International Journal of Trend in Research and Development, Volume 3(3), ISSN: 2394-9333

www.ijtrd.com

Investigating Impact of Herd and Prospect Factors

Influencing Individuals Investment Decision
1

Anil K. Bhatt and 2CA Kishore Kumar Pahuja,

1
Professor, 2Research Scholar,
1,2
Pacific Institute of Business Studies, Pacific University, Udaipur, Rajasthan, India
Abstract-- Behavioural finance encompasses research that
drops the traditional assumptions of expected utility
maximization with rational investors in efficient markets.
Behavioural finance argues that some financial phenomena
can plausibly be understood using models in which some
agents are not fully rational. The current research is conducted
with the objectives of identifying the extent of Herding and
prospect factors affecting the individual investors investment
decision. For this research the data of 500 investors from
Udaipur city were collected as sample. The responses were
analysed using SPSS-19 Software by using multiple
regression test. The research revealed that 3 herding and 3
prospect factors affect the individuals decisions of investment
and the same would be considered for their investment
decision.
Keywords-- Behavioural Finance, Investment Decision,
Market Theory, Overconfidence And Anchoring
I.

INTRODUCTION

Institutional investors having positive-feedback trade more

than individual investors and institutional herding impacts
prices more than do individual investors (Nofsinger and Sias,
1999). This could be because the institutional investors trade
in high volumes more than individual investors( Khan et.al,
2012; Chandra et.al, 2012; Chandra et.al, 2012; Chouhan &
Verma, 2014:a; b, Chouhan, 2013). Hirshleifer & Hong
(2003) reviewed the theory and evidence relating to herd
behaviour, payoff and reputational interactions, social
learning, and informational cascades in capital markets. They
offered a simple taxonomy of effects, and evaluate how
alternative theories may help explain evidence on the
behaviour of investors, firms, and analysts. They considered
both incentives for parties to engage in herding or cascading
and the incentives for parties to protect against or take
advantage of herding or cascading by others. Hong, Lim and
Stein (2000) propose that firm-specific information, especially
negative information, diffuses gradually across the investing
public, and this is responsible for momentum in stock returns.
Shanmugam and Ramya (2010) analysed that, personality
traits have greater impact on ones behaviour. It was found
that there is significant difference in investment behaviour
amongst individuals with high and low investment
knowledge. Hence the study clearly shows that internals with
high investment knowledge show successful investment
Behaviour (Chouhan et.al, 2014; Chouhan et. al, 2013; Khan
et.al, 2014; Naghshbandi et.al, 2016). Ganapthi & Anbu Malar
(2010) indicated that the various small savings schemes are
mainly mean to help the small investors and high tax bracket
investors. They suggested that such schemes should be
advertised properly so that the deposits can be increased and
all can participate in such schemes. Dungore (2011) stated
that women are willing to take more risks than men. The risktaking ability declined with age, risk aversion level decreased
as education level increased and as income levels increased
the investors risk aversion decreased (Chouhan et.al, 2016;
IJTRD | May-Jun 2016
Available Online@www.ijtrd.com

Chouhan, V., & Naghshbandi, N. 2015; Goswami, Chandra &

Chouhan, 2012 & Chouhan & Gorana, 2014).
II.

