Behavioural Biases and Asymmetric Investment Decisions of Indian Retail Investors Across Market Volatility: A Structural Equation Modelling Approach

Abstract

Indian retail investors increasingly deviate from rational decision-making during periods of stock-market volatility, yet the mechanisms underlying this deviation remain incompletely modelled in the Indian context. Drawing on Prospect Theory, this study examines how five behavioural biases, Prudent and Precautionary Behaviour, Financial Heuristics, Self-Regulation Bias, Anchoring Bias, and Information Heuristics, shape retail investors' buy, hold, and sell decisions across positive and negative volatility phases. Primary survey data were collected from 329 individual investors across Tier I, II, and III Indian cities using a structured, validated questionnaire. Confirmatory Factor Analysis and Structural Equation Modelling, conducted in SPSS and AMOS, validated a hierarchical five-factor bias structure (Cronbach's α = .693–.910; 59.37% variance explained) and tested ten hypothesised bias–decision paths. Seven paths were statistically significant, and behavioural biases consistently exerted stronger effects during negative volatility than positive volatility, with anchoring bias and self-regulation bias emerging as the strongest predictors of irrational decisions. These findings extend Prospect Theory's loss-aversion principle to India's retail-investor context and carry direct implications for investor education, behavioural nudges on digital trading platforms, and advisor-level behavioural profiling.