Study on Behavioural Factors Influencing Investment Decision in Real State : A Case Study of Udham Singh Nagar (Uttrakhand)

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1 Study on Behavioural Factors Influencing Investment Decision in Real State : A Case Study of Udham Singh Nagar (Uttrakhand) 150 Kumaun University, Nainital, Uttarakhand, India Abstract Behavioural finance theories which are based on the psychology, attempts how emotions and cognitive errors influence the behaviour of investors in investment decision. The main objective of present study is to identify the Behavioural Factors that influence the investment decision of investors in Real Estate. The study uses structured questionnaire to collect the data from the respondent who invest in Real Estate. The sample of 200 respondent has been taken from the prominent areas of Udham Singh Nagar district of Uttrakhand and various statistical tool, of factor analysis are applied to achieve the objective of the study. Introduction Investment is prevailing in all walks of life. But the way of investment vary from person to person. Some people want to invest their money in the Stock Market, some of in commodity market, some in gold fixed deposits and some of in real estate and so on. All the decisions of investment of investors depend on their needs and time. Investment in real estate is very common for the investors. They invest in the property market for different reasons. Some of the investors invest in the property for commercial purpose, some for resale, and some for investment purpose and many other reasons. But when they invest in the property market, they do not know that certain factors affect their investment decision [1]. Many people make investment emotionally, feeling fantasy, mood and sentiments have been observed to affect investment decision. These are some psychological factors that affect the investors in investment decision. Investors are affected by how investment problems are presented to them. They often make different choices pertaining similar scenarios depending on how the problem has been frame. [2]. There are two different approaches for understanding the human behaviour in their investment decision- Traditional finance and Behaviour finance. Traditional finance assumes that markets are efficient and investors are rational and consider all available information in the decision-making process, that they will favour investment that maximise their wealth. As such, prices are right reflecting all available information and there is no free lunch : no investment strategy can earn excess risk-free rate of return greater than that warranted by its risk [3]. Hence, investment markets are efficient and security prices reflect the true intrinsic values of the assets. That investors act promptly to new information and update prices correctly within a normatively acceptable process. Behaviour finance which is based on psychological factors contends with market efficiency and investors rationality."behavioural Finance," a relatively new area of research, is the study of how human psychology, our thoughts, feelings and attitudes (such as confidence) influence financial decisions. According to [4] behaviour finance is the study of the influence of psychology on the behaviour of financial practitioners and the subsequent effect on market. There are two set of psychological factors-cognitive (the way of think) and Emotional (the way of people feel). Behaviour finance is based on the cognitive psychology (how people think) and the limit to arbitrage (when market will be inefficient). Rather than using all the available information, people select some important information. Psychological factors influence investment decision so that investors have been found to make irrational decision. [5]. The present study has been planned to execute the following objective: 1. Identification of the main Behaviour Factors that influences the investors in property investment decision in Udham Singh Nagar district of Uttrakhand.

