Compared with their global counterparts, retail investors in India are more likely to recognise gains than losses and experience higher wealth losses than other investor categories by disposition effect. This effect is explained as the tendency of an investor to sell assets in which they have experienced gains and hold assets in which they have experienced losses.

This insight on investor behaviour was the key finding of a study done by the Centre for Analytical Finance at Indian School of Business.

The paper published by Sankar De, Naveen R. Gandhi and Subrata Sarkar was a part of a series of research projects in behavioural finance in emerging markets.

The database for the study consists of complete transaction records of all 755 stocks that traded on the NSE between January 1, 2005 and June 30, 2006 covering a sample period of 374 trading days.

The database includes nearly 13.46 crore trades worth Rs 37 lakh crore.

De explains that individual investors are not rational in their behaviour and therefore, tend to recognise their gains more than their losses.

“They feel happy and proud to have made money and say that the investment decisions that they made have been right. However, they will continue to hold on to those investments that are making losses in the hope that they might make money on those as well someday.”

According to the study, losses experienced by individual investors during the sample period were close to Rs 8,376 crore. “These losses are equivalent to 0.77 per of India’s gross domestic savings per year. The total number of investors who traded at least once during this period is 25 lakh, or 0.22 per cent of the Indian population. Put differently, 0.22 per cent of the Indian population lost 0.77 per cent of the total gross domestic savings. Further, the losses are just the trading losses and do not include commissions, transaction taxes and market impact losses,” the report said.

According to a 2009 study on ‘Just How Much Individual Investors Lose by Trading?’, they (trading) losses capture only 27 per cent of the total losses for individual investors. Assuming the same proportion of trading losses for Indian investors, the total losses for Indian individual investors would be around Rs 20,700 crore, or Rs 82,800 per active investor per year including overall losses, added the report.

Apart from disposition effect, another psychological factor that affects individual investors is the level of confidence or the overconfidence effect. Overconfidence, as the word explains, is the tendency of the investor to over-estimate the accuracy of their decisions.

The hypothesis notes that successful traders feel over-confident and consequently trade excessively and make riskier bets.

The study says that financial institutions exhibit the lowest degree of both disposition effect as well as over-confidence effect. Individual investors exhibit the highest degree of disposition effect and non-financial corporations the highest degree of over-confidence effect. But losses suffered due to both these effects are highest in case of individual investors.

Disposition index

According to a recent study quoted in this research paper, the disposition index for India is 2.09, while that of China is 1.66, Finland is 1.30, US is 1.24 and Japan 1.17 implying that Indian investors are more behaviourally biased than their counterparts in other countries.

De further added that reasons for the high disposition bias in India were psychological as well as sociological.

Factors such as financial compulsions and responsibilities individuals would have had, the kind of social milieu they grew up in, their income, family status, among others would also influence their financial behaviour. However, a study of all these factors would require tremendous resources, he said.

“That would be a cross-cultural study. If you go by this, Indian investors are much more behavioural than other investors. Why that is so would require the kinds of data that would be impossible to find. I would have to find data for all these countries and then do this. I would have to delve into sociology of these countries,” he added.

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