Study: Investors 'fall in love' with their stocks

A recent study examining the behaviour of stock market investors in Gujarat's urban centers revealed that 52.39% of investors form emotional attachments to their stocks, refusing to sell even when prices drop. Additional insights from the study include that women tend to favor trading over long-term investment, leading to lower returns, and Gen Z investors experience greater dissatisfaction with losses than satisfaction with equivalent gains.

The researcher

The research was conducted by Dr Faisal Patel, an assistant professor at Udhna College, who analysed 607 investors across four key Gujarat cities — Ahmedabad, Surat, Vadodara and Rajkot — over a four-year period. The sample consisted of 373 men and 234 women from diverse educational, religious and age groups. This study formed part of Dr Patel’s PhD, supervised by Dr Mehul Desai, the principal of Udhna College.

Explaining his motivation for the study, Dr Patel, a commerce and accountancy professor, said: "I thought of the subject during Covid as many people shifted to the stock market because of low interest rates on fixed deposits. Returns from other savings instruments also fell, and people felt the stock market was more rewarding at the time. I thought I ought to examine the psychology and behaviour of these investors and went for it for my PhD."

Dr Patel reviewed both Indian and international literature, identifying 17 behavioural biases, which he grouped into six categories: captive bias, bounded rationality, self-enhancement, herd behavior, hyperbolic discounting, and information avoidance bias.

Patterns that emerged

The study uncovered several intriguing patterns in investor behaviour. Under captive bias, 52.39% of investors held onto stocks despite price declines due to emotional attachments, while 48% retained stocks even after negative news surfaced. In terms of self-enhancement bias, 59.14% displayed overconfidence, believing their successes outweighed their failures in investing. Additionally, 52% attributed their profits to their perceived expertise in the stock market and 51% were convinced they could accurately predict market trends.

The research also explored rational decision-making through the lens of bounded rationality bias. About 48% of investors admitted to investing without conducting research, relying solely on readily available information, while 51.89% based their decisions on trends and news rather than fundamental analysis.

Herd behaviour emerged as a significant trend in the stock market, with 50% of participants acknowledging that their investment choices were influenced by other investors’ decisions. Furthermore, 53% would promptly buy stocks recommended by an advisor, and 47% felt a stock was safe if many others invested in it, with the same percentage trusting friends who had previously guided them to profits.

The study also highlighted a tendency toward short-term thinking, with 54% of investors frequently monitoring the market value of their investments. Additionally, information avoidance bias was prevalent, as 48% of investors considered easily accessible information more reliable than alternative sources, often focusing selectively on news that aligned with their existing beliefs while disregarding opposing perspectives.