Impact of Behavioral Factors in Making Investment Decisions and Performance: Evidence from Pakistan Stock Exchange
DOI:
https://doi.org/10.51153/mf.v16i1.435Keywords:
Heuristics, prospects, Market, Herding, investment performance, investors decisionsAbstract
Market irregularities and irrational behavior triggered investor’s changes in the stock market, and this has led to an investigation into the impact of various behavioral biases and factors affecting decision-making for individual investors. The quality of individual investor behavior in making stock investment decisions is very important to be understood as a reference of the movement of the capital market. This study investigated the role of behavioral finance and investor psychology in investment decision-making at the Pakistan Stock Exchange (PSE). Using a sample of 147 individual investors, the study established that behavioral factors such as Herding, Heuristic, Market and Prospect that affected the decisions of the investors operating at the Pakistan Stock Exchange (PSE). As there are a few studies in Pakistan related to behavioral finance, so this study mainly contributes to the field of behavioral finance in Pakistan. This study focusses on existing theories of behavioral finance which led to develop the hypothesis. The result of the analysis is that the four variables have greatly influenced the investment decision and return on investment. All behavioral variables have a significant impact on the decision-making process of investors, which led to the acceptance of all assumptions regarding the level of influence of behavioral factors in decision making for individual investorsReferences
Alquraan, T., Alqisie, A., & Al Shorafa, A. (2016). Do behavioral finance factors influence
the stock investment decisions of individual investors? (Evidence from Saudi Stock
Market). American International Journal of Contemporary Research, 6(3), 159-169.
Anderson, A., Henker, J., & Owen, S. (2005). Limit Order Trading Behavior and Individual
Investor Performance. The Journal of Behavioral Finance, 6(2), 71–89.
Anderson, J. C., & Gerbing, D. W. (1988). Structural equation modeling in practice: A
review and recommended: Two-step approach. Psychological Bulletin, 103(3), 411–
Bandalos, D. L. (2002). The effects of item parceling on goodness-of-fit and parameter
estimate bias in structural equation modeling. Structural Equation Modeling, 9(1),
–102.
Barber, B. M., & Odean, T. (2000). Trading is hazardous to your wealth: The common stock
investment performance of individual investors. Journal of Finance, 55(2), 773–806.
Barberis, N., & Huang, M. (2001). Mental accounting, loss aversion, and individual stock
returns. Journal of Finance, 56(4), 1247–1292.
Barberis, N., & Thaler, R. (2003). A survey of behavioral finance. Handbook of the Economics
of Finance, 1053-1128. {Avialable}, https://www.nber.org/ system/ files /working_
papers/w9222/w9222.pdf.
Campbell, J. Y., Ramadorai, T., & Ranish, B. (2019). Do the rich get richer in the stock
market? Evidence from India. American Economic Review: Insights, 1(2), 225-40.
Cao, M. M., Nguyen, N. T., & Tran T. T. (2021). Behavioral Factors on Individual Investors’
Decision Making and Investment Performance: A survey from the Vietnam stock
market. The Journal of Asian Finance, Economics, and Business, 8(3), 845-853.
Caparrelli, F., D’Arcangelis, A. M., & Cassuto, A. (2004). Herding in the Italian Stockmarket:
A case of behavioral finance. Journal of Behavioral Finance, 5(4), 222–230.
Chin, W. W., Marcelin, B. L., & Newsted, P. R. (2003). A partial least squares latent variable
modeling approach for measuring interaction effects: Results from a Monte Carlo
simulation study and an electronic-mail emotion/adoption study. Information
Systems Research, 14(2), 189-217.
Choi, N., & Sias, R. W. (2009). Institutional industry herding. Journal of Financial Economics,
(3), 469–491.
Coval, J. D., & Shumway, T. (2005). Do behavioral biases affect prices?. The Journal of
Finance, 60(1), 1-34.
De Bondt, W. F., & Thaler, R. (1985). Does the stock market overreact?. The Journal of
Finance, 40(3), 793-805.
De-Bondt, W. F., & Thaler, R. H. (1995). Financial decision-making in markets and firms:
A behavioral perspective. Handbooks in Operations Research and Management
Science, 9, 385-410.
Demirer, R., Kutan, A. M., & Zhang, H. (2014). Do ADR investors herdα: Evidence from
advanced and emerging markets. International Review of Economics and Finance, 30,
–148.
Evans, D. A. (2006). Subject perceptions of confidence and predictive validity in financial
information cues. Journal of Behavioral Finance, 7(1), 12–28.
Filbeck, G., Hatfield, P., & Horvath, P. (2005). Risk Aversion and Personality Type. The
Journal of Behavioral Finance, 6(4), 170–180.
Fisher, C. M., Buglear, J., Lowry, D., Mutch, A., & Tansley, C. (2010). Researching and Writing
a Dissertation An Essential Guide for Business Students (3rd ed.).New Jersy: Prentice-
Hall.
Fogel, S. O., & Berry, T. (2006). The disposition effect and individual investor decisions:
The roles of regret and counterfactual alternatives. The Journal of Behavioral Finance,
(2), 106–117.
