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Scale
Behavioural biases affecting development
investors’ decision-making approach

process: a scale
development approach
Jinesh Jain Received 16 February 2021
Revised 2 June 2021
Sri Aurobindo College of Commerce and Management, Ludhiana, India 29 September 2021
Accepted 15 November 2021
Nidhi Walia
Punjabi University, Patiala, India
Manpreet Kaur
Sri Aurobindo College of Commerce and Management, Ludhiana, India, and
Simarjeet Singh
Indian School of Business, Mohali, India

Abstract
Purpose – The advocates of behavioural finance have denounced the existing literature on investors’
rationality in the decision-making process and questioned the existence of efficient markets and rational
investors. Although diversified research has been conducted in the area of behavioural finance, yet there is a
need of further explorations into the field as the available knowledge base is confined to one or a few
behavioural biases confronted by investors while making investment decisions. Hence, this study aims to
develop a comprehensive, reliable and valid scale to measure the behavioural biases affecting investors’
decision-making process.
Design/methodology/approach – To develop a comprehensive, reliable and valid scale for measuring
the behavioural biases affecting investors’ decision-making process, rigorous multi-stage scale development
methodology has been followed. Stage one started with an extensive review of the literature followed by
interviews from experienced stockbrokers to clarify construct and getting novel insights about dimensions of
behavioural biases. In stage two, 52 items measuring the dimensions of behavioural biases were generated
and got evaluated from panel of judges. Pilot testing was done in the third stage which gave a set of 39 items.
Finally, in fourth stage, data were collected from 332 individual equity investors on a 7-point Likert scale
using the snowball sampling technique.
Findings – The results of the study highlighted that behavioural biases is a multidimensional phenomenon
that significantly affects investors’ decisions and has different dimensions, namely, Availability Bias,
Representativeness Bias, Overconfidence Bias, Market Factors, Herding, Anchoring, Mental Accounting,
Regret Aversion, Gamblers’ Fallacy and Loss Aversion. The present research has developed a comprehensive,
reliable and valid scale for measuring behavioural biases affecting equity investors’ decision-making process.
Originality/value – Behavioural finance is an emerging area in the field of research particularly in the
Indian context which needs further exploration. The present research concentrates on rendering an
empirically tested scale to the researchers for measuring the behavioural biases and its impact on investor’s
decision-making. Such an instrument can contribute to making progress in the area of behavioural finance
and other research studies may also find it useful to achieve their goals.
Keywords Decision-making, CFA, Behavioural finance, Scale development, Behavioural biases,
Management Research Review
Other management-related topics, Reliabilty and validity © Emerald Publishing Limited
2040-8269
Paper type Research paper DOI 10.1108/MRR-02-2021-0139
MRR Introduction
The study of investors’ decision-making is a subject that intensified researchers to
understand the process and factors that design the investment decisions. The pioneers
advocated rationality in the decision-making process, justifying the decisions on the
grounds of available information (Fama, 1970; Mintzberg et al., 1976; Merton, 1985).
Traditional Finance Theory, Efficient Market Hypothesis and Expected Utility theory have
ruled the hearts of financial analysts to answer the queries pertaining to investment
decision-making for an aeon (Kumar and Goyal, 2015; Charles and Kasilingam, 2016; Jain
et al., 2021). These theories underpin, cultivate and corroborate the age-old concept of
rationality in investment decision-making (Fama, 1970; Solnik, 1973). These theories claim
that stock prices are the outcome of a company’s fundamental values, and thus, if because of
some element of irrationality, the inflated/deflated stock prices are not the good reflectors of
fundamental values, it will lead to the creation of a gap. This gap will be explored as a risk-
free investment opportunity by the investors and eventually, it will eradicate the mispricing
to bring back the equilibrium (Tuyon and Ahmad, 2018). The advocates of behavioural
finance questioned the existence of efficient markets and rational investors, quoting the
stock bubbles and market crashes (Joghee et al., 2020). Behavioural finance puts forward its
case by stating that sometimes this mispricing goes unchallenged due to risky and costly
strategies. Behavioural finance garners the evidence from the market to prove the existence
of irrational investors in the market whose dominance may hinder the rational functioning
of stock markets, investors and their decision-making (Bernstein, 1998; Nofsinger, 2001;
Shefrin, 2007). Decades of study unveiled that investors’ decision-making is a complex brew
of various biases that directs the investor’s behaviour while choosing the best from assorted
investment options (Bondt and Thaler, 1985; Chang, 2008). The decisions are not always
rational, and systematic or cognitive errors can be committed courtesy of behavioural biases
(Chen et al., 2007). Several studies reflected recurrent arrays demonstrating irrationality of
the decision-making process in uncertain times (Bernstein, 1998; Singh, 2012; Paul, 2014).
Psychologists have already condemned rationality in decision-making (Nofsinger, 2001).
Jain et al. (2019) unearthed the traces of irrationality in the Indian equity market owing to the
presence of psychological biases. Economists working in behavioural finance have tried to
illuminate different irrational behaviours shown by the investors in the financial markets
(Chen et al., 2007; Ngoc, 2014). They drew knowledge from the various cognitive behavioural
theories on human beings given in psychology, anthropology and sociology. They came up
with two major theories in behavioural finance, commonly known as Prospect theory and
Heuristics. Nair and Antony (2015) have argued that behavioural finance should be further
explored to understand the irrational behaviour of investors and explore the reasons behind
the sudden rise and fall in the market. A comprehensive scale needs to be developed for
measuring all the behavioural biases affecting investors’ decision-making process. Such an
instrument can contribute towards making progress in the field of behavioural finance, and
other researchers may also find it useful to achieve their goals.

