Behavioural Finance: Heuristics in Investment Decisions
Decision making from investment point of view is basically defined as a rational choice among alternatives or as the conscious selection of a course of action from available alternatives. Investors are also assumed to be a rational creature. Process of decision making in individuals is subject to various psychological changes, which therefore result in behaviour. Prior to a decision making, individual undergoes with several cognitive and emotional illusions which may result in irrationality as argued by several authors. Decision making is required of everyone, individuals as well as administrators. Individual finds numerous models in the extensive literature on decision making with two basic assumptions based on Simon's work: First assumption that decision making is an orderly, rational process that possesses an inherent logic; and the second assumption that steps in the process follow one another in an orderly, logical, sequential flow. A decision is the result of making a judgement or reaching a conclusion. In Heuristic decision making there is a lack of emphasis on hierarchical structure; role behaviour is characterized by freedom for every individual to explore all ideas. The emotional and social tone is relatively relaxed; openness, originality and seeking of consensus are the essentials of heuristic decision making. In a nutshell it is a creative type of decision. Heuristics is one such variable which influences the decision making of investors directly. Hence it is necessary to configure the influence of behavioural finance theory in to individual investor decision making using heuristics.