Authors: Assistant Professor Akhila N, Research Scholar Saranya P K
Abstract: Behavioral Finance theory states that cognitive biases significantly influence investors' decision-making processes especially during market volatility when investors use emotional decision rules rather than logical ones. The purpose of this study is to explore the extent of occurrence of the main types of biases, including loss aversion, overconfidence, herding, disposition effect, and recency bias, during periods of heightened market volatility (2020 market crash due to the coronavirus pandemic, 2022 bear market, and 2024 period of increased volatility). This study employs a mixed-method approach, consisting of a survey experiment among retail investors (n=850) and an analysis of brokerage transactions (n=1,200,000) conducted for 12,000 investors. Findings demonstrate that loss aversion escalates by 47% in times of volatility, prompting panic selling of stocks at 18-22% discount from their later recovery value. Overconfidence decreases, but trading frequency grows 156%, whereas herding behavior is two-fold during volatility surges. A comparative analysis of different volatility regimes identifies recency bias as the most persistent one (r=0.81 correlation with VIX index), whereas disposition effect weakens.
