Psychodynamics of Investments: Study on 'Fear' and 'Love' Among Financially Literate Investors in India

Abstract

This study examines the emotional undercurrents of individual investors. Earlier finance theory was based on the assumption that investors would act rationally. According to the findings, it is the investors' collective expectations and anxieties that have an impact on their investment fortunes. This necessitates a high level of emotional stability on the side of the investors. Investors must have a firm foundation in financial literacy to have the requisite level of emotional stability. This study aims to add to existing theory and practice by analyzing whether investors who have received business-related education are less emotional than those who have not. For the survey inquiry of individual investors, 'fear' and 'love' are considered among the emotional undercurrents of individual investors. The research is based on a survey of 875 individual investors in India, 342 of whom had a business background and the others have none. It has been discovered that no investor, regardless of their level of business education, is emotion-free. Investors with and without a business education display emotional stability in many behavioral aspects of fear and love to varying degrees.

1. Introduction

Individual investor investment behavior has gained appeal among academics since individual investor participation in the stock market has expanded dramatically in recent years. This rise can be attributed to a number of factors, the first of which is the stock market’s unparalleled return on assets, as well as prospects for “making money work” and achieving returns on invested funds. Second, financial instruments have high liquidity, which indicates that an investor may quickly convert financial market instruments into cash. Third, a variety of financial assets refers to a range of financial assets that are available to individuals, from which they can choose assets based on their investing goals (Ledgerwood et al., 2013).

To receive the highest return, investors must analyze all investing components, which may include financial or non-financial information, as well as psychological factors, all of which are necessary for making the best investment decision. When investing in stocks, investors must conduct a thorough financial analysis of the companies they are considering. There are a lot of emotional difficulties that play a key role in the investment process throughout this clever and practical strategy. “Buyers (of equities shares) are frequently disappointed due to cognitive mistakes or a lack of self-control.”

Unfortunately, because investors are not always ‘rational, ’ they are vulnerable to emotions and psychological biases, some of these basic processes and assumptions underlying investment theories tend to slip by the wayside. Behavioral finance is still a novel topic that has garnered little attention from analysts and investors, although it has been exploited for decades (Cao et al., 2021). In light of this, the purpose of this article is to trace the emotional undercurrents of individual investors’ corporate securities investments. Among a wide range of emotions, ‘fear’ and ‘love’ are taken into account in a study of investors with and without a business background.

2. Literature Review

Several distinct works of literature have been produced that show how psychological and emotional aspects influence investors’ investment decisions (Griffith et al., 2020; Lo et al., 2005). In light of this, the next paragraphs give an overview of selected research on the psychodynamics of investment behavior.

According to Psychological Foundations of Economic Behavior, “Financial markets appear dry, technical, and strictly economic from the outside, with only declines in percentages, volume, margin calls, and paper losses in mind. The market’s internal process, on the other hand, is psychological. All markets, whether financial or not, are transactions in which real or financial assets, money, or assets are transferred from one hand to another. It’s critical to remember that these are human hands with thoughts and feelings connected” (Maital, 1982). Investor behavior is influenced by three factors: enthusiasm, overconfidence, and greed (Benjamin, 1984).

How much to invest and in what securities, are in part, a function of people’s preferences and tastes (Jawahar, 1992). Very intelligent people lose money in the markets because of mind-created obstacles (Ira & David, 1992). Judgment is often impaired and decisions are made based strictly on ‘gut’ feelings (Bernstein, 1993). All humans are subject to vagaries of fear, greed, pride of opinion, and all other excitable states that prevent rational judgment (Pring, 1993). Investing in the stock market should be a non-emotional endeavor, yet people tend to either adore or despise a stock (Randall, 1993). The issue isn’t with the market; rather, it’s with ourselves, our views, and our responses to those perceptions (Ellis, 1993). Market values are determined in part by balance sheets and income statements, but in large part by humanity’s aspirations and fears, greed, ambition, and other factors (Loeb, 1996). The market may react quickly to facts, but it can also be subjective, emotional, and ruled by the whims of changing trends (Tvede, 1999). The dominance of psychological and sociological factors supports the herd instinct among investors (Shanmugham, 2000).

