- October 16, 2023
- Posted by: CFA Society India
- Category:In Conversation With
Academic Expert - Prof. Ripsy Bondia, Assistant Professor, IMI, Delhi
Interviewed By - Shivani Chopra, CFA, Co-chair, Public Awareness Committee, CFA Society India
Shivani: What motivated you to pursue a PhD in behavioural finance? What were the key findings of your research?
Prof. Ripsy: In the initial months of my PhD at MDI, I opted for a course on behavioural finance based on a friend’s strong recommendation. I was fascinated by the subject from the very first class. The area resonated with me instantly. A significant part of this was due to Prof. Sanjay Bakshi, who taught this course at MDI. I consider myself extremely fortunate to have had a teacher like him. Amongst other things, the course introduced me to heuristics and biases. It was an eye opener for me. It became clearer that decision making in the stock market was not necessarily rationale. I saw an opportunity to explore this phenomenon further in my research.
In terms of my research, it focused on understanding the buying process of individual investors. It demonstrated how intuitively and subtly paying attention to a stock can become one of the rationales for buying it, often without investors even realizing it. This can have significant financial consequences for them.
Shivani: In your opinion, what are some of the most significant biases or heuristics that impact investor decision-making?
Prof. Ripsy: Herding is one of the tendencies deeply ingrained in investors. As a social animal, we do not want to be left out, whether it’s from engaging in ‘intellectually stimulating’ discussions about the stock market or the appeal of making ‘easy’ money, especially when it appears that everyone else is making money. This FOMO has been observed in nearly every financial bubble throughout human history. While each bubble may introduce a ‘new’ financial innovation, what remains consistent is human greed and the inclination to blindly follow the crowd.
Another tendency often observed in investors is confirmation bias. Once investors develop a positive disposition toward a stock, they assign heavy weight to information that confirms their hypothesis while assigning low weight or even disregarding information that contradicts their thinking. This magnifies their bias towards a stock.
Shivani: Could you discuss a specific study or experiment in behavioural finance that you find particularly interesting or influential? How has it contributed to our understanding of investor behaviour?
Prof. Ripsy: The Asch Experiment of the 1950s is one of the most insightful experiments I have come across. It’s from the field of psychology, but one can draw immense lessons from it in any field, including investing. The experiment revealed the power of our need to belong to a group. As humans, we can go to great lengths (without understanding what we are doing or even knowing that we are wrong) to conform to the rest of the group. This behaviour is commonly observed in financial markets, where investors buy assets about which they have little to no information, just to avoid feeling left out.
Shivani: Are there any challenges or criticisms associated with behavioural finance that you think are important to be aware of?
Prof. Ripsy: Traditionally, finance has been viewed through a rational lens and has been a subject of mathematical elegance. In contrast, behavioural finance draws heavily from psychology and, if one delves deeper, even from philosophy (I think). Many people criticize and question the ‘so-what’ of behavioural finance. I like to answer that by using analogies put forth by Daniel Crossby: To understand matter, you need to understand atoms; to understand language, you need to understand words; to understand living organisms, you need to understand cells. Likewise, to comprehend financial markets, you need to understand its fundamental unit—people and their behaviour. However, I think it is easier said than done to understand human behaviour. While it is easy to explain biases in hindsight, it is difficult to apply these concepts on a real-time basis. Behavioural finance, as a field, is a less deterministic as compared to the traditional finance.
About Prof. Ripsy
Prof. Ripsy Bondia is an Assistant Professor at IMI, Delhi. She has done her FPM from MDI Gurgaon. Before moving to academics, she worked with the research unit of McKinsey & Company and infrastructure consulting unit of IL&FS.
Shivani has more than 13 years of experience across private equity, investment management, corporate finance and training and has worked with corporates like Genpact and Copal Partners. A CFA Charterholder and Masters in Economics, she is presently a trainer for various finance related courses.