REVIEWS OF LITERATURE

Herd behaviour is often said to occur when many people take

the same action, perhaps because some simulator the actions
of others. Herding has been theoretically linked to many
economic activities, such as investment recommendations
(Scharfstein and Stein, 1990), price behaviour of IPOs
(Welch,1992), fads and customs (Bikhchandani, Hirshleifer,
and Welch, 1992), earnings forecasts(Trueman,1994),
corporate conservatism (Zwiebel,1995), and delegated
portfolio management (Maug and Naik,1995), adds to the
herding literature by developing and empirically testing a
model that examines the incentives investment advisors face
when deciding whether to herd. The results are interpreted as
a test of the predictions of the general class of cascade and
herding models.
The sheer volume of information and the varying degrees of
sophistication of investors in financial markets suggest that
there may be a tendency for some investors to mimic the
actions of other investors, especially during periods when
uncertainty in the markets increases. This tendency of
investors to mimic the actions of other investors is called
herding. Representative definitions of herding include a
group of investors trading in the same direction over a period
of time (Nofsinger and Sias, 1999) and (when) individuals
alter their private beliefs to correspond more closely with the
publicly expressed opinions of others (Cote and Sanders,
1997). The tendency of some investors to herd, or act like
other investors, has important implications for financial
markets because herding implies that investors may be
ignoring their private information and in the process driving
prices away from their fundamental values. Herding may lead
to major shifts into or out of financial assets, and may lead to
the formation of bubbles.
Furthermore, the tendency to herd may be strongest during
periods of abnormal information flows and volatility, i.e.,
periods of high market stress, when investors seek the comfort
of the consensus opinion. They may perceive that during these
periods they will, at the minimum, achieve the average market
return if they follow the herd. Second, obtaining additional
reliable information during periods of market stress may be
perceived as prohibitively costly. Thus, following the lead of
the presumably informed aggregate trading behaviour may be
viewed as a low cost solution to problems resulting from
acquisition of high cost information. The herd factors found in
the literature is listed in table-1 with the references in the
reviews as under:
Table1: Herd factors found in the literature with the references
Herd factors
Investment

Used by previous
Researchers
Scharfstein and Stein, 1990

427

International Journal of Trend in Research and Development, Volume 3(3), ISSN: 2394-9333
www.ijtrd.com
recommendations
Price behaviour of IPOs
Fads and customs
Earnings forecasts
Corporate conservatism
Delegated
portfolio
management
Buying and selling,
Choice and volume of
trading stocks
Speed of herding

Prospect factors
Welch,1992
Bikhchandani,
Hirshleifer,
and Welch, 1992
Trueman, 1994
Zwiebel,1995
Maug and Naik,1995

Preference
for
consistency
A desire not to waste for
resources
Modeling Processes
Nature of once opponent
Audience effect
Interpersonal competition
Political vulnerability
Loss Aversion
Regret aversion
Mental accounting

Russ Wermers, 1999

Russ Wermers, 1999
Puckett and Yan, 2008;
Bowe & Domuta, 2004

A. Prospect Factors
Prospect factors are based on prospect theory which proposes
that certain outcomes are over-weighted relative to uncertain
outcomes and that the value functions are different for gains
and losses, (Shefrin and Statman, 1985); (Weber and Camerer,
1998). Balanced logic proposes that when faced with a stock
with unfavorable future expectations, individuals should sell
the stock regardless of their current gain or loss condition.
However, prior research on defeated costs and escalation of
commitment shows that people can become stuck in losing
courses of action even to the point of throwing good money
after bad (Arkes and Blumer 1985; Brockner 1992; Staw and
Hoang 1995). Therefore, individuals may wish to keep a
losing stock and gamble on the future rather than selling and
taking a sure loss and may even become more committed to
holding the stock. The Prospect factors found in the literature
are listed in table-2 with the references in the reviews as
under:
Table 2: Prospect factors found in the literature with the
references

Used by previous
Researchers
Staw, 1981
Arkes & Blumer, 1985
Brockner et.al, 1984
Brockner et.al, 1984
Brockner et.al, 1984
Teger, 1980
Fox & Staw, 1979
Staw & Ross, 1987
Baerman et.al,1982
Staw, 1981

Behavioural Factors with their respective scale items are listed

below.
III.

RESEARCH METHODOLOGY, SAMPLE

DEMOGRAPHICS AND VARIABLES

While meeting the respondents, convenient method is

adopted, because the respondents are not easily available to
debate and discuss on the questionnaire and to respond.
However, it is planned in a meticulous way and collected 500
samples as per target. The response rate is expressed as the
return rate calculated as a percentage of the total number of
questionnaires. Out of the total 600 questionnaires only 500
were returned. The response rate was therefore 83%. Table-3
presents a detailed description of the sample distribution.
While one of the objectives of this was to understand the
sample characteristics and other is to conduct analysis in the
demographic context to understand the variation in the
behaviour manifestation by people with different demographic
background. Each respondent was requested to complete and
return the questionnaire within two weeks. Follow-up
telephone calls were conducted to ensure a higher return rate.

