Empirically Measuring Impact of Behavioral Heuristics, Overconfidence, Disposition Effect on Investment Decisions in PSX: Moderated Mediation Analysis

Abstract

Behavioral heuristics and biases influence the decision-making of people in stock markets. The field of behavioral finance caught the attention after 2008 and the present study has tried to find out the presence of heuristics and biases in the decision-making of Pakistan investors. For this purpose, the present study has collected primary and secondary market data to find out these psychological factors at individual and aggregate levels. Primary data was collected from 442 individual investors and secondary data was collected for 301 companies. The present study has used stratified random sampling and snowball sampling. After the collection of data, analysis was conducted using SPSS, AMOS, Stata, and Smart PLS. Findings of primary market data showed that behavioral biases and heuristics influence the decisions of Pakistani investors. Overconfidence is found to partially mediating between heuristics and investment decisions. The role of the moderator is also significant between heuristics, overconfidence, and investment decisions. Pakistani investors mostly focus on the disposition effect, and they are short-term investors. This indicates that they sell the shares with increasing prices and hold the shares with decreasing prices. The results of secondary market data supported the primary market data results as both heuristics, overconfidence, and disposition effects have shown influence on investment decisions. Overconfidence is partially mediated between both heuristics and investment decisions. The role of moderated mediation was also found positive and significant at the aggregate level. The present study may help academicians, researchers, and policymakers in guiding investors about trading in the stock market of Pakistan. Future research can be conducted on market anomalies, cross-country comparisons, and other behavioral heuristics and biases to enhance the scope of the current study.