The trichotomy of Needs Theory and irrational investor behavior through investor category: evidence from Sri Lanka

Abstract

The trichotomy of Needs Theory has been applied in various studies to analyze psychological features across different professions. However, there is a notable gap in the literature regarding its impact on irrational investor behavior. This study presents a groundbreaking contribution by exploring how individual investors’ unique characteristics, defined by the trichotomy of Needs Theory, impact their stock market decisions. This research offers crucial, interdisciplinary insights into the psychological principles driving human behavior, making it significant for market analysts, investors, stockbrokers, and decision-makers. Utilizing David McClelland’s trichotomy of Needs Theory, the study assesses the behavioral aspects of individual investors. It investigates the impact of said theory on irrational investor behavior at the Colombo Stock Exchange, with the investor category as a moderator. Data was collected through a structured questionnaire from a sample of 386 investors at the Colombo Stock Exchange using systematic random sampling. Structural Equation Modeling was employed to test the hypotheses. The findings indicate that both the need for affiliation and the need for achievement significantly increase irrational investor behavior at the Colombo Stock Exchange. Further, the results embrace a significant positive moderation effect from the investor category on the relationship between the need for affiliation and irrational investor behavior. Moreover, the investor category positively impacts the relationship between the need for achievement and irrational investor behavior in the Colombo Stock Exchange.