Investment and Decision Making; Examining The Role of Behavioral Biases.

Abstract

Traditional finance theory is founded on the utility maximization concept and explains how rational individuals make financial decisions. Even though theory gives numerous insights, real-life observations of people's conduct differed from what the theory anticipated. Behavioral finance is a relatively young field that combines psychology and economics. This study investigates the relationship between interrelated biases, and investment decision making in Pakistan. This study has considered availability bias, overconfidence, loss aversion bias herding mentality and self-serving bias and investment decision making as dependent variable. However, Pakistani investors were chosen as the target audience for the study of the connection between the factors stated above. Primary data was obtained using a quantitative research technique using an adapted structured questionnaire with a 5-point Likert scale. A random sample approach was used to collect responses from 150 respondents (Pakistani investors). Majority studies are conducted on stockbrokers but in this study the working class especially the employees are targeted. Using SPSS Software, the responses were evaluated using statistical tests such as correlation and regression. The results indicate that availability bias, overconfidence, loss aversion bias herding mentality and self-serving bias has positive effects on investment decision making in Pakistan.