Table 3: Sample distribution

Gender
Male
Female
Age
Less than 30 years
31-40
41-50
More than 50 years
Marital status
Married
Divorced
Single
Education qualification
Primary certificate
Secondary certificate
Degree certificate
Post graduate/PhD
Others
Employment
Self-Employment (farming)
Self-Employment (business)
Formal Employment
Both formal and Self Employment
Income (monthly)
Less than 5000
IJTRD | May-Jun 2016
Available Online@www.ijtrd.com

Count

Percentage

293
207

59%
41%

190
145
111
54

38%
29%
22%
11%

403
4
93

81%
1%
19%

57
64
184
191
4

11%
13%
37%
38%
1%

16
281
193
10

3%
56%
39%
2%

31

6%

428

International Journal of Trend in Research and Development, Volume 3(3), ISSN: 2394-9333
www.ijtrd.com
5000-20000
20000-50000
50000-100000
100000-200000
More than 200000

98
136
107
72
56

20%
27%
21%
14%
11%

The description of selected variables for current study is shown in table- as under:
Table 4: Variable list for Herding Factors
Herding Factor

Scale Items

Variable Name

Other investors' decisions of choosing stock types have impact on my

investment decisions.
Other investors' decisions of the stock volume have impact on my investment
decisions.
Other investors' decisions of buying and selling stocks have impact on my
investment decisions.
I usually react quickly to the changes of other investors' decisions and follow
their reactions to the stock market.
Herding factor impact your investment decision

Independent
Variable

Dependent Variable

HF1
HF2
HF3
HF4
HFID

Table 5: Variable list for Prospect Factors

Prospect Factor

Scale Items

Independent
Variable

Variable Name

After a prior loss, I become more risk averse.

PF1

I avoid selling shares that have decreased in value and readily sell shares that
have increased in value
I tend to treat each element of my investment portfolio separately.

PF2

I ignore the connection between different investment possibilities

PF4

PF3

Prospect factor impact your investment decision

Dependent
Variable

PFID

H1: The attributes configuring Herding factors have influence

on investment decision.
To test the data the following hypothesis was developed:
To identify key variables in multivariate regression analysis
H0The attributes configuring Herding factors have no has been used with SPSS-19 software and results were shown
influence on investment decision.
in table-6 as under:
Table 6: Multivariate Regression Analysis for Herding Factors
IV.

DATA ANALYSIS

a.

Descriptive Statistics b.
Mean
HFID
3.122
HF1
4.818
HF2
4.206
HF3
4.368
HF4
3.758
c. Correlations
d.
Pearson Correlation

Sig. (1-tailed)

N
e. Variables
Entered/Removeda
Model

HFID
HF1
HF2
HF3
HF4
HFID
HF1
HF2
HF3
HF4
500
f.
Variables
Entered

IJTRD | May-Jun 2016

Available Online@www.ijtrd.com

Std. Deviation
1.0160
0.4250
0.6540
0.7960
0.8760
HFID
1.000
.360
.180
.218
.856
.
.000
.000
.000
.000
500

Variables
Removed

N
500
500
500
500
500
HF1
.360
1.000
.634
.532
.384
.000
.
.000
.000
.000
500

HF2
.180
.634
1.000
.401
.288
.000
.000
.
.000
.000
500

HF3
.218
.532
.401
1.000
.262
.000
.000
.000
.
.000
500

HF4
.856
.384
.288
.262
1.000
.000
.000
.000
.000
.
500

Method

429

International Journal of Trend in Research and Development, Volume 3(3), ISSN: 2394-9333
www.ijtrd.com
1

HF4

HF2

HF1

Stepwise (Criteria: Probability-of-F-to-enter

<= .050, Probability-of-F-to-remove >=
.100).
Stepwise (Criteria: Probability-of-F-to-enter
<= .050, Probability-of-F-to-remove >=
.100).
Stepwise (Criteria: Probability-of-F-to-enter
<= .050, Probability-of-F-to-remove >=
.100).

a. Dependent Variable: HFID

g.