2 Literature review The review is based on past empirical studies and general literature on cognitive psychological factors which are the basis of behavioural biases. On the basis of several behaviour finance theories cognitive psychological factors are divided into two-heuristics and Prospect. Heuristics defined as the Rule of thumb, which make decision making easier, especially in complex and uncertain environment by reducing the complexities of assessing probability.it includes Representativeness, Gambler s fallacy, Anchoring, Overconfident, Availability bias, Herding bias and Cognitive Dissonance etc. Prospect theory- [6] found that human being give more weight to outcomes that are more certain as compared to outcomes that are merely probable. This theory assign more value to gain and losses as compared to the final asset. It includes Loss Aversion, Regret Aversion, Mental Accounting. [7] found in their study with the help of hypothesis testing that in negotiation counteroffers are generated through an anchoring and adjustment process leading to an effect of the anchor point and those counteroffers are influenced by changes in reference point which in turn determine whether the anchor point is perceived as a gain or a loss. [8] analysed that investors always prefers what they know and are familiar with why investors strongly favour investing in local companies regardless of the fundamental principles of portfolio investment, that diversification is important for optimization. They give more attention to that information which are easily available in the market. [9] found that the investors who are more confident can trade more often. They also analysed that investors who deal with large portfolios or have more education, are more likely to perceive themselves as more competent than investors with smaller portfolios or less education. [10] in their study showed that the affect of loss aversion on the investors in their investment decision of housing real estate market. According to property transaction prices are determined by seller characteristics in addition to units attributes, which makes the property market far from being a perfect asset market. [11] in his study found that investors psychology plays a great role in determining investment decision and market prices. He took a sample of 40 institutional real estate investors located in Nairoboi, Kenya.In his study he ranked the psychological factors in order to their importance from the most important to least important are overconfidence, Frame Dependence, Representativeness, Mental Accounting, Heardin and Affect. [12] explored the impact of behavioural factors and investor s psychology on their decision-making, and to examine the relationship between investor s attitude towards risk and behavioural decision-making. Through this research, the author finds that the investment decision-making is influenced, largely, by behavioural factors like greed and fear, Cognitive Dissonance, heuristics, Mental Accounting, and Anchoring. [13] analysed the factors that affect the decision making of human being at the time of investment and focused on overconfidence and over optimism in the market. The results showed that analysts of the S&P 500 were found by the problems of over confidence and the over optimistic biases. It also confirms theory of Anchoring and Herding. [14] in his study found that there is a difference between behaviour patterns of investors. His study was based on the influence of certain identified behavioural finance concepts (or biases), on the decision making process of individual investors in the Indian Stock Market and categorised the investors in to groups of young and experienced. He found that, Gamblers Fallacy, Anchoring and Hindsight biases were affect the young investors significantly more than experienced investors. [15] studied the behavioural factors influencing the choice of financing methods. In her study she analysed that the investors were influenced by behaviour factors such as Loss Aversion, Anchoring, Mental Accounting and Representativeness. [16] studied the effect of herd behaviour on trading volume and price security. The result found that herd behaviour has positive correlation with trade volume and price of securities. There are various identified psychological factors in behaviour finance literature. Each factor has implication on the behaviour of the investors in decision making. Some of the behaviour factors and their effects on investors are presented in Table

3 From the previous studies conducted by researchers, it was found that most of the studies was based on the agent behaviour for investors investment decision. Most of the researcher noted that the function of the agent or broker match the prospective buyers and sellers. Baryla and [17] analyse that agents are the mirror between buyer and seller. In India, much is not known about the human psychology and investors irrational behaviour that influence property investors and their decision making process. Research methodology Present study is based on the factors influencing the investors in their investment decision in property market. This paper used the descriptive research design. Primary and secondary data has been used. Primary data has been gathered using structured questionnaire. Secondary data has been gathered from the journals of behaviour finance, books and related research papers. The target population for this paper is investors of real estate market in Udham Singh Nagar district of Uttrakhand, India. Convenience sampling has been used. Sample size of 200 male respondents has been taken from the prominent area of Udham Singh Nagar. Data were collected by using structured questionnaire. Collected data was analysed by using statistical tools (SPSS) and have been presented by the use of tables and charts. Table 1. Behavioural Factors and their effect on investors Factors Effect Representativeness Decision making on shortcut that employs the use of past experience to guide the decision making process. Anchoring Gambler s fallacy Overconfidence Herding Cognitive Dissonance Loss Aversion Regret Aversion Mental Accounting Hindsight Tendency to rely too much on first piece of information available, when making decision. Situation where investors tend to predict the reverse of a particular trend. Unwarranted faith in one s intuitive reasoning, judgement and cognitive abilities. Common Phenomena where investors tend to follow the investment decision taken by the majority. Feeling of uncomfortable tension which comes from holding two conflicting thoughts in the mind at the same time. People tendency to strongly prefer avoiding losses to acquiring gains.(losses are twice as powerful as gain) Can make investors either risk averse or motivate them to take greater risk. Tendency for individual to organise their world in to separate mental Account. Tendency to change a recollection from an original thought to something different because of newly provided information. Analysis The main objective of present study is to analyse the behavioural factors that affect the investment decision in Property Market. To fulfil the main objective of the study, 200 respondents were selected based on their keenness to invest their fund in different areas. They were given a questionnaire having 18 questions. This questionnaire was specifically designed to measure and evaluate factors that affect the investors decision to invest. The reliability of the information collected from the respondents was assessed by using Cronbach s Alpha. It was also used to check the internal consistency. The Alpha so computed basically measures the average correlation among the observed variables. The sampling adequacy was measured by KMO and Bartlett s test. The value of obtained was indicative of moderate category. Therefore, sampling was considered satisfactory and appropriate for further analysis. The value of Chi-Square statistics at 153 degree of freedom obtained was and is considered highly significant. Hence factor Analysis can be carried out on the responses collected from the Respondents. 152