Theoretical development
Behavioural finance is an emerging field which is gaining the attention of researchers since
the 1980s. It has challenged traditional finance, which claims investors are rational and
markets are efficient and perfect. Since then, extensive research is being carried out in this
field and significant contributions have been made by various researchers. Various
researchers in the field have developed different aspects to measure behavioural biases. The
concept of heuristics was proposed by Tversky and Kahneman (1974), which covered
anchoring bias, representativeness bias, availability bias. Further, two more dimensions
were added in heuristics, namely, overconfidence bias and gamblers’ fallacy by Waweru Scale
et al. (2008). Kahneman and Tversky (1979) proposed a theory named Prospect theory development
(covering regret aversion, loss aversion, mental accounting and disposition effect), which
elaborated how the investors take decisions keeping in view probabilistic alternatives that
approach
involve the risk the expected result of the decision is predictable. Some researchers have
analysed the impact of herding and market factors on decision-making. Earlier literature
shows that investors’ decisions are affected by behavioural biases resulting in irrational
decisions (Thaler, 1980). This section particularly deals with behavioural biases that creep
into while making investment decisions.

Overconfidence bias
Overconfidence is a common behavioural bias that occurs while making judgements and
decisions and has been researched widely by Kahneman and Tversky (1973). Such bias
occurs during the investment decision-making process, where people are very sure about
their understandings of investment and disregard the risks related to investment. Investors
behaving irrationally assume that they can make the best investment decisions based on
their information. A group of studies are available which have proved the significant
positive impact of overconfidence bias on decision-making behaviour (Seo and Barrett, 2007;
Bashir et al., 2013; Riaz and Iqbal, 2015; Ullah et al., 2017). Overconfidence sometimes leads
to excessive trading and the accomplished profit is not sufficient to cover transaction costs
(Odean, 1998; Odean, 1999; Barber and Odean, 2001). Gervais and Odean (2001) have found
in their study that overconfidence is dynamic, and it changes according to successes and
failures. Further, he added that overconfidence is higher in those who have been trading for
a short time, whereas people develop better self-assessments with increased experience.
Some studies have studied the difference in overconfidence bias due to demographic factors.
Tekçe et al. (2016) found that men are more overconfident than women investors. Age,
wealth and financial literacy reduce overconfidence.

Representativeness bias
The considerable research on representativeness bias has been done by Busenitz and
Barney (1997), and they have defined representativeness bias as making a generalisation
about a phenomenon based on few observations, usually originating from small and non-
random samples. Investors tend to invest in the stocks of the companies based on their
attributes like quality products, managers as the basis of investment decisions. Andreassen
and Kraus (1990), DeBondt (1993) and Lakonishok et al. (1994) concluded that investors tend
to invest in those shares that have high returns in the past as they consider past returns can
predict future gains. Dhar and Kumar (2001) also concluded that investors prefer stocks
with abnormally high returns compared to stocks having normal returns. Grether (1980)
further added to the existing literature on representativeness bias by concluding that this
bias generally affects inexperienced investors more as compared to others. Chen et al. (2007)
found that representativeness bias is found in individual investors and not in institutional
investors. However, Tekçe et al. (2016) gave a contradictory view that investors do not chase
the positive recent returns, and investors’ experience further decreases representativeness
bias.

