Last Updated on October 20, 2023 by Fiza Khurram
Investors on the Pakistan Stock Exchange (PSX) encounter a number of behavioral issues that can influence their decision-making and, in turn, their performance. Recent research by Muhammad Tanveer Ikram and Mubbsher Munawar Khan of the University of the Punjab’s Hailey College of Banking & Finance examines the impact of herding and heuristic biases on investors’ decisions, shedding light on the fascinating interplay between psychology and finance.
The relatively young field of behavioral finance examines the ways in which investors’ emotions and cognitive biases can sway their choices. The purpose of this research was to learn how investors’ emotions and cognitive biases affect their decision-making.
The research builds on ideas of behavioral finance to create hypotheses about how investors’ decisions are influenced by their emotions. The researchers disseminated questionnaires to individual investors trading on the Pakistan Stock Exchange to explore these possibilities. Using cutting-edge programs like SPSS and AMOS, we painstakingly studied the data we gathered from these investors.
This study’s results are quite informative. It reveals that different investors at PSX are affected by a wide variety of behavioral characteristics. Among these are the aforementioned Anchoring-ability bias, as well as Herding, Overconfidence, and the gambler’s fallacy. Although each of these elements is relevant, their effects are often mild.
When analyzing the connection between these psychological aspects and financial returns, however, the true revelation emerges. Herding, which includes aspects like buying and selling, choice of trading stocks, trading volume, and speed of herding, and Heuristic biases, which encompass overconfidence and the gambler’s fallacy, are two of the many behavioral factors found to have a significant impact on investment performance. It’s interesting to note that heuristic behaviors have the most favorable impact on investment performance, whereas herding behaviors have a smaller but still positive impact.
This research adds to the expanding body of literature on behavioral finance in Pakistan by illuminating the intricate network of factors that determine investors’ actions and the resulting financial results on the Pakistan Stock Exchange.
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