4 Table 2. KMO and Bartlett's Test Kaiser-Meyer-Olkin Measure of Sampling Adequacy Bartlett's Test of sphericity Approx. Chi-Square Df 153 Sig Reliability Statistics Cronbach's Alpha N of Items The questions of the questionnaire are based on different set of factors and these set factors are from two Human cognitive theories namely Heuristic theory and Prospect theory. The Heuristic theory of behaviour finance mainly included Representativeness, Gambler s fallacy, Anchoring, Overconfident, Availability Bias, Herding bias and cognitive dissonance etc. The use of prospect theory of behaviour finance was determined by the Loss Aversion, Regret Aversion and Mental Accounting. The result was found by using descriptive measures of central tendency. The respective frequency and mean of the various questions of different factors are provided in Table 3. It was found that out of 18 questions, 13 questions were related to Heuristics Theory and 5 questions are related to Prospect theory. The results revealed that Recent performance (s) affect the investors profoundly/ most in their investment decision. Most of the property investors (85 out of 200 i.e. (42.5% ) always focussed on recent performance for their investment decision. 60 investors out of 200 (30 %) investors always based their investment on the theory that current prices are right. Our findings are in agreement with those reported by [18]. He reported that investors set the value of property on the basis of recent selling/buying prices. Our results are also in concurrence with those reported by [19], who found that investors that the investors decision to invest is largely governed by the theory that current price are right. The factor that affect the investors in their investment decision is Past performance (mean score 3.78). Most of the investors76 (38%) always focus on past performance for investment decision. Most of the investors (35%) often use trend analysis for their investment. The finding is related to the study of Barberis (2001) who found that people tend to relate events to good occurrence and to overstress the importance of such a relation. The next factor that the investors (42.5%) mean score 3.65 always prefer to sale property that have increased in value and willing to hold the property (41.5%) because it show the profit. Table-3 Mean Score of Questions and their frequencies Questions Do you focus on past performance when you take decision for investment? Do you focus on recent performance for investment? Do you think that current prices are right and your decisions are based on it? Do you able to take more risk after gaining good return? Do you take suggestion from others when go for investment? Do you able to take decision opposite to the past Performance? Do you able to forecast the market return? Do you have high expectation beyond the market expectation on property return? Do you prefer to buy local market than invest in other states or at international level? Do you take decision of investment on the basis of decision of other group? After taking decision you think that your decision is wrong? Do you avoid selling property that have decreased in value? Do you prefer to sale property that have increased in value? Do you believe that you have superior forecasting ability and can control the occurrence of future events? Do you willing to sale the property because it shows the loss? Do you willing to hold the property because it shows the profit? Do you tend to treat each element in your investment profile separately? Do you use trend analysis for investment decision? Mean score

