Behavioural Finance of Stock Market: A Case Study

Abstract

Behavioural finance is a discipline within financial economics that elucidates the diverse psychological aspects. It is an area of research that integrates principles from psychology and economics to comprehend the impact of human behaviour on financial markets and decision-making. In contrast to conventional financial theories, which presume that investors act rationally, and markets operate efficiently, behavioural finance recognizes that individuals frequently make choices driven by emotions, cognitive biases, and heuristics. Behavioural finance proposes that investors tend to either overreact or underreact when faced with new information. As a result, stock prices can deviate from their true value, presenting opportunities for arbitrageurs to exploit market inefficiencies. This theory also sheds light on the formation of market bubbles, where asset prices skyrocket to unsustainable levels due to speculative excitement and irrational exuberance. Likewise, behavioural biases like fear and panic can instigate market crashes, as evidenced by events such as the burst of the dot-com bubble in the early 2000s and the global financial crisis of 2007-2008. The study analyses and explains the behavioural patterns of the Indian Stock Market and establishes the link between psychological factors and investment decisions such as buying and selling of securities. The study delves deeper into behaviour of retail investors, DII, FII and FPIs during periods of booms as well as busts. studying how the Indian stock market has reacted historically upon considering the various macroeconomic, geopolitical, and fundamental updates and trends. As a proxy for Indian Stock Market the NSE’s NIFTY 50 and BSE’s Sensex indices are considered, and for observing behavioural patterns in specific sectors, NSE sectoral indices such as NIFTY IT, NIFTY BANK, NIFTY FMCG etc are considered.