An Evaluation of Investment Behavior of Individual Investors and its Impact on Investment Decision making

Authors

  • Awan, M. Hayat
  • Hayat, Zara
  • Faiz, Rafia
  • Ghufran, Bushra

Keywords:

Behavioral Finance, Investor Behavior, Technical Analysis, Fundamental Analysis

Abstract

Purpose: Efficient market hypothesis (EMH) holds that the recent stocks prices reflect
all the available information, so the proponents of EMH suggest a passive investment
tactics of indexing that makes no attempt to beat the market. This research investigates
the determinants of investment behavior of individual investors and their relative
importance in shaping overall investment behavior. The impact of investment behavior
on investment decisions is also examined.
Methodology/Design: Primary data was collected in two phases: first, preliminary
interviews were conducted with 25 brokers listed with Pakistan Stock Exchange (PSX),
and then quantitative data was collected from 246 individual investors having their
brokerage accounts maintained with brokers listed with PSX. Categorization of
individual investors was done on the basis of investment objectives, level of investment
and demographics.
Findings: Statistical analysis reveals that the investment behavior has significant
relationship with decision making process. These results also suggest that the
dimensions of investment behavior “Involvement and Overconfidence” are
significantly related with the “Market Sentiments”, “Involvement” with “Technical
Analysis” and “Risk attitude and Overconfidence” with the “Fundamental Analysis”.
Implications: These results hold significant implications for the brokers and
individual investors in their decision making in increasing the rationality by
considering the factors of individual behavior in the stock market.

References

Anderson, P.W., Arrow, K.J. & Pines, D. (eds) (1988) The Economy as a Complex Evolving System. Reading, MA: Addison-Wesley..

Arthur, W. B., Durlauf, S. N., & Lane, D. A. (Eds.). (1997). The economy as an evolving complex system II (Vol. 27). Reading, MA: Addison-Wesley.

Arthur, W. B. (1995). Complexity in Economic and Financial Markets. Complexity, 1(1), 20-25.

Arthur, W. B., (1994). Inductive reasoning and Bounded Rationality. The American Economic Review, 84(2), 406-411.

Asch, S. E. (1956). Studies of independence and conformity: I. A minority of one against a unanimous majority. Psychological monographs: General and applied, 70(9), 1.

Barber, B. M., & Odean, T. (2002). Online investors: do the slow die first?. The Review of Financial Studies, 15(2), 455-488.

Barber, B. M. & Odean T., (2000). Trading is Hazardous to your Wealth: The Common Stock Investment Performance of Individual Investors.

The Journal of Finance, 55(2), 773-806.

Barberis, N. & Thaler R.H; (2003). A Survey of Behavioral Finance in Handbook of the Economics of Finance. edited by G.M. Constantinides, M. Harris and R. Stulz, Elsevier Science B.V. Amsterdam, North Holland.

Bashir, T., Azam, N., Butt, A. A., Javed, A., Tanvir, A., (2013). Are Behavioral Biases Influenced By Demographic Characteristics & Personality Traits? Evidence from Pakistan. European Scientific Journal, 9(29), 277-293.

Benartzi, S. & Thaler R. H; (2001). Naive Diversification Strategies in Retirement Saving Plans. American Economic Review, 91(1), 79-98.

Bird, G., Du, W., & Willett, T. (2017). Behavioral Finance and Efficient Markets: What does the Euro Crisis Tell us?. Open Economies Review,

(2), 273-295.

Conlisk, J. (1996). Why Bounded Rationality. Journal of Economic Literature, 34, 669-700.

DeBondt, W. F. M. & Thaler R. (1985). Does the Stock Market Overreact? Journal of finance, 40(3), 793-805.

Fama, E. (1970). Efficient capital markets: a Review of theory and Empirical Work. Journal of Finance, 25, 383-417.

Gabaix, X., & Laibson D., (2000). A Boundedly Rational Decision Algorithm. American Economic Review, 90, 433-438.

Grinblatt, M. & Keloharju M. (2000). The Investment Behavior and Performance of Various Investor Types: A Study of Finland’s unique data set. Journal of Financial Economics, 55, 43–67.

