Impact of Investor Biases on Investment Decisions of Investors: Evidence from Pakistan

Abstract

This dissertation studies the impact of investor biases on investment decisions of Pakistani stock investors. Investors take many investment decisions in stock market on daily basis but could not avoid investor biases which they are facing during this decision-making process. For this researcher carried this study and had two primary aims; first to analyze the impact of investor biases on investment decisions of Pakistan stock investors and second to find which of investor biases have high, moderate, low, positive or negative, statistically significant and insignificant impact on investment decision making .The study will use Kahneman & Tversky (1979) Prospect theory as the main theoretical framework, for analyzing impact of four investor biases such as : Overconfidence bias, conservatism bias, herding effect bias and availability bias on investment decisions of investors. The study applied a mixed method approach. Quantitative data was collected through a well-defined adopted questionnaire from the respondents selected through Stratified random sampling technique. In first stage, piloting was done on the sample of 50 respondents to shortlist best questions in the questionnaire who could answer all the research questions raised in the study. After piloting and refining of questionnaire a questionnaire survey was carried out by the researcher and administered to over 462 (77% response rate) stock investor of Pakistan stock exchange (PSX) branches such as : Karachi Stock Exchange(KSE), Lahore Stock Exchange(LSE) and Islamabad Stock Exchange(ISE) on the basis of Stratified random sampling technique. After that, quantitative data was analyzed by using IBM SPSS 21 statistical software. This data analysis was carried out in two sections namely; pre and post to find the impact of different investor biases on the investment decision of Pakistani stock investors. Both descriptive and exploratory analysis were done to determine the impact of these variables in pre and post analysis. The main variables were overconfidence bias, conservatism bias, herding effect bias and availability bias consisting of seven, six, seven and six sub variables respectively. After that, qualitative data analysis was carried out through interviews technique and then through thematic analysis technique. Findings of both quantitative and qualitative data analysis in this study revealed that investor biases have different level of impact on investment decisions of PSX investors and results shows that they have statistical significance and insignificant impact, positive and negative impact, high, moderate and low impact on investment decisions of PSX investors.