Overconfidence, Risk Tolerance and Investment Strategy: A Study of Capital Market Investors in India

Abstract

Traditional finance theories postulate that capital markets areefficient and that investors are rational. Markowitz, Fama andSamuelson pioneered thinking in traditional finance in the fiftiesand sixties. Later on, objections were raised on the assumptionof rationality of investors. One actual behavioural trait exhibited
by investors, which is far from being rational, is overconfidence.The present paper investigates the existence of overconfidenceamong investors, their risk tolerance levels and their impact oninvestment strategies adopted by them. The study showedsignificant levels of overconfidence that can impact investors’
strategy. Investors do fall into very distinctive categories of risktolerance levels. They can be risk taking and risk averse, butmajority are risk neutral. Investors can have distinctive levels ofrisk attitude/tolerance and overconfidence, but it is found thattheir risk attitude does not impact or determine theiroverconfidence.