Effect of Psychological Biases on Investment Decision Making : Evidence from Pakistan

Abstract

The purpose of this research is to examine the effect of psychological biases on investment decision making. The study of investment decisions in the field of Behavioral finance have been conducted in the developed cities of Pakistan such as Islamabad, Rawalpindi, Karachi, Lahore etc. but the region of KPK was neglected in this context and no sample was previously taken from KPK. The newness of this study is that the sample is taken from the investors of KPK, Pakistan. The variable used in this research for psychological biases are overconfidence, regret aversion, self-control and investment decision making. For this study, data is collected by the standardized questionnaire of 200 respondents. The data is collected through the snow-ball sampling technique, in which one investor is requested to recommend a colleague who is also an investor to fill up the questionnaire. The questionnaire was filled according to the factors of investment decisions i.e. real estate, gold, currency, bonds (insurances) and shares or partnerships. The impact of overconfidence and self-control on investment decision is positively significant and the regret aversion has negatively significant on investment decision. The statistical significance shows that there is an impact of these mental and emotional biases on the decision making of investors. Mostly the investors in KPK invest in real estate and have their own businesses because it is a safe investment as compared to other investments.