Anchoring bias
Although anchoring bias has been researched widely, but a significant contribution has
been made by Tversky and Kahneman (1974), who defined the presence of anchoring bias as
a situation when people make estimates based on an initial value called as the reference
MRR point. Anchoring refers to human inclination to trust limited information like news or
volume of trading or one-day returns) while making the investment (Andersen, 2010). This
bias entices investors to attach or anchor importance to a reference point which may be a
past event or trend. Investors generally anchor by considering the recent high price of the
stocks as the reference point. So, if the price drops as compared to the reference point,
investors tend to invest in the stock at a discount (Vasile et al., 2010). Anchoring on past
prices can adversely affect investors’ returns. Earlier research is evidence of this bias
affecting investor’s decision-making process (Andersen, 2010; Subash, 2012; Matsumoto,
2013). Anchoring is correlated with representativeness as investors get dependent on their
experiences from the recent past, and they become optimistic when prices increase and go
pessimistic during fall in the market (Shiller, 1999). Investors also predict the earnings of the
company based on past trends (Waweru et al., 2008).

Availability bias
Tversky and Kahneman (1974) have coined the concept of availability bias. They have
defined availability bias as a circumstance where people evaluate the frequency of a class or
the chance of an event by the ease with which such instances or occurrences come to their
mind. This behavioural finance bias occurs when investors overweigh the available
evidence and determine the possibility of similar events. It refers to memorising the
instances which are related to attention. This results in investors’ overreaction to the market
movement, which may be upward or downward. A cognitive bias compels investors to over
predict the chances of events depending upon memorable events (Jahanzeb, 2012). Moradi
et al. (2013) concluded an interrelationship between personality dimensions and availability
bias in the Tehran stock exchange.

Gambler’s fallacy
Waweru et al. (2008) broadened the scope of heuristics by introducing the concept of the
Gamblers’ fallacy to the field of behavioural finance. It is people’s inappropriate belief
regarding the reversal of a trend. This may lead investors to anticipate the end of a good or
poor run of market returns. It is a misconception that if an event happens in the past more
often than predicted, there will be fewer chances of its occurrence in the future. This is also
known as the Law of Small Numbers or Monte Carlo Fallacy. When an investor takes a
decision based on limited information, it shows his trust in the law of small numbers
(Tversky and Kahneman, 1974; Hogarth, 1987). Huber et al. (2010) found a significant effect
of this bias on investors’ decisions. Earlier research has proved that investors make over-
optimistic estimates based on limited positive information (Barnes, 1984; Kahneman and
Lovallo, 1993; Canner et al., 1997). Rakesh (2013) has analysed its impact on returns and has
concluded that gamblers fallacy affects investors’ expectations, adversely impacting
investment returns. Amin et al. (2009) have also found that gamblers fallacy bias has
contributed to irrational decisions in Lahore.

Regret aversion
Regret theory was proposed in 1982 by different authors (Fishburn, 1982; Bell, 1982; Loomes
and Sugden, 1982), which led to the emergence of the concept of regret aversion. Regret
aversion represents a bias where an investor suffers from the regret of investing in a wrong
stock when the return from the alternative foregone stock is better. Regret aversion bias
induces investors to avoid actions because of the fear of wrong decisions. Investors avert
regret by not selling decreasing shares and selling upward-moving shares. This emotion of
regret becomes stronger when they hold losing stocks for a more extended period and sell
the increasing ones early (Lehenkari and Perttunen, 2004; Fogel and Berry, 2006). Shefrin Scale
and Statman (1985) explored that this bias encourages investors to invest in stocks that give development
dividends on a regular basis. Earlier literature shows the positive role of risk aversion in
investment decisions (Lim, 2012; Khan, 2017).
approach

Loss aversion
Tversky and Kahneman (1991), the major contributors in the field of behavioural finance,
defined loss aversion as a notion that losses loom bigger than equivalent gains. This bias
proves that investors are loss averse who prefer to save the capital instead of focussing on
increasing it. Investors are more affected by losses, whereas they are less happy with an
equal amount of gains (Barberis and Thaler, 2003). This bias leads investors to become risk-
averse when the loss occurs, and resultantly, they sell the shares after a slight shift in price
and make irrational decisions (Odean, 1998; Kahneman et al., 1991). Earlier research proves
that this bias affects investors’ decisions (Kengatharan and Kengatharan, 2014; Ngoc, 2014).
This bias has been found to affect female investors more than male investors (Blavatskyy
and Pogrebna, 2008; Hassan et al., 2014). Even foreign direct investment (FDI) real estate
investors also confront this bias while making investment decisions (Joghee et al., 2020).

Mental accounting
Thaler (1980) coined this concept of mental accounting bias, which means investors treat
each element of their investment portfolio separately. They assign different costs to different
transactions, and they evaluate these transactions by analysing the mental impact of these
costs. Investors usually tend to avoid losses because their sentiments are much more intense
in case of losses than in case of profits. Losses cause more mental burden, which is
challenging to overcome, and hence, investors avoid investing more chances of losses
(Kahneman and Tversky, 1979; Tversky and Kahneman, 1992). Mehra and Prescott (1985)
have defined this as an equity premium puzzle which explains that loss-averse behaviour
caused by mental accounting bias makes investors myopic on losses.

