Advances in Consumer Research
Issue 5 : 119-127
Original Article
Analysing Behavioural Bias Effects on Risk Premiums in Retail Derivatives Trading A Decomposition Framework
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1
Assistant Professor, Business Administration, SRM Institute of Science and Technology, Chennai, Tamil Nadu,
2
Assistant Professor (Sr.G), Faculty of Management, SRM Institute of Science and Technology, Vadapalani Campus, Chennai, Tamil Nadu, India,
3
Assistant Professor, College of Law & Legal Studies, Teerthanker Mahaveer University Moradabad UP, Moradabad, Uttar Pradesh
4
Assistant Professor, Department of Commerce, The Assam Royal Global University, Kamrup (Metro), Guwahati, Assam
5
Assistant Professor, Department of Commerce, Shyama Prasad Mukherji College for Women, University Of Delhi, Narela, New Delhi:- 110040
6
Director Array Research Pvt Ltd
Abstract

Behavioural finance has increasingly challenged the assumptions of traditional financial theories by demonstrating that investor decisions are frequently influenced by psychological biases rather than pure rationality. In retail derivatives trading, where leverage, volatility, and speculative decision-making dominate market participation, behavioural biases significantly affect pricing behaviour, risk perception, and premium formation. This study proposes a decomposition framework to analyse the effects of behavioural biases on risk premiums in retail derivatives trading environments. The framework integrates cognitive, emotional, and social biases into a structured analytical model capable of decomposing premium distortions arising from irrational market behaviour. The study investigates how biases such as overconfidence, loss aversion, anchoring, herd mentality, confirmation bias, and disposition effects contribute to deviations in derivatives pricing and risk-adjusted returns. Through a hybrid analytical methodology combining behavioural finance theory, market microstructure analysis, and retail trading behaviour modelling, the research evaluates the interaction between psychological decision processes and premium volatility in derivatives markets. The findings indicate that retail traders often misprice risks due to emotionally driven decisions, excessive speculation, and asymmetric information processing, leading to inflated or compressed risk premiums during volatile market phases. Furthermore, the decomposition framework reveals that behavioural distortions intensify under conditions of high leverage, rapid information dissemination, and social trading influence. The study argues that integrating behavioural decomposition models into derivatives risk analysis enhances the understanding of market inefficiencies and improves predictive assessment of retail-driven premium fluctuations. Overall, the paper demonstrates that behavioural biases are not peripheral anomalies but structural forces that reshape risk pricing dynamics in modern retail derivatives markets..

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