Financial Accounting Theory Case Study 2022

Running Head: FINANCIAL ACCOUNTING THEORY
FINANCIAL ACCOUNTING THEORY
Name of the University
Author Note

1FINANCIAL ACCOUNTING THEORY
Executive Summary
Behavioral finance is the study of influence of the psychology on investor’s behavior or the
financial analysts. Investors do not constantly behave rational, as they are influenced by their
biases. For gaining insights on this subject, this paper intends to discuss on influence of the
behavioral factors in making the decisions of investment. Hence, as it is concluded that
behavioral factors play great role in affecting investment decisions of share market, its
understanding will be helpful to the investors and other investment portfolios for constructing
an effective portfolio of investment for achieving the desired objective of investment.

2FINANCIAL ACCOUNTING THEORY
Table of Contents
Introduction................................................................................................................................3
Literature Review.......................................................................................................................3
Behavioral Finance and Investors..........................................................................................3
Behavioral Factors Influencing the Investors Decision-Making...........................................6
Behavioral Biases Influence on Investment Decision-Making and Performance................10
Conclusion................................................................................................................................12
Reference..................................................................................................................................13

3FINANCIAL ACCOUNTING THEORY
Introduction
In stock market, investment behavior of an individual investors is highly influenced
by various psychological factors. These psychological factors highly contribute to the
decisions of investor for allocation of surplus financial resources in different stocks and
instruments of stock market. The successful investors are those who make investment
decisions after doing cautious analysis of the company, industry and economy in process of
investing in share market. Most researcher in the capital market have found that
diversification result in the risk reduction to greater extent in the high volatile conditions of
market. The traditional theories have assumed that in the course of making decision of the
investment, investors behave rationally because individual does not always behave rationally,
as their decisions may be influenced by behavioral preconceptions (Kotlar et al. 2014).
The high volatility of share market put questions on the validity of “efficient market
hypothesis”. Behavioral finance is the new stream of the research study that make
justification of problems faced by the traditional investors. Generally, individual investors are
influenced by different behavioral factors that limit them for acting rationally in process of
the decision-making of investment as supported by the traditional theories of economics. The
behavior of individual and the emotional biases indicates direction for the different securities
as well as other relevant decisions of investment (Kengatharan and Kengatharan 2014).
Hence, this paper aims to discuss influence of the behavioral factors for making investment
decisions and the performance study on the investors of “Colombo Stock Exchange”.
Literature Review
Behavioral Finance and Investors
Behavioral finance is the famous field in finance, which suggests the theories based
on the psychology of human for explaining the anomalies of stock market concept that is