Impact of Investor's Personality Traits and Behavioral Biases on Investment Decision Making

Abstract

Behavior of investors matters greatly in how financial markets operate, however, their actions rarely fit the expectations found in standard financial theories. Traditional theories, for instance EMH and MPT, trust that people in the market are smart, avoid risk and consistently focus on getting the most out of their decisions. Although some criticize economics, research and historical financial events prove that psychology, emotions and limits in thinking still control many investors’ decisions. Therefore, behavioral finance has emerged, joining ideas from psychology with choices in financial matters. Personality characteristics and behavioral biases are important areas in the field that might help us understand strange and inconsistent ways people invest their money. The purpose of this study is to analyze how personality traits described by the Big Five plus overconfidence, herd behavior, loss aversion and anchoring can affect the investment decisions of Pakistani retail investors. A quantitative approach was taken, so structured questionnaires were used to gather data from active stock market investors included in the sample. Relationships between variables related to psychology and investment behavior were assessed using descriptive statistics, correlation and regression analysis.It appears that Openness and Conscientiousness personality traits lead to better investment decisions, contrasting with the link between Neuroticism and impulsive, poor risk management. Overconfidence and joining the crowd in investing or herd behavior, were often the top reasons for reckless and sensitive financial decisions in times of market uncertainty. During tense situations where uncertainty reigned, anchoring and loss aversion made it hard for people to make smart investment choices.The conclusions from this research are useful to investors, financial advisors and educators. Learning about what affects your mind as an investor allows you to make better choices. Because of these assessments and tools, financial advisors can provide better and fairer financial advice. Both educators and policymakers are able to use behavioral finance ideas to help individuals prepare for the emotional aspects of investing.As a result, this study explores investor actions with a better picture of both their traits and the cognitive biases during market events. This study fills a gap in the literature by studying how behavioral and mental aspects collectively affect the decision to invest. Not only do the results help understand the topic better, but they also provide useful ideas for boosting investors’ performance by managing their emotions.