Herding bias
Herding is a bias where investors mimic the decisions of others, generally a larger group,
while making decisions (Spyrou, 2013). Nofsinger and Sias (1999) defined herding bias as
investor’s behaviour mimicking the decisions of others. Individual investors follow herding
behaviour than institutional investors (Kim and Wei, 2002; Lee et al., 2004; Goodfellow et al.,
2009). Earlier literature has explored two types of herding behaviour, namely, irrational or
intentional herding and rational or spurious herding. The reasons for rational herding may
be the same choice for a share and similar response to the news, incentives for fund
managers. Intentional herding involves copying other investor’s decisions without
analysing available information. Intentional herding is more prominent in individual
investors, as evident in earlier literature than institutional investors (Kim and Wei, 2002).
Goodfellow et al. (2009) gave an interesting finding that the herding effect is shown more
during market downswings and during market upswings but to a lesser extent.

Market factors
The market factors like available market information, fundamentals of the stocks, events of
market and stock prices can impact the response of investors to change in price (Waweru
et al., 2008). Market factors highly affect investors’ decisions, as evident in earlier literature
(DeBondt and Thaler, 1985; Odean, 1998; Lai et al., 2001; Waweru et al., 2008). Investors
MRR invest in best-selling shares considering important events of the stock market (Waweru
et al., 2008). Barber and Odean (2000) found that investors base their decisions on market
events that have nothing to do with the future performance of such stocks.
A thorough review of the literature shows that extensive research has been conducted on
behavioural biases affecting the investors’ decision-making process worldwide. Some
studies have been conducted taking heuristics bias (covering overconfidence bias,
representativeness bias, anchoring bias, availability bias and gamblers’ fallacy) as
independent variables affecting investors’ decision-making process (Chen et al., 2007; Kliger
and Kudryavtsev, 2010; Matsumoto et al., 2013; Riaz and Iqbal, 2015; Tekçe et al., 2016;
Ullah et al., 2017). A group of studies is available that have focussed on the effect of prospect
theory (covering regret aversion, loss aversion, mental accounting and disposition effect) on
investors’ decisions (Kahneman and Tversky, 1979; Waweru et al., 2008; Richards et al.,
2011; Zona, 2012). A good number of studies are available analysing the impact of herding
on investment decisions (Dennis and Strickland, 2002; Caparrelli et al., 2004; Lee et al., 2004;
Lim, 2012; Kengatharan and Kengatharan, 2014). Some studies have focussed on individual
biases like Andersen (2010) has focussed on anchoring bias, Shefrin and Statman (1985) has
analysed the disposition effect and Khan (2017) have focussed on availability bias and loss
aversion and Rakesh (2013) has analysed gamblers’ fallacy. The available research on
behavioural biases has somehow not covered all the behavioural biases that can affect
investors’ investment decisions. Hence, the present study is an attempt to develop a
comprehensive, reliable and valid scale to measure the behavioural biases affecting
investors’ decision-making process.

Scale development methodology

The present study aims at developing a reliable and valid scale for measuring different
behavioural biases of individual equity investors, which affect their decision-making
process. For developing the scale, rigorous stages of scale development, as mentioned in the
research study by Papadas et al. (2017), have been followed. A multistage procedure has
been followed to develop the scale, as displayed in Figure 1.

Stage I – Construct definition and content domain

A careful analysis of the literature is required for construct definition (Netemeyer et al.,
2003). A deep understanding of the behavioural biases was obtained, and their various
dimensions were explored, namely, heuristics biases (covering overconfidence bias,
representativeness bias, anchoring bias, availability bias and gamblers’ fallacy), prospect
theory (covering regret aversion, loss aversion and mental accounting), herding bias and
market factors after an extensive review of the literature. To gain further understanding of
the dimensions measuring various behavioural biases, in-depth interviews were conducted
with 20 experienced stockbrokers. This qualitative analysis consisting of extensive
literature review and in-depth interviews helped in clarifying the construct and providing
novel insights about its 10 dimensions.