Model Summary
Change Statistics
R
Square
Change
F Change
.733
1367.663
.005
8.996
.009
16.721

Adjusted R Std. Error of

Model R
R Square Square
the Estimate
1
.856a
.733
.733
.52568
2
.859b
.738
.737
.52151
3
.864c
.746
.745
.51345
c. Predictors: (Constant), HF4, HF2, HF1
h. ANOVAd
Model
Sum of Squares
1
Regression
377.940
Residual
137.618
Total
515.558
2
Regression
380.387
Residual
135.171
Total
515.558
3
Regression
384.795
Residual
130.763
Total
515.558
c. Predictors: (Constant), HF4, HF2, HF1
d. Dependent Variable: HFID

df
1
498
499
2
497
499
3
496
499

The final Regression model with 3 independent variables

(HF4, HF2, and HF1) explains almost 74.5 percent of the
variance of Herding factor items. Also, the standard errors of
the estimate have been reduced. The three regression
coefficients, plus the constraints are significant at 0.05 levels.
The impact of multi colinerarity in the 3 variables is not
substantial. They all have the tolerance value less than 1.
The ANOVA analysis provides the statistical test for overall
model fit in terms of F Ratio. The total sum of squares
(384.795) is the squared error that would accrue if the mean of
herding items has been used to predict the dependent variable.
This reduction is deemed statistically significant with the F
ratio of 486.526 and significance at level of 0.000. With the

df1
1
1
1

df2
498
497
496

Sig. F Change
.000
.003
.000

Mean Square
377.940
.276

F
1367.663

Sig.
.000a

190.194
.272

699.309

.000b

128.265
.264

486.526

.000c

above analysis it can be conclude that only three variables i.e.,

HF4, HF2, and HF1 explains influence of the herding factors
on investment decisions Further to analyse the Prospect
Factors following hypothesis was developed:
H0: The attributes configuring Prospect factors have no
influence on investment decision.
H1: The attributes configuring Prospect factors have influence
on investment decision.
To identify key variables in multivariate regression analysis
has been used with SPSS-19 software and results were shown
in table-7 as under:

Table 7: Multivariate Regression Analysis for Prospect Factors

a.

Descriptive Statistics
Mean
PFID
3.252
PF1
4.292
PF2
2.872
PF3
4.818
PF4
3.672
b.

Std. Deviation
0.86602
0.82468
1.11809
0.42099
1.66672

N
500
500
500
500
500

Correlations

Pearson Correlation

PFID
PF1
PF2
PF3

IJTRD | May-Jun 2016

Available Online@www.ijtrd.com

PFID
1.000
.221
.411
.321

PF1
.221
1.000
.379
.703

PF2
.411
.379
1.000
.408

PF3
.321
.703
.408
1.000

PF4
.501
.660
.548
.743

430

International Journal of Trend in Research and Development, Volume 3(3), ISSN: 2394-9333
www.ijtrd.com
Sig. (1-tailed)

PF4
PFID
PF1
PF2
PF3
PF4

.501
.
.000
.000
.000
.000
500

N
c. Variables Entered/Removeda
Model
Variables Entered
Variables Removed
1
PF4
.
2

PF2

PF1

.660
.000
.
.000
.000
.000
500

.548
.000
.000
.
.000
.000
500

.743
.000
.000
.000
.
.000
500

1.000
.000
.000
.000
.000
.
500

Method
Stepwise (Criteria: Probability-of-F-to-enter <= .050, Probabilityof-F-to-remove >= .100).
Stepwise (Criteria: Probability-of-F-to-enter <= .050, Probabilityof-F-to-remove >= .100).
Stepwise (Criteria: Probability-of-F-to-enter <= .050, Probabilityof-F-to-remove >= .100).

a. Dependent Variable: PFID

d.

