MENTAL ACCOUNTING, FRAMING AND LOSS AVERSION IMPACT ON INVESTMENT DECISIONS OF INDIVIDUAL INVESTORS IN THE COLOMBO STOCK EXCHANGE

Abstract

This study investigates how behavioural biases, including loss aversion, framing, and mental accounting, affect the choices made by individual investors on the Colombo Stock Exchange (CSE). Behavioural finance recognizes investment behaviour influenced by emotional and cognitive variables rather than just rationality. The research aims to determine the influence of these biases on investment outcomes to provide insights to enhance financial decision-making and market efficiency. Data was gathered from 207 individual investors using structured questionnaires as part of a quantitative methodology. Statistical techniques of multiple regression, correlation analysis, and exploratory factor analysis were used to assess the impact of the three behavioural biases. Pre-testing and factor analysis were also used in the study to guarantee the validity and reliability of the instruments. The findings show that loss aversion, mental accounting, and framing greatly impact investing choices. Investors who engage in mental accounting deploy money differently according to their imagined goals, which results in less-than-ideal diversity. While loss aversion leads to conservative tactics and a reluctance to sell at a loss, framing biases decisions based on how information is presented. Regression analysis validated these variables as significant predictors, with loss aversion having the most impact. In the CSE, behavioural biases have a significant role in influencing investment choices. The most prevalent bias was loss aversion, followed by mental accounting and framing. Better investment practices and increased market efficiency can result from addressing these biases through investor education, awareness campaigns, and regulatory actions. The study lays the groundwork for further research in economies with comparable cultures and emphasizes the significance of incorporating behavioural insights into financial decision-making frameworks.