Investment performance is harmed by fear, greed, risk seeking and aversion, and peer group pressure. For most investors, psychological biases are unavoidable. The use of psychology in investing can help investors avoid costly mistakes caused by the influence of human emotions on financial decisions (Shefrin, 2002). Some investors make illogical decisions, causing prices to fluctuate and create predictable patterns from time to time (Malkiel, 2003). According to a survey of Indian investors done by the Securities and Exchange Board of India in 2003 (SEBI, 2003), investing in stocks involves not only the investors’ thoughts and conjectures but also their impressions of the economy and the company. Many aspects that influence investors’ decision-making processes, such as social influence, social contacts, and media, are discussed in most behavioral finance research. Interactions with peers, acquaintances, and family members are effective ways to exchange information and ideas. The primary factors of investment behavior and decisions are risk-taking attitude, social interaction, emotions, religious faith, and financial knowledge.

Individual investors have experienced emotional upheavals as a result of the market’s enormous swings, with hope reigning supreme during upswings and despair reigning supreme during downswings. Individual and institutional investors’ decision-making processes may be influenced by human emotions. Psychological biases have an impact on all investors (Nodsinger, 2014). Overconfidence, optimism, herd behavior, and risk aversion were among the psychological characteristics utilized to assess stock market investment intentions (Phan & Zhou, 2014). Herding has a greater impact on investor psychology in emerging markets, according to Luu and Luong (2020). Investment intention is influenced by behavior, subjective norms, perceived behaviour control, and attitude (Phan & Zhou, 2014). Personal, psychological, and emotional variables impact an investor’s decisions.

The majority of market volatility can be traced to investor psychology. Irrational investor actions are the source of the majority of the risk, as a result of their extreme optimism, which leads to price increases that exceed the true value of the companies in question. The financial markets’ psychological patterns are based on how human psychology influences decision-making and explains the rationality of investors’ exit. Individual perceptions and knowledge play a role in the decision-making process, and the decision is based on the information available, with preferences, attitudes, sentiments, and reasons all playing a role. Individuals’ risk attitudes, perceptions of social influence, and faith determine investors’ intentions, and intentions shape individual behavior. Individual investors’ personality attributes have an impact on their stock investment intents, styles, and methods (Lai, 2019). Irrational variables, rather than rational factors, have a greater influence on investors’ investing decision-making. (Rahayu et al., 2021).

The prior section brought up the emotional side of investing. Equity investments, in particular, provide investors with a roller-coaster ride. Winning or losing is frequently determined by investor psychodynamics rather than market forces. In fact, it is the aggregate hopes and anxieties of market players that have an impact on investing fortunes. This necessitates emotional stability among equities investors, which arises from a variety of factors, including financial knowledge. The problem statement in the following paragraphs is based on these premises, with appropriate literature support.

The need to improve the general public’s basic comprehension of financial concepts is expanding as financial complexity increases (Lusardi & Mitchell, 2007). The literature indicates that financial literacy levels influence sensible financial behavior. The importance of financial knowledge in the evolution of stock investment behavior cannot be overstated.

Financial expertise, according to Klapper et al. (2015), is essential in the present day, when financial markets offer a wide range of sophisticated financial products. Financially illiterate investors faced disastrous outcomes, such as bigger debts with high-interest rates (Klapper et al., 2015), fewer savings, and more borrowing. Financially educated persons, on the other hand, have stronger financial management abilities (Lusardi & Mitchell, 2007). Individuals’ financial attitudes may also be influenced by financial literacy. There are, however, a few studies that shed light on the link between financial literacy and investing decision-making. The more “naive” the investors are, the more panicked they become, setting the stage for true stock market disasters. It is accepted wisdom that our level of knowledge or our perceived level of knowledge with investing or the markets will impact decision-making (The Investment and Wealth Institute, 2021).

