Behavioral Biases in Investment Decision Making and Moderating Role of Investor's Type

This study is an effort to assess the role of behavioral biases in investment decision making and moderating role of investor's type in Karachi Stock Exchange. Traditional financial theories consider individuals as rational agent who makes decisions after evaluating all available information and maximize their utility. However, behavioral finance opposed the concept of perfect rationality and identified psychological factors and their impact on decision-making. A survey questionnaire is designed and is used to collect responses using convenience sampling techniques from a sample of 348 investors of Karachi Stock Exchange. Investment decisions are modeled with overconfidence, herding, and disposition effect, while investor type is taken as moderating variable. Multiple regression method is used to test influence of three behavioral biases on investment decision. Two stages least square method is used to examine the moderating effect of investor's type on relationship between behavioral biases and financial decision making. The results show that disposition effect, herding and overconfidence have significant positive impact on investment decision. Investor's type has no moderating role in disposition, negative moderating role in herding and positive moderating role of overconfidence in investment decision. Results conclude that passive investors show more herding bias while active investors show more overconfidence bias. This study will help financial advisors to better advice their clients. The one way to reduce these biases may be the education and training of investors. Research culture should be promoted and investors should be trained in technical analysis