Executive Summary

Behavioural finance is the study of investor’s psychology while making investment decisions.
The idea that psychology drives stock market movements flies in the face of established
theories that advocate the notion that markets are efficient. Proponents of the efficient market
hypothesis say that any new information relevant to a company's value is quickly priced by the
market through the process of arbitrage. The behaviour of investors is not always rational, so
investment managers do not forget how the psychology factor of a person plays a substantial
role in behaviour of financial market. Psychological biases such as emotions, fear, over-
confidence, greed, and risk aversion influence investors’ behaviour that, in turn, influences
stock markets.

There are three basic theories which shape efficient market hypothesis. The first and most
important principle is that investors are rational and valuable by securities notion. This is based
on the idea that everyone becomes carefully informed from available accounting information
before investment decision making. The second principle is that decisions were consistent with
each other and the third principle is that decision maker is always seeking his interests. There
are many types of these inflations and most of them result in paradoxical behaviours in
individual.

The purpose of this study is to determine the investment behaviour of individual businessmen
and their behaviour towards investments. Investors perception will provide a way to accurately
measure how the investor thinks about the various investment avenues in the country. There is
a high need to understand their physiological attributes and biases towards financial
investments to understand how the investors are putting their money into investment avenues.
This study also focusses on the physiological biases of businessmen and factors considered by
the businessmen while investing.

In this study, we had done an exploratory research the information regarding the investor’s
preference was collected through questionnaire survey. Through providing questionnaire, the
responses from small and medium scale business individual (random sampling method, sample
size of 100 respondents) which spread across various cities in India are collected as a part of
the primary data collection. Secondary information’s will be collected through referring
various article, journals, research papers, magazines and newspapers.
Apart from the main objective of the study (to understand the impact of psychological factors
on investment behaviour of small-scale business men in India), this study also aims to identify
and prioritize the factors that influence the investor behaviour in investment decisions making
process and to understand how physiological factors and different type of biases affects an
individual while making investment decisions. About 25 journals have reviewed as part of this
study which will be telling the necessity of understanding the psychological factors and their
impact in people while investing.

Investment is one of the most volatile components of the economy adding interest and
challenge for theories that attempt to explain investment behaviour. The oldest and most
familiar explanation came from the theory of user cost of capital where by the firm maximizes
its market value by adjusting its capital stock to a point where the marginal value product of
capital equals the market interest rate. User cost theory however says little or nothing about
what determines the marginal value product of capital In addition to these theoretical
foundations, this study also explains about the key concepts in behavioural finance and
investing options such as equity, mutual funds, bonds and soon which are having significant
importance with respect to this study.

Separate analysis for the responses collected of each question used in the questionnaire are
done under the analysis section. This study shows associations and impacts between
independent and dependent variables. A Null Hypothesis and a Corresponding Alternate
Hypothesis have been formulated to facilitate hypothesis testing. The Chi-Square Test is used
for testing of statistical significance of observed associations between independent
(psychographic) and dependent (investment behaviour) variables. The simple regression which
is a statistical method that allows to summarize and study relationships between two continuous
(quantitative) variables has also been used to draw the inferences and conclusion.

Findings include most of the respondents has knowledge about investing whether it might be
small or large it doesn’t matter as that person is limited his knowledge to his risks and his
business. This study concludes by stating that investor psychology and investment have a direct
relationship. Although even businessmen are subject to some biases, they tend to think more
rational than an average investor in many ways as their knowledge of economy, seasons,
markets gives them a higher pedestal on the investment side of the business.