Ananth Narayan Gopalakrishnan, a whole-time member of the Securities and Exchange Board of India (Sebi), shared his insights on the role of regulation in mitigating behavioural errors in investing at the third edition of Outlook Money’s 40After40 Retirement Expo in Mumbai.
He covered critical aspects of capital formation, regulatory challenges, technological disruptions, and common behavioural pitfalls among investors in his speech.
The Role Of Regulation In Investor Behaviour
Gopalakrishnan began by drawing an analogy between regulators and doctors, emphasising that while Sebi is not responsible for every investor’s financial health, it plays a crucial role in maintaining the overall integrity of capital markets.
“First, do no harm,” he quoted from the Hippocratic oath, stressing that regulators must avoid over-regulation, which can stifle legitimate market activities, just as under-regulation can allow malpractices to thrive.
Balancing Type 1 And Type 2 Regulatory Errors
He elaborated on two types of regulatory errors.
Type 1 Errors
These occur when regulators fail to prevent malpractices, citing historical examples like the Harshad Mehta and Ketan Parekh scams. Sebi is highly vigilant to avoid such lapses.
Type 2 Errors
These happen when excessive regulation deters genuine market participation. Gopalakrishnan warned that overzealous rules could hinder capital formation, as even well-intentioned businesses might withdraw from the market.
To foster sustained capital growth, Sebi strives to minimise both types of errors, ensuring a balanced regulatory approach, he said.
Adapting To Technological Disruptions
Gopalakrishnan highlighted the transformative impact of emerging technologies like artificial intelligence, quantum computing, and robotics on capital markets.
“The nature of our economics is going to change,” he said, while urging stakeholders to proactively shape the future rather than merely reacting to technological shifts. He added that Sebi and the broader ecosystem must embrace risks today to remain relevant in the rapidly evolving financial landscape.
Common Behavioural Errors In Investing
Gopalakrishnan identified several prevalent behavioural biases among investors:
Fear And Greed
These fundamental emotions drive market volatility. Investors often oscillate between these extremes, leading to impulsive decisions.
Overconfidence And Overtrading
Citing research by Barber and Odean, he pointed out that frequent trading typically results in lower returns for average investors, contrasting with exceptions like Warren Buffett.
Neglecting Asset Allocation
Many investors focus excessively on stock picking and market timing, ignoring asset allocation – a key determinant of portfolio performance.
Influence Of Finfluencers
Gopalakrishnan cautioned against blindly following financial influencers and market gurus, stressing the importance of independent, informed decision-making.
Herd Mentality
He presented data to illustrate this point. Between FY22 and FY24, mutual fund inflows averaged Rs 3.2 lakh crore annually, while fresh equity issuances lagged at Rs 1.5 lakh crore. This imbalance suggested that capital appreciation might be driven more by inflows than by genuine capital formation. However, he noted that FY24 showed a healthier balance, with mutual fund inflows at Rs 4.8 lakh crore and IPO issuances at Rs 2.9 lakh crore.
Underestimating Risk
The most significant error, according to Gopalakrishnan, is a lack of awareness regarding personal risk appetite. He stressed that uninformed risk-taking can destabilise both individual portfolios and the broader financial ecosystem.
Sebi’s Approach To Addressing Behavioural Errors
Gopalakrishnan underscored that while individual investors must take responsibility for their biases, Sebi should play a supportive role.
Ensuring Adequate Disclosures
Sebi mandates comprehensive disclosures from companies issuing initial public offerings (IPOs), enabling investors to make informed decisions.
Investor Education And Awareness
By promoting financial literacy and responsible investing, Sebi aims to empower investors to recognise and mitigate their behavioural biases.
Gopalakrishnan concluded by reiterating that individuals are primarily responsible for sound investing. However, Sebi remains committed to creating a regulatory environment that fosters informed decision-making, balanced market participation, and sustained capital formation. As technological and economic landscapes evolve, regulators and investors alike must adapt to steer through the complexities of the future, he added.
