From Emotions to Equity: The Role of Psychological Biases in Decision Making and Investment Performance in Pakistan

Abstract

The main objective of this research is to explore and identify the behavioral factors that influence the investors in financial decision making. The significance relationship of behavioral factors and investment performance is also examined and tested. The role and importance of behavioral factors and psychological factors in decision making is assessed. The mediating role of Heuristics in decision making and the moderating role of risk perception is also tested and analyzed in this research. The comparison of decision making in traditional finance and behavioral finance is conducted to present in depth understanding of psychological factors and their role in effecting investment performance. The empirical study is conducted through descriptive statistics, Reliability, Validity, Correlation, Exploratory factor analysis, Confirmatory factor analysis, and mediation and moderation tests are run to present results. The market knowledge, risk perception, Heuristics, stress, Mood, Social Interaction, and other psychological factors are discussed. The significance of the behavioral factors is tested through SPSS. The sample of 111 is conducted from the financial literate to infer the results based on empirical statistics..

Keywords: Behavior Finance, Heuristics, Herding, Exploratory Factor Analysis, Investment Performance, Risk Perception, Reliability.