Impact of Behavioral Biases on Investment Performance in Pakistan: The Moderating Role of Financial Literacy

Abstract

This study aims at understanding the relationships of certain behavioral biases with the investment performance, and identifies the moderating role of financial literacy upon these hypothesized relationships. Data is collected through questionnaire from the investors trading at Pakistan Stock Exchange (PSX). Structured Equation Modeling (SEM) is used to analyze the data with the results that only anchoring and overconfidence biases have significant effects on investment performance. The results also show that presence of financial literacy does not play any role in improving the performance of investors. Majorly, findings of current study contribute by testing the moderating role of financial literacy between the behavioral biases and the outcome of investment decisions and thus expected to be useful for investors and policy makers.

Investor personality as a predictor of investment intention – mediating role of overconfidence bias and financial literacy

“…The existing literature shows that behavioral biases influence an individual investor's decision-making, thus making their decision irrational (Jain et al, 2015;Madaan and Singh, 2019;Ong'eta, 2021). The behavioral biases such as overconfidence (OC) bias (Jain et al, 2015;Madaan and Singh, 2019;Malik et al, 2021), anchoring bias (Jain et al, 2015;Quddoos et al, 2020), gambler's fallacy (Kigen, 2020;Malik et al, 2021), herding behavior (Madaan and Singh, 2019) and other behavior biases (Jain et al, 2015) have a significant impact on the investment intention (II; decision) of the individual investor, resulting in poor investment decisions or poor investment returns. In contrast, a study by Bashir et al (2013) concluded that there is no significant distinction between male and female decision-making reactions regarding OC bias.…”

“…, 2021), anchoring bias (Jain et al. , 2015; Quddoos et al. , 2020), gambler’s fallacy (Kigen, 2020; Malik et al.…”

Mediating Role of Risk Perception Between Behavioral Biases and Investor’s Investment Decisions

“…A closer look at the literature reveals several gaps and shortcomings. The studies conducted in Pakistan focused on behavioral biases and investment decision making of investors (Ali et al, 2021; Anum, 2017; Asab et al, 2014; Aurengzeb, 2022; Ayub, 2018; Badshah et al, 2014; Farooq & Sajid, 2015; Ishfaq, 2015; Khan et al, 2018, 2021; Mahmood et al, 2020; Mumtaz & Ahmad, 2020; Parveen et al, 2021; Quddoos et al, 2020; Rasheed et al, 2018; Raza, 2014; Rehan et al, 2021; Zafar & Siddiqui, 2020). This study contributes to explore the investment behavior in blue-chip stocks with mediating role of risk perception.…”

The Financial Decision Making of Retail Investors in Pakistan Stock Exchange: A Comprehensive Analysis of Key Factors

“…𝐇 𝟏 = Behavioral Biases significantly influence perception of an individual investor while investing. Quddoos, Rafique, Kalim, and Sheikh (2020) suggest another important dimension about investors' overconfidence; sometimes, investors analyze the future of the market based upon the previous or past trends without examining the actual conditions or fundamental conditions analysis regarding the trend line. Muneeswaran, Babu, Gayathri, and Indhumathi (2020) studied the impact of various behavioral biases upon financial decision-making of retail investors and found the overconfidence bias has a significant effect on the decision-making of retail investors.…”

“…Traditional finance claims that stock market has always been efficient, and stock price reflects all available information. Traditional finance also assumes that investors are always rational in market and design their portfolio based on rationale assumptions (Quddoos, Rafique, Kalim, & Sheikh, 2020). Many scholars presented various theories in support of traditional finance, like the Efficient Market Hypothesis (EMH) and Expected Utility Theory (EUT).…”