Impact of Information Processing Biases on Investment Decisions

Abstract

Disciple of behavioral finance is gradually gaining significant importance where behaviors of people are analyzed regarding their financial and investment decisions. The current study investigates the effect of information processing biases on investor’s decision making. Information processing biases are those biases in which information misleads the subject. This study was conducted in Pakistan to generalize the results on Pakistani investors. Questionnaire was designed to get data from investors of Pakistan. Different items of questionnaire were adapted to collect data from 300 respondents in Gujrat, Sialkot and Lahore region of Pakistan. Snowball sampling technique was adopted to collect data. The normality assumption of regression was not met after applying the normality test so other techniques were adopted. The relation of all information processing biases and investor’s decision making was significant. The results of the study showed that all information processing biases (Anchoring and Adjustment Bias, Framing Bias, Availability Bias and Regency Bias) have strong negative relation with investor’s decision making thus hindering in making rational decisions by investors. By and large all the hypotheses are accepted indicating that all these information processing biases intervene and contribute towards the financial and investment decisions of the individuals and all of the study biases have negative contribution as they corrode the quality of decisions and thus most of them do not result in profitable outcomes