Model Summary

Adjusted
Model
R
R Square Square
1
.501a
.251
.250
2
.527b
.278
.275
3
.548c
.301
.296
c. Predictors: (Constant), PF4, PF2, PF1

R Std. Error of
the Estimate
.75014
.73734
.72644

e. ANOVAd
Model
Sum of Squares
1
Regression
94.021
Residual
280.227
Total
374.248
2
Regression
104.041
Residual
270.207
Total
374.248
3
Regression
112.499
Residual
261.749
Total
374.248
c. Predictors: (Constant), PF4, PF2, PF1
d. Dependent Variable: PFID

df
1
498
499
2
497
499
3
496
499

The final Regression model with 3 independent variables

(PF4, PF2, and PF1) explains almost 29.6 percent of the
variance in Prospect factor items. Also, the standard errors of
the estimate have been reduced. The three regression
coefficients, plus the constraints are significant at 0.05 levels.
The impact of multi colinerarity in the 3 variables is not
substantial. They all have the tolerance value less than 1.
The ANOVA analysis provides the statistical test for overall
model fit in terms of F Ratio. The total sum of squares
(112.499) is the squared error that would accrue if the mean of
prospect items has been used to predict the dependent
variable. This reduction is deemed statistically significant
with the F ratio of 71.059 and significance at level of 0.000.
With the above analysis it can be conclude that only three
variables i.e., PF4, PF2, and PF1explains influence of the
prospect factors on investment decisions.
CONCLUSION
The investors should not divide their investment portfolio into
separate accounts because each element of the portfolio may
have a strict relation to the others and the treating each
element as an independence can be result a unfavorable
investment performance. All the behavioural factors
influences the decision making process of individual
IJTRD | May-Jun 2016
Available Online@www.ijtrd.com

Change Statistics
R
Square
Change
F Change
.251
167.089
.027
18.429
.023
16.027

df1
1
1
1

df2
498
497
496

Sig.
Change
.000
.000
.000

Mean Square
94.021
.563

F
167.089

Sig.
.000a

52.020
.544

95.683

.000b

37.500
.528

71.059

.000c

investors. Advisor should advise the investor to make an

investment decision spent enough time and resources to
analyse the company. To overcome the anchoring bias
investor should be patient and check once if you are making
an emotional decision or a data driven decision. Discuss with
trusted resources to take a critical thinking view Check only
the underlying fundamentals since great businesses very rarely
trade at mouth-watering valuations. Moreover, they will
always trade at higher valuations. It can also be concluded
that other investors' decisions of choosing stock types, other
investors' decisions of the stock volume must not have impact
on investment decisions. Investor should not react quickly to
the changes of other investors' decisions and follow their
reactions to the stock market. They must not become more
risk averse after a prior loss, must not avoid selling shares that
have decreased in value and readily sell shares that have
increased in value and should not ignore the connection
between different investment possibilities
References
[1] Barber, Brad, and Terry Odean, 2001. Boys will be
boys: Gender, overconfidence, and common stock
investment. Quarterly Journal of Economics 116, 261292

