Rational and irrational influences on investing decisions

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Abstract

This study analyzes rational and irrational influences on individual investors’ investing decisions in the Nepalese stock market. By utilizing a sample size of 300 individuals, our research employs a dual-pronged approach involving exploratory and confirmatory factor analyses (EFA and CFA). One-dimensionality evaluation involves frequency and descriptive analyses, followed by the EFA and structural equation modeling (SEM). Principal component analysis (PCA), coupled with Varimax rotation, identifies five crucial factors (behavioral, accounting, firm image, attitude towards risk, and investing decisions) from the initial 32 variables. SEM revealed the significant influence of rational and irrational factors (Shefrin, 2016). The study has found some common behavioral aspects in most respondents; for example, most of them sell shares that have experienced an increase in value and avoid selling shares that have exhibited a decline in value. Likewise, most of them are heavily influenced by the opinions and actions of others. Accounting information and a firm’s image have a considerable favorable influence on investing decisions (Sachdeva et al., 2023). The implications of this research extend to investors, practitioners, and regulators, encouraging informed decision-making and market stability. This research enhances our understanding of investment dynamics by integrating logical and irrational elements.

Keywords: Behavioral Factors, Risk, Firm’s Image, Accounting Information, Decision-Making

Authors’ individual contribution: Conceptualization — D.K.; Methodology — D.K. and G.B.; Software — D.K. and R.K.D.; Validation — D.K., R.K.D., and G.B.; Formal Analysis — G.B.; Investigation — D.K.; Resources — R.K.D. and G.B.; Data Curation — R.K.D.; Writing — Original Draft — D.K.; Writing — Review & Editing — D.K., R.K.D., and G.B.; Visualization — D.K. and G.B.; Supervision — R.K.D. and G.B.; Project Administration — G.B.

Declaration of conflicting interests: The Authors declare that there is no conflict of interest.

JEL Classification: G10, G11, G40, G41

Received: 29.08.2023
Accepted: 18.04.2024
Published online: 22.04.2024

How to cite this paper: Karki, D., Dahal, R. K., & Bhattarai, G. (2024). Rational and irrational influences on investing decisions. Corporate & Business Strategy Review, 5(2), 92–101. https://doi.org/10.22495/cbsrv5i2art8