Stage II – Item generation and expert review

During this stage, items measuring various dimensions of behavioural biases were
generated after a thorough literature review and analysis of the interviews. This process
generated 52 items. Due consideration was paid while framing statements to get the
response. For ensuring content and face validity, a panel of judges was made to get the items
appraised. The panel of judges included five experienced stockbrokers, five experienced
equity investors and two doctoral researchers in the field of behavioural finance. They had
 Scale
Stage I: Construct Definition and Content Domain development
approach
 Thorough review of literature to define construct
 Twenty interviews from experienced stockbrokers
 Qualitative analysis of interviews to clarify construct and getting
novel insights about ten dimensions of behavioural biases

Stage II: Item Generation and Expert Review

 Generation of 52 items measuring ten dimensions of behavioural

biases
 Evaluation of items on a 5-point scale from panel of judges
including five experienced stockbrokers
 five experienced equity investors and two doctoral researchers in
the field of behavioural finance for ensuring content and face
validity

Stage III: Scale Purification and Item Refinement

 Pilot Survey from fifty equity investors

 The final set of 39 items were retained for the final scale
development step

Stage IV: Finalisation of Scale

 Final data collection from 332 equity investors
 Validation of scale Figure 1.
 Establishment of reliability and validity of scale Scale development
process

to evaluate the items on a five-point scale in terms of representativeness, specificity and

clarity (Haynes et al., 1995). In total, 42 items that scored three out of five were retained for
further analysis. Some of the items were rephrased as per the suggestions given by experts.

Stage III – Scale purification and item refinement

Once the experts thoroughly judge, modify and trimmed the items, pilot testing of items
should be done from the relevant population of interest (Clark and Watson, 1995). A pilot
MRR survey was conducted from 50 equity investors having experience of three years to increase
the authenticity of the questionnaire and to ensure the right wording as well as sequencing
of the statements. After stage two, the scale contained 42 statements measuring behavioural
biases, but three were dropped after the pretesting as these were found inappropriate. A
final set of 39 items were retained for the next and final stage of the scale development
process.

Stage IV – Finalisation of scale

Finally, to confirm the dimensionality, reliability and validity of the scale, a large
quantitative study was conducted. The survey instrument contained 39 statements
measuring different behavioural biases to be answered on a seven-point Likert Scale where
seven stands for Strongly Agree and one for Strongly Disagree. Data were collected from the
states of Punjab, Himachal Pradesh and Haryana (India). Snowball sampling technique was
used to select the sample. Respondents for the present study included individual equity
investors with having investment portfolios and at least three years of investment
experience. The survey instrument was distributed to different equity investors through
brokers and investment advisors. The data were collected between April 2021 to May 2021.
A total of 800 questionnaires were distributed to the selected equity investors, out of which
337 were returned, from which 332 questionnaires were usable. The remaining five
questionnaires were incomplete; therefore, these were not considered for the study. The
effective response rate was 41.5% which was considered satisfactory.

Analysis and interpretation

Analysis techniques
As the survey instrument was self-structured, therefore, firstly, exploratory factor analysis
(EFA) was run through predictive analytics software (PASW) to club the statements
measuring behavioural biases which affect investors’ decisions into factors. The critical step
involved in the development of a scale is checking the reliability and validity of the scale.
Hence, a measurement model under structural equation modelling was specified and run as
confirmatory factor analysis (CFA) through analysis of a moment structures (AMOS) to
check the reliability and validity of the scale.

Sample characteristics
Complete responses were collected from 332 respondents. Out of the 332 responses collected,
242 respondents were men, whereas 90 were women. In total, 74% of the total respondents
were found to be in the range of 25–50 age group. In total, 26% of respondents fall in the age
group of below 25 and above 50. Most of the respondents (74%) were found to be either
graduate, postgraduate or higher educational qualifications. As regard the annual income of
the respondents, 38% of them were in the range of US$2,500 to US$6,500. In total, 87%
of the respondents were found to be having more than five years of stock market experience.
The important highlights regarding the demographic profile of the respondents are depicted
in Table 1 given below.

Reliability analysis
Reliability repeated measurements are conducted on the characteristic (Malhotra and Dash,
2016). In the present study, the internal consistency and reliability have been checked with
the help of Cronbach’s alpha statistic and composite reliability (CR). For any scale to be
reliable, Cronbach’s alpha and CR should be more than 0.7 (Malhotra and Dash, 2016).
Gender
Scale
Male 73.0% development
Female 27.0% approach
Age
Below 25 15.4%
25–35 41.6%
35–50 32.2%
Above 50 10.8%
Educational qualification
Higher education 26.2%
Graduate 41.3%
Postgraduate or higher 32.5%
Annual income
Below US$2,500 22.2%
US$2,500–US$6,500 37.8%
US$6,500–US$12,500 35.8%
>US$12,500 4.2%
Experience in stock market
3 to 5 years 12.8% Table 1.
5 to 10 years 35.2% Demographic profile
10 years or above 52.0% of the respondents

Cronbach’s alpha, as well as CR, were found to be more than 0.8 for all the constructs,
proving the reliability of the scale. The results for the same are presented in Table 3.