There is a link between financial literacy and educational background (Lusardi & Mitchell, 2007). Individuals with the least amount of schooling performed significantly worse than those with higher education levels (Lusardi & Mitchell, 2007). Because financial literacy rises with educational attainment, educational degrees have a strong link with financial literacy (Klapper & Lusardi, 2020).

The preceding section has demonstrated that investors require emotional stability, which is dictated by their level of financial literacy. Financially literate investors, as shown by their educational backgrounds, are more likely to detect related risks before making investment decisions and to avoid allowing emotions to influence their investment management process. Business education, in particular, becomes increasingly important among the numerous streams of education. The educational history of investors, particularly in undergraduate and graduate business education, among other things, acts as an excellent proxy for financial literacy. This paper is based on the idea that investors who have taken business-related courses have a superior understanding of financial literacy.

Bachelor of Commerce (B. Com), Bachelor of Business Administration (BBA), Master of Commerce (M. Com), and Master of Business Administration (MBA) programs in business education provide the requisite background in investment possibilities in general and stock market operations in particular. The economic and psycho-dynamics of investments are both considered in these streams’ stock market investment orientation. As a result, investors with these educational backgrounds are well-positioned to comprehend the investment game from both a financial and psychological perspective. Investors with business education are assumed to use logic and reason in their investment operations, resulting in emotional stability throughout the investment process. They are less vulnerable to emotions like fear and love. Hence this study has been undertaken.

3. Methodology

The current study is undertaken to study the susceptibility of investors to the emotions of fear and love as well as to present a comparative analysis of investors’ susceptibility to fear and love among the Indian investors with and without business education backgrounds.

The study employs a survey approach to examine the investors’ vulnerability to fear and love emotions. To select a sample from an unknown population, convenient sampling is utilized. The information was gathered from stock market participants with at least three years of experience investing in the stock market to guarantee that they have a thorough understanding of the elements that influence investment behavior. Individual investors were given questionnaires with specific questions on fear and love behavior on a five-point Likert scale. Four words outlining the underlying behaviors were framed for each emotion. The inputs for designing this instrument were drawn from ‘The Tough Minded Investor’ by Clifford (1993), among others.

The research examined 875 individual investors in India, with 342 having business education and the rest having no formal education. The scores on each behavioural construct are added together to generate a mean value, which measures the intensity of fear and love, as well as a coefficient of variation (CV), which measures how consistent their views on the underlying behavioral constructs are. Appendix A contains information on demographic factors affecting investors with and without a business education.

4. Results and Discussion

4.1. Analysis of Susceptibility to Fear

Fear is an emotional reaction to perceived changes that drive investors to be nervous. Fear might arise among investors as a result of the uneasiness and nervousness produced by a prolonged drop in share prices. Furthermore, increasing buying due to greed would eventually turn into dread. Even when the stock has reached its highest price, the investor’s greed drives him to keep the stock. The greedy mind believes it is only a matter of time. This view will be shattered if the price continues to fall. The investor develops apprehension. He begins to question whether or not he should keep his investments.

The investor manages his fear by hoping that the price would improve and never go over what he paid. If the stock price continues to decrease, he will be overcome by despair. The more he considers the problem, the more panicked he feels until he can no longer tolerate it. As a result, investors are constantly afraid that their investment will lose value. The degree to which these characteristics are present among investors with business and non business academic backgrounds is described below. Table 1 and Figure 1 show information on the fear behavior of investors with a background in business education.

Table 1: ‘Fear’ Among Investors with Business Education Background

Note: Figures in the brackets indicate the percentage share to their respective totals. S.D. = Standard Deviation, C.V. = Coefficient of Variation.