431

International Journal of Trend in Research and Development, Volume 3(3), ISSN: 2394-9333
www.ijtrd.com
[2] Chandra, A. (2008). Decision Making in the Stock
Market: Incorporating Psychology with Finance. New
Delhi-110025
[3] Chandra, B., Chouhan, V., and Goswami, S.,(2012:a)
Analyzing Trends and Profitability vis--vis Working
Capital Organizations of India Management (WCM) A
Study of Select Information Technology (IT), Indian
Journal of Finance, ISSN: 0973-8711, Vol.6, No. 7, July,
PP 13-26.
[4] Chandra, B., Goswami, S. and Chouhan, V., (2012: b)
Investigating Attitude towards On-Line Advertising on
Social Media An Empirical Study, Management
Insight, SMS Varanasi, ISSN: 0973-936X, Vol. VIII, No.
1, June, PP 1-14.
[5] Chouhan, V. & Gorana, H. (2014). Analysing Consumer
Decision making for FMCG products on basis of
different culture: a case study of Rajasthan and Gujarat
states, American International Journal of Research in
Humanities, Arts and Social Sciences, 8(2), 217-222.
[6] Chouhan, V. & Verma, P., (2014:b), Measuring validity
of performance appraisal tools in Performance Appraisal
System, Nirnay the Journal of Decision Science, Vol. 6,
No. 1, Jan-July, pp 57-64.
[7] Chouhan, V. & Verma, Pushpa (2014:a), Improving
effectiveness of Performance appraisal tool: Who thinks
that it uses improved techniques?, Business Spectrum,
4(1), 71-82.
[8] Chouhan, V., & Naghshbandi, N. (2015). Measuring
Employees Value: A Critical Study on Human Resources
Accounting in India. International Journal of
Management, Accounting and Economics, 2(4), 277-292.
[9] Chouhan, V., (2013), Global Convergence of Accounting
Standard And Indian Perspective, International Journal
of Research in Finance & Marketing, 33(7), 15-27
[10] Chouhan, V., Chandra, B., Goswami, S. (2014),
Predicting financial stability of select BSE companies
revisiting Altman Z score, International Letters of Social
and Humanistic Sciences, 15(2), 92-105.
[11] Chouhan, V.,Verma, Pushpa, Sanghvi, Himanshu and
Gupta, Apurv (2013), Assessing Workers and
Managers Perception on Judgment Accuracy in
Performance Appraisal System (PAS) International
Journal of Engineering, Business and Enterprise
Applications (IJEBEA), 5(1), 95-99.
[12] Chouhan, Vineet, Chandra, Bibhas, Goswami, Shubham
& Verma, P.(2016).Analyzing the Performance
Appraisal System of a Public Sector Organization in
India: The Case of Rajasthan State Mines and Minerals

IJTRD | May-Jun 2016

Available Online@www.ijtrd.com

Limited, IUP Journal of Management Research, 15(1),

48-74.
[13] Goswami, S., Chandra, B & Chouhan, V. (2012).
Analyzing Customer Perception towards Hypermarkets
An Empirical Study. The Alternative-Journal of
Management Studies and Research (BIT Mesra), 2, 87107.
[14] Gwily, M. R., (2009). Can behavioral finance model
account for historical asset prices? Cardiff Economics
Working Papers
[15] Johnson, M., Lindblom, H., Platan, P. (2002). Behaviora
Finance: And the change of investor behaviour during
and after the speculation bubble at the end of the 1990s.
Masters Thesis in Finance, Lund University.
[16] Kahneman, D., & Tversky, A. (1979). Prospect theory:
An analysis of decision under risk. Econometrica:
Journal of the Econometric Society, 263-291.
[17] Khan, S., Chouhan, V., Chandra, B. & Goswami, S.
(2012). Measurement of Value Creation Vis--Vis EVA:
Analysis of Select BSE Companies, Pacific Business
Review, 5(1), 114-131.
[18] Khan, S., Chouhan, V., Chandra, B., & Goswami, S.
(2014). Sustainable accounting reporting practices of
Indian cement industry: An exploratory study. Uncertain
Supply Chain Management, 2(2), 61-72.
[19] March, J., Sharpira, Z. (1987). Managerial Perspective
on Risk Taking. Management Science No. 33
[20] Naghshbandi, N., Chouhan,V., Jain, P.(2016). Value
based measurement of financial performance.
International Journal of Applied Research, 2(2), 365-369.
[21] Odaen, R.A. (1998). Behavioral Finance and its
Implications for Stock-Price Volatility, Financial Analyst
Journal 54, No.2
[22] Raines, J.P., Leathers, C.G. (2011). Behavioral Finance
and Post Keynesian-Institutional Theories of Financial
Markets, Journal of Post Keynesian Economics.
[23] Reilly, J., & Brown, J. (2004). Management and control
of cost and risk for tunneling and infrastructure projects.
Tunnelling and Underground Space Technology, 19(4),
330.
[24] Ritter, R.J. (2003). Behavioral Finance: Pacific Basin
Finance Journal, Vol. 2, No.14.
[25] Ross, L. (1987). The Problem of Construal in Social
Inference and Social Psychology, Hillsdale, NJ: Erlbaum
[26] Subrahmanyam, A. (2008). Behavioural finance: A
review and synthesis. European Financial Management,
14(1),
12-29

432