Exploratory factor analysis

EFA was applied to identify the underlying dimensions measuring behavioural biases
affecting the investment decision-making of the individual equity investors. The initial
assumptions of the EFA test were found to be satisfactory as depicted by the Bartlett test of
sphericity (chi-square = 7,786.947, df = 741, significance = 0.000) and the Kaiser-Meyer-
Olkin test for measuring the sampling adequacy (value = 0.822). It was found that
significant correlations existed between the variables and the sample is adequate for further
analysis. Sampling adequacy for individual variables was checked through an anti-image
correlations matrix and was found significantly high for all the variables considered for the
study. EFA was run with varimax rotation and factors with eigenvalues of more than one
were selected (Hair et al., 2012) and were considered for the final analysis. In total, 10 factors
were identified altogether, explaining 75% of the variance, namely, Availability,
Representativeness, Overconfidence, Market, Herding, Anchoring, Mental Accounting,
Regret Aversion, Gamblers’ Fallacy and Loss Aversion, as shown in Table 2.

Confirmatory factor analysis

For checking the uni-dimensionality of a scale (i.e. the magnitude to which all the variables
in a factor measure the construct), CFA is a more appropriate technique than EFA. It, hence,
is more used in the construct validation process. In this study, the measurement model has
been run by applying CFA (displayed in figure 2) by using the AMOS software and the
essential statistics are presented in Table 3. As CFI (comparative fit index) values for all the
constructs are greater than 0.90, showing the fitness of the CFA model. Different types of
validity have also been checked, which is briefly summarised as under:
 MRR

Table 2.

equity investors
Factors measuring
behavioural biases of
(%) of Cumulative
Factor variance percentage of
Sr. no. Factor-wise dimensions loadings Mean SD Eigenvalue explained variance

F1 Availability 4.545 11.654 11.654

AV1 If someone has told you that a financial crisis is about to happen in a year’s 0.862 4.515 2.100
time, you would be convinced
AV2 You prefer to buy stocks on the days when the value of the index increases 0.868 4.605 1.999
AV3 You prefer to invest in stock which has been evaluated by well-known 0.811 4.593 1.816
experts
AV4 You prefer to buy local stocks than trade in international stocks 0.879 4.569 2.078
AV5 You prefer to sell stocks on the days when the value of the index decreases 0.870 4.557 1.966
AV6 Your investment decision depends on new and favourable (positive) 0.828 4.713 2.104
information released regarding the stock
F2 Representativeness 3.292 8.441 20.095
REP1 You prefer to invest only in familiar stocks 0.814 4.587 1.902
REP2 Even if your best researched stock does not perform according to your 0.730 4.548 1.878
expectations, still you hold the same
REP3 You use trend analysis to make investment decisions 0.803 4.593 1.915
REP4 If other stocks of a company are performing well and the same company 0.741 4.575 1.885
offers new shares, you will buy the same
REP5 you buy “hot” stocks and avoid stocks that have performed poorly in the 0.814 4.602 1.911
recent past
F3 Herding
HERD1 Other investors’ decisions of choosing stock types have an impact on your 0.880 4.334 2.082 3.135 8.040 28.135
investment decisions
HERD2 Other investors’ decisions of the stock volume have an impact on your 0.875 4.340 2.136
investment decisions
HERD3 You usually react quickly to the changes of other investors’ decisions and 0.834 4.313 2.048
follow their reactions to the stock market
HERD4 Other investors’ decisions of buying and selling stocks have an impact on 0.871 4.488 2.153
your investment decisions
F4 Market 3.123 8.008 36.142
MKT1 You have over-reaction to price changes of stocks 0.897 4.512 2.060
MKT2 0.865 4.397 2.082
(continued)
 (%) of Cumulative
Factor variance percentage of
Sr. no. Factor-wise dimensions loadings Mean SD Eigenvalue explained variance

You carefully consider the price changes of stocks that you intend to invest
in
MKT3 You analyse the companies’ customer preference before you invest in their 0.860 4.301 2.227
stocks
MKT4 Market information is important for your stock investment decision 0.853 4.599 1.831
F5 Overconfidence 3.036 7.784 43.926
OC1 You believe that your skills and knowledge of the stock market can help 0.823 4.942 2.041
you to outperform the market
OC2 You know the best time to enter and to exit your investment position from 0.830 4.445 2.058
the market
OC3 You feel more confident in your own investment opinion over the opinion 0.859 4.478 2.105
of your colleagues or friends
OC4 You trade frequently than other people 0.859 4.620 2.103
F6 Anchoring 2.779 7.126 51.052
ANC1 You usually invest in a stock that has fallen considerably from its previous 0.785 4.533 1.994
closing or all times high
ANC2 You use the purchase price of stocks as a reference point in trading 0.840 4.617 1.912
ANC3 You rely on my previous experiences in the market for making next 0.795 4.581 1.956
investment
ANC4 You forecast the changes in stock prices in the future based on recent stock 0.789 4.731 1.877
prices
F7 Mental accounting 2.377 6.094 57.146
MA1 You tend to treat each element/account in your investment portfolio 0.852 4.575 2.006
separately
MA2 You Sell losing investment from your portfolio 0.857 4.421 1.934
MA3 You ignore the connection between different investment possibilities 0.842 4.620 1.877
F8 Regret aversion 2.359 6.049 63.194
RA1 You sell shares that have increased in value faster 0.848 4.472 1.915
RA2 You avoid selling shares that have decreased in value 0.866 4.406 1.986
(continued)
approach
Scale