Figure 1: ‘Fear’ Among Investors With Business Education Background

Table 1 and Figure 1 show that the most common fear behavior among investors is selling shares when the market index (Sensex) falls sharply (Mean = 3.0468), followed by their inability to bear the stress of watching the prices of the shares they own fall (Mean = 3.0088), and selling shares when companies report bad news (Mean = 2.8246). Selling shares on finding a paper loss with the concern that prices would go farther lower (Mean = 2.778) is the last manifestation of fear behavior. Investors have shown more consistency in ‘their incapacity to bear the stress generated by witnessing share values decrease’ (CV = 40.55) among the conceptions of fear behavior.

Information on the fear behavior among investors who are without business education is presented in Table 2 and Figure 2.

Table 2: ‘Fear’ Among Investors with Non-Business Education Background

Note: Figures in the brackets indicate the percentage share to their respective totals. S.D. = Standard Deviation, C.V. = Coefficient of Variation.

Figure 2: ‘Fear’ Among Investors with Non-business Education Background

Table 2 and Figure 2 show that selling stock while the market index is in free decline (Mean = 3.1468) is a strong fear behavior among investors with little or no business experience. This was followed by their inability to bear the stress of watching share prices fall (Mean = 2.9381), selling shares after discovering a considerable paper loss (Mean = 2.9362), and selling shares after the firm publishes bad news (Mean = 2.7561). These investors exhibit a higher level of consistency in terms of ‘their inability to bear the stress of witnessing a share price decrease’ (CV = 39.75). However, their actions of selling stock when the company reports bad news are inconsistent (CV = 46.84).

4.2. Analysis of Susceptibility to Love

Love represents a range of human emotions and experiences demonstrating a sense of affection. It’s a powerful and intangible feeling you have for someone or something. Investors tend to acquire a strong love for a particular stock. This love affair may blossom when they purchase a stock that is seeing a continuous price increase. When the stock price rises, the investor’s paper profit rises, and his ego naturally becomes entangled in the price movement. When the price continues to rise, he is ecstatic that his prediction has come true.

As the price of his stock rises, the investor develops an emotional attachment to it and is frequently offended when others think it is overpriced. Every subsequent price increase makes him happy since he has made more money than expected. The investor is more elated by the wonderful news about the company in the media. His hopes for a price increase grow even higher. The following paragraphs address the vulnerability of investors to love based on their educational backgrounds. Table 3 and Figure 3 show data on the love investors’ behavior with a business education background.

Table 3 and Figure 3 show that investors with business education have a strong love for the company (Mean = 3.3953), praising shares to their friends and associates (Mean = 2.8538), experiencing sheer joy if the share price goes beyond their dreams (Mean = 2.3596), and experiencing a continuous price increase after purchasing shares (Mean = 2.3363). Among these love behavior traits, investors have exhibited better consistency in having a personal relationship with the company and feeling disloyal if the shares are sold (CV = 37.04). However, they have shown inconsistency in expressing pure excitement if the stock price rises beyond their wildest expectations (CV = 53.09).

Table 3: ‘Love’ Among Investors with Business Education Background

Note: Figures in the brackets indicate the percentage share to their respective totals. S.D. = Standard Deviation, C.V. = Coefficient of Variation.

Figure 3: ‘Love’ Among Investors With a Business Background

Table 4 and Figure 4 provide information on investors’ loving behavior when they have a non-business education.

Table 4: ‘Love’ Among Investors with Non-Business Education Background

Note: Figures in the brackets indicate the percentage share to their respective totals. S.D. = Standard Deviation, C.V. = Coefficient of Variation.

Figure 4: ‘Love’ Among Investors With a Non-Business Background

Table 4 and Figure 4 show that investors without business education show a marked love behavior in the form of personal attachment to the company and believe it is disloyal to sell shares (Mean = 3.3974), praising their shares to friends and associates (Mean = 2.7073), expecting a continuous price increase after they have purchased the shares (Mean = 2.3677), and experiencing sheer joy if the share price goes beyond their expectations as they find an investment opportunity. Investors have shown a higher level of consistency in building a personal attachment to the company (CV = 35.79) and a higher level of inconsistency in their love behavior “of experiencing pure ecstasy if the share price rises beyond their expectations (CV = 51.66).