Fornell, C. and D. F. Larcker (1981). “Evaluating structural equation models with unobservable
variables and measurement error. Journal of Marketing Research 18(1),
-50.
Frazzini, A. (2006). The disposition effect and underreaction to the news. The Journal of
Finance, 61(4), 2017-2046.
Gay Jr, R. D. (2008). Effect of macroeconomic variables on stock market returns for
four emerging economies: Brazil, Russia, India, and China. International Business &
Economics Research Journal (IBER), 7(3).1-8.
Gefen, D., Straub, D., & Boudreau, M. C. (2000). Structural equation modeling and
regression: Guidelines for research practice. Communications of the Association for
Information Systems, 4(1), 7-79.
Genesove, D., & Mayer, C. (2001). Loss aversion and seller behavior: Evidence from the
housing market. The Quarterly Journal of Economics, 116(4), 1233-1260.
Goodfellow, C., Bohl, M. T., & Gebka, B. (2009). Together we invest? Individual and
institutional investors’ trading behavior in Poland. International Review of Financial
Analysis, 18(4), 212–221.
Grinblatt, M., Keloharju, M., & Linnainmaa, J. T. (2012). IQ, trading behavior, and
performance. Journal of Financial Economics, 104(2), 339–362.
Hair, J. F., Hult, G. T. M., Ringle, C., & Sarstedt, M. (2014). A Primer on Partial Least Squares
Structural Equation Modeling (PLS-SEM) (Second). California: SAGE.
Hair, J. F., Black, W. C. Babin, B. J. and Anderson, R.E. (2010), Multivariate Data Analysis,
Englewood Cliffs, NJ: Prentice-Hall.
Harrington, D. (2009). Confirmatory Factor Analysis. Oxford: Oxford University Press.
Helms, J. E., Henze, K. T., Sass, T. L., & Mifsud, V. A. (2006). Treating Cronbach’s Alpha
reliability coefficients as data in counseling research. The Counseling Psychologist,
(5), 630–660.
Hu, L. T., & Bentler, P. M. (1999). Cutoff criteria for fit indexes in covariance structure
analysis: Conventional criteria versus new alternatives. Structural Equation Modeling,
(1), 1–55.
Hvide, H. K. (2002). Pragmatic beliefs and overconfidence. Journal of Economic Behavior
and Organization, 48(1), 15–28.
Jum C., N. (1978). Psychometric Theory (2nd ed.). McGraw-Hill.
Kahneman, D., & Tversky, A. (1979). On the interpretation of intuitive probability: A reply
to Jonathan Cohen. Cognition, 7(4), 409–411.
Kallinterakis, V., Munir, N., & Radovic-Markovic, M. (2010). Herd behavior, illiquidity and
extreme market state: Evidence from Banja Luka. Journal of Emerging Market Finance,
(3), 305–324.
Kempf, A., & Ruenzi, S. (2006). Status Quo Bias and the Number of Alternatives: An
Empirical Illustration from the Mutual Fund Industry. Journal of Behavioral Finance,
(4), 204–213.
Kengatharan, L., & Kengatharan, N. (2014). The Influence of Behavioral Factors in Making
Investment Decisions and Performance: Study on Investors of Colombo Stock
Exchange, Sri Lanka. Asian Journal of Finance & Accounting, 6(1). 1-23.
Kim, K. A., & Nofsinger, J. R. (2008). Behavioral finance in Asia. Pacific-Basin Finance Journal,
(1–2), 1–7.
Kyle, A. S., & Wang, F. A. (1997). Speculation Duopoly with an agreement to disagree: Can
overconfidence survive the market test? Journal of Finance, 52(5), 2073–2090.
Lai, M. M., Low, K. L. T., & Lai, M. L. (2001). Are Malaysian investors rational? The Journal of
Psychology and Financial Markets, 2(4), 210-215.
Laopodis, N. T., & Papastamou, A. (2016). Dynamic interactions between stock markets and
the real economy: Evidence from emerging markets. International Journal of Emerging
Markets, 11(4), 715–746.
Leech, N. L., Barrett, K. C., & Morgan, G. A. (2005). SPSS for intermediate statistics: Use and
interpretation. United Kingdom: Psychology Press.
Lehenkari, M., & Perttunen, J. (2004). Holding on to the Losers: Finnish Evidence. Journal of
Behavioral Finance, 5(2), 116–126.
Le-Luong, P., & Thi Thu Ha, D. (2011). Behavioral factors influencing individual investors’
decision-making and performance. A survey at the Ho Chi Minh Stock Exchange. Master
Thesis, Umea School of Business, Sweden.
Lin, A. Y., & Lin, Y. N. (2014). Herding of institutional investors and margin traders on extreme
market movements. International Review of Economics and Finance, 33, 186–198.
Lin, A. Y., & Swanson, P. E. (2003). The Behavior and Performance of Foreign Investors in
Emerging Equity Markets: Evidence from Taiwan. International Review of Finance, 4(3–4),
–210.
