Behavioral Factors Effecting Investment Decision of an Individual Investor at Islamabad Stock Exchange

Abstract

Investment decision of an individual investor is always influenced by the traditional finance or by the modern finance. In traditional finance, while making an investment decision the investor totally depends upon in determining the intrinsic value of the stock or security so that they can know whether the stock or security is overvalued or undervalued. This intrinsic value is calculated by using mathematical formulas. The modern finance theory is commonly known as behavioral finance, which applies psychological knowledge to understand that how behavior of an individual investor effects the individual investor investment decision (In this study the investors are referred as an individual investors). This research is being conducted so that we can examine such behavioral factors which effects the investment decision of an individual investor in Islamabad Stock Exchange (ISE). It focuses towards examining the relationship between the variables of heuristic theory (HT), prospect theory (PT), market factor (MF) and herding factor (HF) with the investment decision of an individual investor in Islamabad Stock Exchange. This study begins with the existing theories of behavioral finance and with the research which is already conducted on behavioral finance. Based on these, hypotheses for this study are being put forward and then these hypotheses are examined through closed ended questionnaires. The population of this research is the individual investor of Islamabad Stock Market. This study came up with a sample of 136 respondents. The questionnaires are being filled by the pick and drop procedure at registered offices of stock brokers. This gathered data is being run in SPSS software. Various tests are conducted through SPSS to analyze the data like reliability analysis, correlation, descriptive analysis and regression analysis. By the end of this study, the outcome exhibits that the four behavioral factors i.e. heuristic theory, prospect theory, market factor and herding factor have direct or positive affect on the investment decision of an individual investor in Islamabad Stock Exchange. By comparing all the variables of behavioral factors, Market factor has high effect on investment decision of an individual investor. This study will help the individual investors to improve their investment decision making by utilizing their skill in an effective way.