Table 2.
development
 MRR

Table 2.
(%) of Cumulative
Factor variance percentage of
Sr. no. Factor-wise dimensions loadings Mean SD Eigenvalue explained variance

RA3 You feel more sorrow about holding losing stocks too long than about 0.831 4.551 2.046
selling winning stocks too soon
F9 Gamblers’ fallacy 2.332 5.978 69.173
GF1 You tend to ignore the benefits that can accrue by investing in different 0.835 4.301 2.213
investment options
GF2 After a fall in the market for few days consecutively, you believe that now 0.873 4.506 1.758
the market will move upwards
GF3 You are normally able to anticipate the end of good or poor 0.847 4.394 1.978
F10 Loss aversion 2.272 5.825 74.998
LA1 When faced with a sure gain, you are risk-averse 0.865 4.503 2.035
LA2 When faced with a sure loss, you are a risk-taker 0.833 4.433 1.966
LA3 You avoid selling shares that have decreased in value and readily sell 0.808 4.355 1.944
shares that have increased in value

Source: Computed from primary data

 Scale
development
approach

Figure 2.
Confirmatory factor
analysis
MRR Content validity
Content validity ensures whether a measure represents all the dimensions of a construct
(Rungtusanatham, 1998). Content validity can be checked using the services of recognised subject
experts to check whether test items reflect the knowledge required for a chosen subject. Content
validity of the scale has been checked for the present study, as statements measuring behavioural
biases were derived from the literature and reviewed by academicians and professionals. Constructs
and variables have been decided for the study after getting the advice received from the experts.

Construct validity
If a scale measures what it tends to measure, construct validity is ensured. It is an analysis
of the extent to which variables are measured by the construct correctly (O. Leary-Kelly and
Vokurka, 1998). In the present study, a measurement model was prepared for all the
constructs and CFA was applied after drawing the co-variances for all the constructs. Uni-
dimensionality can be checked through CFI value. If the CFI value is more than 0.9, there is a
solid indication of uni-dimensionality. In the present study, CFI values for all the 10
constructs of the scale are found to be above 0.90, as presented in Table 3.

Convergent validity
It is the degree to which distinct assessment techniques agree to in their measurement of the same
trait (Byrne, 2009). For checking the convergent validity, the average variance extracted (AVE) is
calculated. It is the average amount of variance that a construct explains in the indicator
variables. For achieving convergent validity following conditions must be satisfied:

 CR should be larger than the AVE.

 AVE should be more than 0.5 (Hair et al., 2012).

The statistics are presented for all 10 dimensions in Table 3. In the present study, both the
above-mentioned conditions are satisfied, revealing strong evidence of convergent validity.

Discriminant validity
Campbell and Fiske (1959) introduced the concept of discriminant validity, which is used to
check the uniqueness for the measures of different constructs and distinctness of the one
construct from the other constructs, and thus, it proves to be a unique contribution.
Discriminant validity ensures that one measure does not highly correlate with the other
measures. For establishing discriminant validity, the following conditions must be satisfied:

Constructs Cronbach’s a CR. AVE MSV ASV CFI

Representativeness 0.860 0.861 0.554 0.081 0.044 0.988

Anchoring 0.841 0.842 0.572 0.103 0.040 1.000
Availability 0.932 0.932 0.697 0.059 0.028 0.942
Gamblers_Fallacy 0.845 0.849 0.653 0.104 0.035 1.000
Loss_Aversion 0.834 0.840 0.639 0.108 0.046 1.000
Regret_Aversion 0.859 0.859 0.671 0.135 0.052 1.000
Herding 0.902 0.903 0.699 0.071 0.025 1.000
Table 3. Market factors 0.899 0.901 0.695 0.033 0.016 0.975
Reliability and Mental_Accounting 0.861 0.861 0.674 0.135 0.052 1.000
validity statistics Overconfidence 0.891 0.892 0.674 0.104 0.046 0.996
  AVE for every construct should be more than MSV (maximum shared variance). Scale
 AVE for every construct should be more than ASV (average shared variance) development
statistics (Hair et al., 2012). approach
As depicted in Table 3, AVE for each construct is higher than MSV as well ASV statistics,
thereby exhibiting discriminant validity of the scale.