Liu, Y., & Salvendy, G. (2009). Effects of measurement errors on psychometric measurements
in ergonomics studies: Implications for correlations, ANOVA, linear regression, factor
analysis, and linear discriminant analysis. Ergonomics, 52(5), 499–511.
Michaely, R., Thaler, R. H., & Womack, K. L. (1995). Price reactions to dividend initiations and
omissions: Overreaction or drift?. The Journal of Finance, 50(2), 573-608.
Naik, P. K., & Padhi, P. (2015). On the linkage between stock market development and
economic growth in emerging market economies: Dynamic panel evidence. Review of
Accounting and Finance, 14(4), 363-381.
O’Brien, R. M. (2007). A caution regarding rules of thumb for variance inflation factors.
Quality and Quantity, 41(5), 673–690.
Oberlechner, T., & Osier, C. (2012). Survival of overconfidence in currency markets. Journal
of Financial and Quantitative Analysis, 91-113.
Odean, T. (1999). Do investors trade too much? American Economic Review, 89(5), 1279-
Odean, T. (1998). Are investors reluctant to realize their losses?. The Journal of
Finance, 53(5), 1775-1798.
Parveen, S., & Siddiquee, M. (2018). Anchoring Heuristic, Disposition Effect and
Overconfidence Bias in Investors: A Case of Pakistan Stock Exchange. Abasyn Journal
of Social Sciences, 11(2), 280–294.
Pervez, G., & Grønhaug, K. (2010). Research Methods in Business Studies. Harlow: Financial
Times/ Prentice Hall.
Prószyński, W. (1994). Criteria for internal reliability of linear least squares models. Bulletin
Géodésique, 68(3), 162-167.
Rabin, M. (2002). Inference by believers in the law of small numbers. The Quarterly Journal
of Economics, 117(3), 775-816.
Rasheed, M. H., Rafique, A., Zahid, T., & Akhtar, M. W. (2018). Factors influencing investor’s
decision making in Pakistan: Moderating the role of locus of control. Review of
Behavioral Finance, 10(1), 70–87.
Ritter, J. R. (2003). Behavioral finance. Pacific-Basin Finance Journal, 11(4), 429–437.
Russell, J. A. (1978). Evidence of convergent validity on the dimensions of effect. Journal
of Personality and Social Psychology, 36(10), 1152-1167
Sarstedt, M., Ringle, C. M., Henseler, J., & Hair, J. F. (2014). On the Emancipation of PLSSEM:
A Commentary on Rigdon. Long Range Planning, 47(3), 154–160.
Saunders, M., Lewis, P., & Thornhill, A. (2009). Research Methods for Business Students New
Jersy: Pearson Education Limited.
Sun, J. (2005). Assessing goodness of fit in confirmatory factor analysis. Measurement
and Evaluation in Counseling and Development, 37(4), 240-256.
Shafi, M. (2014). Determinants are influencing individual investor behavior in the stock
market: a cross-country research survey. Nigerian Chapter of Arabian Journal of
Business and Management Review, 62(1100), 1-12.
Shah, S. Z. A., Ahmad, M., & Mahmood, F. (2018). Heuristic biases in investment decisionmaking
and perceived market efficiency: A survey at the Pakistan stock exchange.
Qualitative Research in Financial Markets, 10(1), 85–110.
Shefrin, H., & Statman, M. (1985). The Disposition to Sell Winners Too Early and Ride
Losers Too Long: Theory and Evidence. The Journal of Finance, 40(3), 777–790.
Shelby, L. B. (2011). Beyond Cronbach’s Alpha: Considering Confirmatory Factor Analysis
and Segmentation. Human Dimensions of Wildlife, 16(2), 142–148.
Statman, M. (1999). Behavioral Finance: Past Battles and Future Engagements. Financial
Analysts Journal, 55(6), 18–27.
Tan, L., Chiang, T. C., Mason, J. R., & Nelling, E. (2008). Herding behavior in Chinese stock
markets: An examination of A and B shares. Pacific-Basin Finance Journal, 16(1–2),
–77.
Venezia, I., Nashikkar, A., & Shapira, Z. (2011). Firm-specific and macro herding by
professional and amateur investors and their effects on market volatility. Journal of
Banking and Finance, 35(7), 1599–1609.
Wamae, J. N. (2013). Behavioral factors influencing investment decision in the stock
market: A survey of investment banks in Kenya. International Journal of Social Sciences
and Entrepreneurship, 1(6), 68-83.
Waweru, N. M., Munyoki, E., & Uliana, E. (2008). The effects of behavioral factors in
investment decision-making: a survey of institutional investors operating at the
Nairobi Stock Exchange. International Journal of Business and Emerging Markets, 1(1),
-41.
Yao, J., Ma, C., & He, W. P. (2014). Investor herding behavior of Chinese stock market.
International Review of Economics and Finance, 29, 12–29.
Downloads
Published
Issue
Section
License
- Copyright of all the submissions to the Market Forces will remain to the contributors.
- Anyone is allowed to distribute, remix, tweak, and build upon his/her work, even commercially, as long as it is credited/cited to the original contributors of the Market Forces.