An Empirical Examination of the Impact of Locus of Control on Investor Behavioral Baises
Purpose: The purpose of this paper is to examine the relationship between locus of control and behavioural biases, cognitive and emotional in investor decision making. The study attempted to establish the relationship between locus of control and twenty behavioural biases identified through literature review in behavioural finance.
Design/methodology/approach: An exhaustive review of existing literature in the field of behavioural finance was undertaken to identify and develop instruments to measure twenty behavioural biases. Subsequently, a pilot was run on 109 investors to validate the instruments used to measure the different biases. This validated instrument was administered on 552 investors drawn across four metro cities of India namely; Delhi, Kolkata, Mumbai and Chennai along with Rotter’s locus of control questionnaire to investigate the impact of locus of control on behavioural biases in investment decision making.
Findings: The study revealed that an investors locus of control had a strong impact on biases in investment decision making. Investors with external locus of control were found to be more likely to demonstrate cognitive dissonance, hindsight and ambiguity aversionbiases in investment decision making. Investors with an internal locus of control were more inclined to demonstrate prediction overconfidence, certainty overconfidence, optimism, illusion of control and confirmation biases.
Research limitations/implications: Our study has only focussed on one personality variable, which is locus of control. This study can be extended to other personality traits and their relationship with investor behavioural biases and preferences.
Originality/value: Results from this study help understand the impact of locus of control on investor biases and preferences, which can facilitate in identifying an investors predisposition towards particular investing choices. This also serves as a mechanism to identify whether investors have an underlying inclination towards specific biases in investment decision making. This identification can facilitate remediation or corrective actions on part of the investor based whether he has an internal or an external locus of control.
Keywords - Behavioural Finance, Cognitive and Emotional Biases, Locus of Control, Investor Decision Making