Behavioral determinants of investment decisions: evidence from Indian retail equity investors in the wake of COVID-19 induced financial risks

Purpose The study aims to identify and understand the underlying behavioral tendencies and motivations influencing investor sentiments and examines the relationship between these underlying factors and investment decisions during the COVID-19-induced financial risks. Design/methodology/approach The study uses the primary data and information collected from 300 Indian retail equity investors using a nonprobability sampling technique, specifically purposive and snowball sampling. This research uses the insights from Phuoc Luong and Thi Thu Ha (2011) and Shefrin (2002) to delineate behavioral factors influencing investment decisions. Structural equation modeling estimates the causal relationship between underlying behavioral factors and investment decisions during the COVID-19-induced financial risks. Findings The study establishes that the “Regret Aversion,” “Gambler’s Fallacy” and “Greed” significantly influence investment decisions, and provide a comprehensive understanding of how psychological motivations shape investor behavior. Notably, “Mental Accounting” and “Conservatism” exhibit insignificance, possibly influenced by the unique socioeconomic context of the pandemic. The research contributes to 35% of variance understanding and prompts the researchers and policymakers to tailor investment strategies aligned to these behavioral tendencies. Research limitations/implications The findings hold policy implications for investors and policymakers and provide tailored recommendations including investor education programs and regulatory measures to ensure a resilient and informed investment community in the context of India's evolving financial landscapes. Originality/value Theoretically, behavior tendencies and motivations have been strongly linked to investment decisions in the stock market. Yet, empirical evidence on this relationship is limited in developing countries where investors focus on risk management. To the best of the authors’ knowledge, this study is among the first to document the influence of underlying behavioral tendencies and motivation factors on investment decisions regarding retail equity in a developing country.