The influences of psychological factors on investors decision making in the South African derivative market

Abstract

Studies in behavioral finance have shown that human behavior often diverges from the rationality assumed by economists, as their decisions can occasionally be swayed by their emotional and psychological states. Given this concern, the study examines psychological factors influencing individual decision-making in the South African financial market. A structured questionnaire was used in collecting data from 414 participants who are individual investors actively involved in trading in the Johannesburg stock exchange market with the application of the random sampling method. The main objective of this study is to explore the psychological variables or biases that determine the investment decision-making of individual investors. Furthermore, this paper investigates psychological factors such as Anchoring, Herding, Overconfidence and Representative biases in investment decision-making. Findings revealed that all the variables, overconfidence, herding, anchoring and representative heuristics have a relationship with each other but the only variable that influences the individual investment decision is the representative heuristic while less consideration is given to another variable. The results of this study would help financial advisors understand the high importance of psychological factors and help them integrate behavioral insights into investment strategies. This will in turn help them provide better services to their clients. It will also help individual investors to acknowledge and understand the psychological factors influencing investment decisions and how to take note of them to make better decisions. Policymakers can consider the implications of psychological biases on market stability.