Most people like to think of themselves as rational when money is on the line. Yet anyone who has watched a friend panic-sell during a market dip, or double down on a losing stock because “it has to bounce back,” knows that investing rarely follows a clean logical script. Decades of behavioral finance research have shown that systematic mental shortcuts, known as cognitive biases, shape the way investors interpret information and place their bets.
A new investigation published in Advances in Consumer Research looks at how several of these biases interact with emotional intelligence to influence investment decisions in India’s stock market. The central finding: emotional intelligence appears to buffer investors against at least one common bias, confirmation bias, weakening its pull on the decisions people make.
The Question Behind the Research
Lead researcher Yash Acharya, a Ph.D. scholar at RK University in Rajkot, Gujarat, together with co-authors from Atmiya University and Gujarat Technological University, wanted to know which cognitive and emotional factors most strongly shape how individual investors decide where to put their money. The team also asked whether emotional intelligence, defined as the ability to recognize and manage one’s own emotions and read the emotions of others, might alter how specific biases translate into investment behavior.
To frame the question, it helps to know a few terms. Anchoring bias is the tendency to lean heavily on the first number or piece of information received, such as a stock’s original purchase price. Confirmation bias is the habit of seeking out information that supports what one already believes while ignoring contrary evidence. Herding bias refers to following the crowd rather than sticking with one’s own analysis. Availability bias is the tendency to give outsized weight to information that comes easily to mind, like recent news headlines. Risk perception is how much danger an investor senses in a given choice, and financial literacy measures basic knowledge of investing concepts.
How the Study Was Conducted
The researchers distributed a 43-question survey to 250 individuals with experience investing in Indian equity markets, focusing on major cities in Gujarat. Of those, 195 responses were judged complete and reliable enough for statistical analysis. Participants were recruited through convenience sampling, meaning the team reached out to investors who were accessible to them rather than drawing a random sample of all Indian investors.
The survey included demographic questions covering gender, education, occupation, portfolio size, and the share of savings invested in stocks. A second section used five-point agreement scales to measure risk perception, financial literacy, emotional intelligence, herding bias, anchoring bias, confirmation bias, availability bias, and overall investment decisions. Roughly 58 percent of respondents were men, most held postgraduate degrees, and about 68 percent had portfolios worth less than 2 lakh rupees (about $2,400).
The team first checked the reliability of each scale using a statistical measure called Cronbach’s alpha, confirming the questionnaires produced consistent responses. They then ran multiple regression analysis to see which variables predicted investment decisions, followed by a moderation analysis to test whether emotional intelligence changed the strength of the link between confirmation bias and investment choices.
What the Analysis Revealed
Three factors stood out as statistically significant predictors of investment decisions: risk perception, emotional intelligence, and herding bias. Together with the other variables, the model explained about 20 percent of the variation in how participants reported making investment choices.
Risk perception had the strongest positive association. Investors who perceived higher levels of risk tended to make more deliberate investment choices. Emotional intelligence was also positively linked to investment decisions, suggesting that people who reported being more aware of and able to manage their emotions described making more balanced choices. Herding bias showed a significant effect as well, indicating that investors who pay close attention to what others are doing tend to let that influence their own moves.
Several variables that the researchers expected to matter did not show direct effects in the final model. Confirmation bias, availability bias, anchoring bias, and financial literacy were not significant direct predictors once other variables were accounted for. Anchoring bias and financial literacy showed significance in separate tests, hinting at indirect relationships.
The most notable result came from the moderation analysis focused on confirmation bias. Among investors with low emotional intelligence, confirmation bias had a clear effect on investment decisions. Among those with moderate emotional intelligence, the effect was still present but weaker. Among investors with high emotional intelligence, the link between confirmation bias and investment decisions became statistically insignificant. In other words, higher emotional intelligence was associated with a reduced influence of confirmation bias on decision-making.
What It Might Mean for Investors and Advisors
For individual investors, the results point to a practical angle. Skills associated with emotional intelligence, such as recognizing when a strong feeling is coloring one’s reading of market news, may help reduce the tug of confirmation bias when evaluating a stock. The findings also suggest that being alert to herd behavior and thinking carefully about perceived risk are part of the decision-making picture.
For financial advisors and firms offering investor education, the study hints that teaching portfolio theory alone may not fully address how clients actually behave. Tools or training that help investors notice and manage their emotional reactions could complement traditional financial literacy programs.
Several caveats apply. The sample was drawn through convenience sampling from investors in Gujarat, so the results may not extend to investors in other regions or markets. The study relied on self-reported survey data, which depends on respondents answering honestly and accurately about their own behavior. And because this is a correlational survey rather than a controlled experiment, the findings describe patterns of association rather than proven cause-and-effect relationships. Still, the work adds to a growing body of research suggesting that the line between rational analysis and emotional reaction is blurrier than classical finance theory once assumed.
