An Empirical Investigation of Investor’s Behavioral Biases on Financial Decision Making

Abstract

Investor’s irrationality is an inevitable reality that has been time and again highlighted by researchers (Statman, 2008). Therefore, this study is another effort to assess the role of behavioral biases in financial decision making in Pakistan Stock Exchange (PSX).A survey questionnaire is designed and used to collect responses using convenience sampling technique from sample of 250 investors of PSX. Behavioral biases include overconfidence, over thinking, herding, cognitive bias, and hindsight effect of investors. Multiple regression models are used to test influence of five behavioral biases on investment decision. The results show that overconfidence, over thinking, herding, cognitive bias, and hindsight effect have significant positive impact on investment decision. Overall results conclude that much change in investment decision is due to behavioral biases. This study will help financial advisors to better advice their clients. The one way to reduce these biases may be education and training of investors.

Effect of Socio-demographic Factors (Age, Occupation and Education) on Behavioral Biases of Individual Investors’ Decision-making Evidence from The Colombo Stock Exchange

“…Lee, Jang and Indro (2004) argued that to protect reputations and get reward advancements, analysts seek others' previous familiarities/experiences or decisions. The results of Chhapra, Rehan, Kashif and Bai (2018) found a positive impact of herd-behavior on investment decisions. In investment decision making, investors' trust also favor herding.…”

The role of behavioral bias on financial decision making: a systematic literature review and future research agenda

“…In addition, the components of investor cognitive bias, namely framing and cognitive heuristics, are also determinants of the quality of investment decisions. Likewise, study by (Chhapra et al, 2018) shows that overconfidence, herding, cognitive bias, hindsight effect, and over thinking have a significant positive effect on investment decisions. The overall results conclude that many changes in investment decisions are due to bias.…”

“…Number two (Zahera & Bansal, 2018) received 93 citations published in the journal "Qualitative Research in Financial Markets", but this journal has 6 articles listed above (see Table 2). While the tenth order (Chhapra et al, 2018) and (Mushinada & Veluri, 2018) both get 27 citations.…”

“…A number of studies related to this have empirically proven the effect of behavioral bias on financial decision making. For example, several studies that show how behavioral biases can influence investors' decisions, among others, were carried out by (Chhapra, Kashif, Rehan, & Bai, 2018); (Zahera & Bansal, 2018); (Raheja & Dhiman, 2020); (Jain, Walia, & Gupta, 2019); (Shukla, Rushdi, & Katiyar, 2020). Research on behavioral bias has become a topic of discussion among researchers in the last few decades.…”

The potential of alternative investments as an asset class: a thematic and bibliometric review

“…Fifth, studies focusing on investors' behavioral biases in alternative investments are missing. Chhapra et al (2018) and Zahera and Bansal (2018) provide evidence on the presence of behavioral biases among investors. An exception to this is the study of Aytaç et al (2018), which explored the herding behavior among investors in the wine market.…”