Behavioural Biases and Mutual Fund Investment Decisions in India: Risk Perception, Construct Validity and Directions for Future Research
DOI:
https://doi.org/10.68219/19fbmx67Keywords:
behavioural finance, mutual funds, risk perception, investment decisions, measurement validity, financial literacy, IndiaAbstract
Behavioural finance offers us an alternative explanation to the notion that investment decisions are always made on the basis of the rational, unbiased processing of risk and return. This is a critical narrative review of the effects of overconfidence, loss aversion, herding and anchoring and the role of mental accounting on investment decisions in Indian mutual funds particularly focusing on the possible explanatory power of the subjective risk perception. The article draws on theories of basic behavioral finance and some recent research and investigates the conceptual similarity between risk perception, risk tolerance and financial literacy. It highlights common method problem issues, such as relying on self-reported decisions, inadequate differential scoring on bias measures, mediation analysis across cross sections and limited geographic representativeness. A conceptual framework is formed to differentiate between direct bias–decision relations from indirect relations via perceived risk, and proposes financial literacy and investor experience as context-sensitive conditions. The review is not intended to be comprehensive on the database or to calculate pooled effects. Rather, it promotes a measurement-oriented research agenda that stresses the need for validated measures, explicit investment outcomes, longitudinal or experimental designs, and open reporting of statistical results. These suggestions can enhance the interpretation and comparability of future studies of investors in Indian mutual funds.
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