option disagree and 7 responses were for option strongly disagree. Hence, 9% responses were for option strongly agree, 54% responses were for option agree, 11% responses were for option neutral, 19% responses were for option disagree and 7% were for option strongly disagree.
5.3 Testing of hypothesis Hypothesis:
Testing of hypothesis was done using Chi-square tests
1) Influence of past events in life on investment decisions
Ho: There is no influence of past events in life on investment decisions of an individual.
Ha: There is
influence of
past events in life on investment decisions of an individual.
The results of the Chi-square tests were as follows:
Chi-Square tests
Table 1.3 shows the result of Chi square tests. The sample size was of 100 individual investors and Chi-square test was applied to find out whether there was influence of past events in life on investment decisions of an individual. The value of Pearson's Chi-square was 76.4 and p value was .000, therefore p value was less than 0.05 level of significance. It means null hypothesis was rejected and there exists influence of past events in life on investment decisions of an individual.
2)Association between age of an individual and influence of past events in life on investment decisions of
Ho: There is no significant relationship between age of an individual and influence of past events in life on investment decisions.
Ha: There is significant relationship between age of an individual and influence of past events in life on investment decisions.
Cross tabulation table of Age group and Investment decisions are influenced by past events in life.
Table 1.3 shows cross tabulation of age group and responses to statement investment decisions are influence by past events in life. The responses to young age category and strongly agree option were 3, the responses to middle age and strongly agree option were 2, the responses to old age and strongly agree option were 4, the responses to young age category and agree option were 27, the responses to middle age and agree option were 27, the responses to old age and agree option were 0, the responses to young age category and neutral option were 8, the responses to middle age and neutral option were 3, the responses to old age and neutral option were 0, the responses to young age category and disagree option were 9, the responses to middle age and disagree option were 8, the responses to old age and disagree option were 2, the responses to young age category and strongly disagree option were 3, the responses to middle age and strongly disagree option were 4 and the responses to old age and strongly disagree option were 0.
Chi-Square Tests
Table 1.4 shows the result of Chi square tests. The sample size was of 100 individual investors and Chi-square test was applied to find out whether there was any association between age and influence of past events in life on investment decisions. The value of Pearson's Chi-square was 31.274 and p value was .000, therefore p value was less than 0.05 level of significance. It means null hypothesis was rejected and there exists significant association between age and influence of past events in life on investment decisions.
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