Grinblatt, M. & Keloharju M. (2001). What Makes Investors Trade? The Journal of Finance, 56(2), 589-616.

Hardiesa, K., Breeschb, D. & Bransonb, J., (2013). Gender differences in overconfidence and risk taking: Do self-selection and socialization matter? Economics Letters 118(3), 442–444.

Heena, T. (2015), Risk tolerance dependent on what? Demographics or personality type: Findings from an empirical research. Journal of Marketing and Consumer Research, 6, 48-56.

Hirshleifer, D. & Shumway T. (2003). Good Day Sunshine: Stock Returns and the Weather. The Journal of Finance, 58(3), 1009-1032.

Kahneman, D. & Tversky A. (1973). On the Psychology of Prediction. Psychological Review, 80(4), 237-51.

Kahneman, D. & Tversky A. (1979). Prospect Theory: An analysis of Decision under Risk. Econometrica, 47(2), 263-291

Kahneman, D. & Tversky A., (2000). Choices, Values, and Frames. Cambridge: Cambridge University Press.

Kahneman, D., (1973). Attention and Effort. Englewood Cliffs, NJ: Prentice-Hall.

Kahneman, D., Knetsch J.L. & Thaler R.H.(1990). Experimental tests of the Endowment Effect and the Coase theorem. Journal of political Economy, 98(6), 1325-1348.

Kamstra, M. J., Kramer L.A., & Lev M.D.i, (2003). Winter Blues: A SAD Stock Market Cycle. American Economic Review, 93, 324-343.

Kavita C. K &, Mohanraj M.P. (2016); Impact of Demographic Variables and Risk Tolerance on Investment Decisions: An Empirical Analysis, International Journal of Economics and Financial Issues, 6(1), 169-175

Kengatharan, L., Kengatharan, N., (2014). The Influence of Behavioral Factors in Making Investment Decisions and Performance: Study on Investors of Colombo Stock Exchange, Sri Lanka. Asian Journal of Finance & Accounting 6(1), 1-23

Kimeu C.N; Anyango W. & Rotich G. (2016), Behavioural Factors Influencing Investment Decisions Among Individual Investors In Nairobi Securities Exchange, The Strategic Journal of Business & Change Management

Lim, L.C., (2012). The Relationship between Psychological Biases and the Decision Making of Investor in Malaysian Share Market. Unpublished Paper International Conference on Management, Economics & Finance (ICMEF 2012) Proceeding

Lodhi, S., (2014), Factors influencing individual investor behaviour: An empirical study of city Karachi. Journal of Business and Management, 16(2), 68-76.

Luu, T. B., (2014). Behavior Pattern of Individual Investors in Stock Market. International Journal of Business and Management, 9(1), 1-16.

Machina, M., (1982). Expected Utility Analysis without the Independent Axiom. Econometrica, 50, 277-365.

Mbaluka, P., Muthama, C., Kalunda, E., (2012). Prospect Theory: Test on Framing and Loss Aversion Effects on Investors Decision-Making Process at the Nairobi Securities Exchange, Kenya. Research Journal of Finance and Accounting, 3(9), 31-41.

Miller, G. A., (1956). The magical number seven plus or minus two: Some limits on our capacity for processing information. Psychological Review, 63, 81-97.

Muth, M. F. (1961). Rational Expectations and the Theory of Price Movements. Econometrica, 29(3), 315-35.

Newell, A., & Simon, H. A. (1972). Human problem solving (Vol. 104, No. 9). Englewood Cliffs, NJ: Prentice-Hall.

Oberlechner, T. & Hocking S. (2004). Information sources, news, and rumors in financial markets: Insights into the foreign exchange market. Journal of Economic Psychology, 25, 407-424.

Odean, T. (1998). Are Investors Reluctant to Realize their Losses? The Journal of Finance, 53(5), 1775-1798

Downloads

Published

2022-03-23

How to Cite

Awan, M. Hayat, Hayat, Zara, Faiz, Rafia, & Ghufran, Bushra. (2022). An Evaluation of Investment Behavior of Individual Investors and its Impact on Investment Decision making. UW Journal of Management Sciences, 1(1), 28–41. Retrieved from https://uwjms.org.pk/index.php/uwjms/article/view/56