5 The result was relate with the study of [20] who found that investors avoid selling shares that have decreased in value and ready to sell shares that have increase in value. [21] found that investors reported regret about holding a losing stock too long run about selling a wining stock too soon. The study also found the factors that rarely affect the investors. Most of the investors 82 (41%) rarely take the decision opposite to the past performance. [7] analysed that, in the most situation, it leads investor to anticipate the end of good/bad market performance.thus, situation who are biased to a status tend to chose an alternative disregarding whether the choice is optimal or not. Most of the investors 77(38.5%) rarely think that investment decision taken by them is wrong. From the above result it was found that information of the market (past and future) affect the investors most for their investment decision. Most of the investors always prefer to sale the property that have increased in value and willing to hold the profit,because it show the profit. There are some factors that affect less to the investors in their investment decision. Study found that investors rarely go opposite to the past performance and rarely think that there decision is wrong. In order to determine the behaviour factors influencing the investment decision in Real State. A factor analysis was carried out by using the exploratory factors analysis method (Table 4). The main aim for using factor analysis method was to reduce the data and to observe relevant element of data. Table 4. Total Variance Explained Extraction Sums of Squared Rotation Sums of Squared Component Initial Eigen values Total % of 154 Cumulative % Total % of Loadings Cumulative % Total % of Loadings Cumulative % Variance Variance Variance There are 18 variables in the questionnaire. These 18 variables were factorized with Varimax Rotation to interpret and to determine which of thevariables related to their group with the two behavioural theories. The result shows that out of 18 variables 7 variables explained over of the total variances. The Kaiser criterion has been applied to retain the measure with Eigen value greater than one. This means unless a measure had at least as much as the equivalent to one original variable, it is dropped. The percentage of variance explained by factors 1 to 7 are , , 9.080, 8.810, 7.299, and respctively (Table 4). The result shows that %, of the total variance is represented by the information contained in the factor matrix of the 7 factors. The variance percentage is more than 50%, therefore it is sufficient to say that variables are somehow related to each other. Table 5 shows the derived

6 factors represent the different element of financial behaviour which form the underlying factors from the original 5 point scale of 18 statements. Table-5 Rotated Component Matrix Past performance Recent performance Current prices are right Take more risk after good return Suggestion from others Take decision opposite to the past performance Able to forecast the market return High expectation Buy local market Decision based on other group decision Think your decision is wrong Avoid selling property Prefer to sale property Superior forecast ability Willing to sale property Willing to hold property Treat each element separately Analyse past trend The name of the factor statement and factor loading with communalities has been summarized in Table 6. Factor loading represent a correlation between an original variable and its factors. Further the 7 factors that defined these characteristics have been assigned suitable names according to the variables loaded on each factors. These 7 factors are Property Information, Overconfidence, Logical approach, Regret Aversion, Hindsightness, Herding & Mental Accounting and Expectation from the Market. One statement has been dropped due to factor loading of less than The communalities shown in the Table 6 explains the amount of variance in the variable that is accounted by the factors taken together (Hair at al 1998). Large communalities indicate that a large amount of the variance in a variable has been extracted by the factor solution. 1. Property Information-The rotated matrix has revealed that respondents have perceived this factor to be most important with the highest explained variance of %.This factor has covered 4 statements out of 18 statements presented in Table-4.The factor has been named as property information because investor focus on both the information either past or present, while go for investment decision. This is the most affected factor that affects the investor in their investment decision. The result relate with the result of [4] who found that investors fix prices which he seems to the best price. 2. Logical Approach-The second most important factor account for % of the variance. This factor also covers 4 questions (Table-4).The factor has been named as Logical Approach as Investors putting too much weight on their predictive skills as compared to other data present in the market and believe they can control 155

7 the market. [22] in his study found that most people generally are overconfident about precision of their knowledge and ability. Table-6 Factors Name with their Loading and communalities S.NO. Name Statements Factors Communalities of Factors 1 Property Information 2 Logical Approach 3 Market Dyanmic 4 Regret Aversion 1. Do you focus on past performance when you take decision for investment? 2. Do you focus on recent performance for investment? 3. Do you use trend analysis for investment decision? 4. Do you willing to hold the property because it shows the profit? 1. Do you think that current prices are right and your decisions are based on it? 2. Do you able to take more risk after gaining good return? 3 Do you believe that you have superior forecasting ability and can control the occurrence of future events? 4. Do you tend to treat each element in your investment profile separately? 1. Are you able to forecast the market return? 2. Do you prefer to buy local market than invest in other states or at international level? 3. Do you take decision of investment on the basis of decision of other group 1.Do you avoid selling property that have decreased in value? Loading (Extraction) Hindsight Bias 1.Do you able to take decision opposite to the past performance? 2.After taking decision you think that your decision is wrong? Herding Bias 1.Do you take suggestion from others when go for investment? 2.Do you willing to sale the property because it shows the loss? Over confidence 1.Do you have high expectation beyond the market expectationon property return? Market Dynamics--The third factor account for 8.431% of the variance, with loading of three statements. The factor has covered 3 questions. The factor has been named as Market Dynamic as market is not certain and investors have to change according to the market situation. Investors prefer the information that are convenient. The result is related to the study of [8] who found that investors give more attention to that information which are easily available in the market. 4. Regret Aversion-. The fourth factor account for 8.138% of the variance, with loading of single statement i.e. Do you avoid selling property that have decreased in value? Regret aversion is a psychological error that 156