Conclusion
The objective of the study was to develop a reliable and valid scale for measuring behavioural
biases affecting the investment decision-making of individual equity investors. The study is the
first attempt to conceptualise and operationalise the concept of behavioural biases affecting the
investment decision-making process. The proposed measurement tool has been developed and
validated after following rigorous multistage scale development methodology.
A thorough review of literature helped in construct definition and qualitative analysis of
interviews conducted gave novel insights into dimensions. Further items were generated based on
10 dimensions identified from qualitative analysis as well as a review of literature and refinement
procedures were followed to trim down the items measuring various behavioural biases.
EFA was run to determine the underlying factors measuring behavioural biases that
affect investment decisions of the individual equity investors, which extracted 10
dimensions, namely, Availability, Representativeness, Overconfidence, Market, Herding,
Anchoring, Mental Accounting, Regret Aversion, Gamblers’ Fallacy and Loss Aversion.
CFA was used to check the reliability and validity of the scale and results were found to be
satisfactory. Hence, the present research has developed a reliable and valid scale for
measuring behavioural biases affecting equity investors’ decision-making process.
The intention behind conducting the study was to conceptualise behavioural biases of
individual equity investors, provide a new reliable and valid scale to measure it and provide data-
based evidence on how it affects the investment decision-making process. The research has
contributed to a more refined knowledge base of the dimensions of behavioural biases. It has made
an addition to the existing work in the field, which was confined to specific biases or theories.

Implications of the study

From a theoretical perspective, our research augments the existing knowledge base on the usage
of a validated scale to measure behavioural biases affecting individual equity investors’ decision-
making process. This reliable and valid tool would bring standardisation in the behavioural
finance research domain. Further, researchers can use this scale to assess the behavioural biases
encountered by individual equity investors while making investment decisions in other
developing countries. This scale can also be used to facilitate comparisons of the results yielded
by several research studies in the field of behavioural finance. The scale has been developed by
using data collected from individual equity investors. Researchers can make use of the same scale
for analysing the behavioural biases of the institutional investors also. As earlier studies have
recommended the study of behavioural biases in the mediating role between financial literacy
and investment decision-making, this instrument can further be customised to fill this research
gap. In nutshell, the present research has augmented the available research based on behavioural
biases in the field of behavioural finance. Behavioural finance is an emerging field that is
capturing the attention of researchers, but a comprehensive study covering major behavioural
biases can certainly add to the existing knowledge base.
As far as managerial implications are concerned, the scale can be very useful for financial
advisors, investors and policymakers. Financial advisors can assess various behavioural biases
MRR affecting the decision-making of individual equity investors and provide the required feedback to
investors for improving their investment decision-making process by minimising the biases. In this
way, investment outcomes of individual equity investors can be enhanced, resulting in augmented
wealth creation. Investors will also find the scale useful because they can have a check on the biases
that they unintentionally can commit while making equity investment decisions. The awareness of
biases will ultimately result in the minimisation of biases leading to effective decision-making. This
is recommended to the investors that they should maintain a map of behavioural biases to which
they are likely to be exposed, even after attaining a satisfactory awareness level. This needs to be
checked on a regular basis to recollect and update their memories, and thus, give them a greater
chance of making better decisions in the stock market. Knowledge of behavioural distortions and
their implementation in investment decision-making will increase the logic of investment decisions
and thereby make room for higher market performance. Such scale can be beneficial to the
policymakers as well, as it will augment their knowledge about the biased behaviour of the
investors during different market conditions. This would suggest education for individual
investors, as this would overcome unfavourable investing consequences resulting from behavioural
biases. The focus should be on conducting more and more training programmes for potential and
existing individual investors, which will create awareness among the investors and guard against
behavioural biases and will ultimately help investors in making sound investment decisions.

Limitations and directions for future research

The present study does suffer from certain limitations. While developing a scale for measuring the
impact of the behavioural biases on the equity investors’ decision-making process, neither mediator
nor moderator variables were considered. However, this is a limitation of the study but can serve as
a direction for future research. Future research can be undertaken for analysing the role of
mediators like risk perception, risk tolerance and moderator variables like financial literacy,
investment experience, gender in the given hypothesis. Continuous refinement of the scale proposed
and supported in this study is possible based on further research and time to time changes
occurring in the field of behavioural finance.

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Corresponding author
Manpreet Kaur can be contacted at: [email protected]

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