4.3. Comparative Analysis

Table 5 and Figures 5(a) and 5(b) show the results of a comparative analysis of investors’ vulnerability to fear among shareholders with and without a business education.

Table 5: Analysis of Susceptibility to Fear: Comparative View

Source: Tables 2–3

Figure 5(a): Susceptibility to Fear: Comparative View (Mean Values)

Figure 5(b): Susceptibility to Fear: Comparative View (CV Values)

Table 5 and Figure 5(a) show that both categories of investors exhibit a strong form of fear behavior when selling shares when the market index falls. However, it is especially intense among investors who do not have a business background. Furthermore, the stress of watching share prices fall is revealed to be the second most common fear behavior among both classes of investors, with the intensity being higher among those with business education. There is a difference between these two types of investors in terms of the lowest panic behavior: investors with a business education background sell shares when the firm reveals financial loss, whereas investors without a business education background sell shares when the company announces bad news.

Table 5 and Figure 5(b) reveal that both kinds of investors have exhibited a greater degree of constancy in their inability to endure the stress of watching share values fall. Their panic behavior, on the other hand, differs in consistency. Investors with business education are more inconsistent in selling shares when the company announces negative news, but investors without a business education are less consistent in selling shares when the company discloses bad news.

Table 6 and Figures 6(a) and 6(b) give information on a comparative investigation of investors’ susceptibility to love.

Table 6: Analysis of Susceptibility to love: Comparative view

Source: Tables 4–5.

Figure 6(a): Susceptibility to Love: Comparative View (Mean values)

Figure 6(b): Susceptibility to Love: Comparative View (CV values)

Table 6 and Figure 6(a) show that loving behavior among both classes of investors has nearly identical preferences. The most conspicuous type of loving behavior is a personal commitment to the firm and appreciation for stocks. Investors with a business education have stated that if the stock price rises, they will be delighted. In the case of investors with non-business education, however, expecting a continual growth in share price is the third powerful form of loving behavior. However, in the case of investors with business education, it is the least preferred mode of behavior.

Surprisingly, both types of investors have exhibited consistency (Table 6 and Figure 6(b) in their personal relationship with the company and feel they are betraying the company if they sell shares. Investors with a business degree, on the other hand, have demonstrated a higher level of consistency than those without. When the share price exceeds expectations, both categories of investors have shown increased inconsistency (Table 6 and Figure 6(b)).

5. Conclusion

The goal of this study was to see if financially literate investors, i.e., those with business education, have more emotional stability and consistency in their investment behavior than financially less literate investors, i.e., those with a non-business educational background and if there is any significant difference in their behavior in terms of their intensity on various behavioral dimensions of fear and love. When it comes to fear behavior, the study discovered that both types of investors are more likely to sell their stocks when the market Index is in free fall. This is a typical sort of fear behavior among investors of both types.

It’s worth noting that both have been consistent in their inability to cope with the stress of watching stock values decrease. When it comes to love behavior, both classes of investors have expressed an emotional commitment to the company and feel they are betraying the company if they sell their shares. Interestingly, they’ve all shown constancy in this type of love behavior. Based on this data, it can be stated that no investor, regardless of their level of business knowledge, is emotion-free. Investors with and without a business education display emotional stability in the majority of behavioral characteristics of fear and love to varying degrees.

Orientation to business education has not made the desired dent in fostering emotional stability in the investment affairs of investors. To manage the susceptibility to emotions such as fear and love, all the investors across the board need to develop patience and control over their emotions. Investors should also be realistic in their approach and develop an open mind to admit the fall in share prices.