8 arises out of excessive focus on feeling of regret at having made a decision. This factor has been taken from the study of [4]. He found that investors avoid selling shares that have decreased in value and ready to sell shares that have increase in value. 5. Hindsight Bias- The fifth factor account for 8.078% of the variance. The factor loaded two questions namely-are you able to take decision opposite to the past performance? After taking decision you think that your decision is wrong? The factor has been taken from the study of [23] defined as a tendency to change a recollection from an original thought to something different because of newly provided information. 6. Herding Bias-The sixth factor account for 7.88% of the variance and covered two questions as- Do you take suggestion from others when go for investment? Do you willing to sale the property because it shows the loss? The factor has been named as Herding, as it is the common phenomena that investors take suggestion from the people, who have the knowledge of that field. The result relate with the study of [24] who found strong evidence of herding behaviour at NSE that investors are more likely to herd diving market stress. 7. Over Expectation-The seventh and last factor account for 7.614% of the variance. It loaded only one statement i.e. Do you have high expectation beyond the market expectation on property return? The name has been Over Expectation investors take decision regarding investment with the expectation of getting high return from the market. Conclusion The present study is based on the Study on Behavioural Factors influencing investment decision in Real Estate. The main objective of the study is to identified the behavioural factors that influence the investment decision of investors in real estate. The result disclose through factor analysis explain that the 18 questions that were used to measure the investment behaviour of investors were reduced to 7 factors i.e. Property Information, Logical Approach, Market Dynamic, Regret Aversion, Hindsight bias, Herding Bias and Over Expectation. The I st factor explain that information of the market is very important for the investors. They focus on the both past as well as present information when go for investment decision. Logical Approach as Investors putting too much weight on their predictive skills as compared to other data present in the market and believe they can control the market. Market Dynamic as market is not certain and investors have to change according to the market situation. Investors prefer the information that are convenient. Result also found that investors avoid selling shares that have decreased in value and ready to sell shares that have increase in value. Hindsight as a tendency to change a recollection from an original thought to something different because of newly provided information. Herding, as it is the common phenomena that investors take suggestion from the people, who have the knowledge of that field. The last factor is over expectation as investors take decision regarding investment with the expectation of getting high return from the market. From the finding it can be concluded that investors of Udham Singh Nagar are influenced by Behavioural Factors. References [1] Statman, M., Fisher, K. and Anginer, D Affect in Behavioual asset pricing model. Financial Analyst Journal. 64(2): [2] Jorden and Miller (2008). Fundamentals of investment valutaton and management, new York,4 th edition,mc graw Hill. [3] Fogel, O. and Berry, T. (2006). The disposition effect and individual investor decision: the roles of regret and counterfactual alternatives. Journal of Behavioural Finance. 12: [4] Shiller, R The behaviour of rome buyers in booom and post boom market, NBER working paper, National Bureau of Economic Research. [5] Ritter, J.R Behavirol Finance. Pacific Basin Finance Journal.11(4): [6] Kahneman and Teverky (1979). Prospsct theory- an analysis of decision under risk. Econometrica. 47: [7] Kempf A. and Ruenzi, (2006). Status bias and the number of alternatives; an empirical illustration from the mutual fuand industry. Journal of Behavioural Finance. 7: [8] Barberies, N. and Huang, M. (2001). Mental accounting, loss aversion and individual stock return. Journal of finance

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