Certificate of Approval

I certify that I have read “Investment behavior and financial performance of individual investors”
“ a case of small investors in Peshawar” by Irfan Ullah. In my opinion this work meets the
criteria for approving a thesis submitted in partial fulfillment of the requirements for the degree
of MBA (3.5 Finance) at the City University of Science & Information Technology, Peshawar.

Supervisor:

Mr. Nauman Habib

Prof. Dr. Jehanzeb

(Head of the Department)

i
 Declaration

I hereby declare that the research submitted to Department of Management Sciences at City
University of Science and Information Technology by me is my original work. I am aware of the
fact that in case, my work is found to be plagiarized or not genuine, City University has the full
authority to cancel my research work and I am liable to panel action.

Date: - b

ii
 Dedication

This research is dedicated to my parents who served and prayed a lot for me. This research is
also dedicated to my teachers Mr. Mohamad Nauman Habib and Mr. Zain Ullah Khalil who
guided me and helped me in completing this research paper and who inspired and encoraged me
through out my research.

iii
 ABSTRACT

This study was conducted to analyze the effect of behavioral biases on investment performance
of small individual investors “a case of Peshawar investors”. Primary data source was used in
this research. Snowball technique was used to collect the data from 80 investors. Reliability,
descriptive statistics, correlation and linear regression has been used for data analysis. It was
found that behavioral biases Representativeness positively impact investment performance while
overconfidence effect it negatively and prospects bias Loss aversion has negative correlation
with all independent variables but positively correlated with dependent variable investment
performance. Herding behavior of investors also increase the investment performance of an
individual investors. On the basis of those findings, it is concluded that behavioral biases has
impact on the investment performance of individual investors.

iv
 Acknowledgments
First of all I would like to thanks Almighty Allah who is the most merciful and the most
beneficial who enabled and guided mew to complete this mammoth task. I express my deep
sense of gratitude to Mr. Mohammad Nauman Habib for his inspiring guidance, scholarly
interpretations and valuable criticisms throughout the course of my work.
I am gratefully obliged to the Investors of Peshawar and my friends Mr. Najeeb Ullah Mangal,
Mr. Mohamad Nazeef Latifi and Mr. Sabir Shah for helping me to collect data necessary for the
study.
I extend my sincere thanks to Mr. Zain Ullah Khalil, Mr. Sohail Khalil and other Faculty
members of Management Science department of CUSIT for their help and support.
I also thank my family members and colleagues for all their support and encouragement
throughout the completion of the work
Above all, I bow before and thank ‘God Almighty’ without whose blessings this work would
have never been completed.

Irfan ullah

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 TABLE OF CONTENTS
CHAPTER 1: INTRODUCTION 1

1.1 Background: 1

1.2 Problem statement: 3

1.3 Objectives of the research: 3

1.4 Research Questions: 4

1.5 Significance of the study: 4

1.6 Scope of study: 4

1.7 Limitations of study: 4

CHAPTER 2: LITERATURE REVIEW 5

2.1 Background: 5

2.2 Factors: 8

2.2.1 Heuristics (cognitive): 8

2.2.1.2 Representativeness: 9

2.2.2.1 Loss aversion: 13

2.2.2.2 Regret aversion: 13

Figure 1.1 15

2.4 Operational definitions of the variables: 15

2.4.1 Investment decision making: 15

2.5 Hypotheses: 17

CHAPTER 3: RESEARCH METHODOLOGY 18

3.4 Sample: 18

3.5 Sampling technique: 19

3.7 Statistical tools (tests): 19

4.2 Discussion: 37

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CHAPTER 5: CONCLUSION AND RECOMMENDATIONS 40

5.1 conclusion 40

5.2 Recommendations 40

5.3 Direction for future research 41

REFERENCES 42

Appendix 45

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 CHAPTER 1: INTRODUCTION

This section discusses the introduction of the study. It also highlights the contribution made by
this study towards the literature along with the organization of this study.

1.1 Background:
A place where Stock are bought and sold is called stock market (Zuravicky, 2005, p.6). In an
economy, besides playing the role of a source for financing investment, stock market also
performs a function as a signaling mechanism to managers regarding investment decisions, and a
catalyst for corporate governance (Samuel, 1996, p.1). However, stock market is best known for
being the most effective channel for company’s capital raise (Zuravicky, 2005, p.6). People are
interested in stock because of “long-term growth of capital, dividends, and a hedge against the
inflationary erosion of purchasing power” (Teweles & Bradley, 1998, p.8). the other feature that
makes the stock market more attractive than other types of investment is its liquidity (Jaswani,
2008). Most people invest in stocks because they want to be the owners of the firm, from which
they benefit when the company pay dividends or when stock price increases (Croushore, 2006,
p.186). However, many people buy stocks for the purpose of control over the firms. Regularly,
shareholders need to own specific amount of shares to be in the board of directors who can make
strategic decisions and set directions for the firms. Almost every country of the world has stock
markets. These stock markets are interconnected with each other. Change in one Stock market
may change the other stock market as well.
In 2008, the great financial crises that were originated in USA but it heavily resulted in great
recession in the Globe (Subash 2012). It means that being the largest economy of the world;
crises in USA affect the overall economy of the world. Investment comes from two ways,
Institutions and individuals and both play a vital role in the economy of Pakistan. Several studies
have been conducted to analyze and explore the importance and the behavior of investors. Some
of them are on macro level and some of them are firm related. Investment by definition is “the
current sacrifice of resources and reaping the future benefits” (Zuravicky, 2005, p.6). It looks
quite simple from definition but it is a complex and dynamic process in practical.

1
Investment depends upon many other factors too. Among those factors, some are external-
environment-related i.e market performance, firm performance while some of them are
particularly related to the psyche of the individual’s i.e confidence, mentality and knowledge.
Daniel Kahneman and Amos Tversky, two psychologists who worked hard and long in 1970s in
the field of psychology, develop a new standard in 1980s which is called Behavioral Finance,
that focuses on how people behave in a particular environment generally. Specifically,
Behavioral finance studies how psychological elements affect the decision making of
individuals, corporation and markets.

Before the 1990s, investment decisions were relying on Efficient Market Hypotheses (EMH).
According to EMH, current security prices reflect all the available information and hence there is
no chance to outperform the market, no chance to earn any over or under than average return.
Other factors on which investment decisions were relying was self-rationality. Self-rationality
means that an investor will always behave rationally and there is no chance of irrationality. At
that time, the behavioral finance was not fully introduced. But since the emergence of
Behavioral finance, efficiency of the market and self-rationality are noticed to be not enough for
the decision making during last two or three decades from a market perspective. As Jhonsson,
Lindblom, and Platan (2002) stated in their study that investors behaved irrationally during
speculative bubbles. Investment made during speculative bubble, from 1998 to 2000, investors
heavily invested for short period of time which shows that investors are risk aversions.
Investment has been decreased by the investors due to ambiguous future even if they are offered
with high return. Individual investors were affected by Herding and Under/overconfidence
during the period of speculative bubbles.

From academic perspective the key reason behind the emergence of the behavioral finance, was
the difficulties facing by traditional theories. Behavioral finance tries to merge traditional finance
theories with psychology with an aim to give a complete decision-making model (Subash 2012).
From a practicing perspective, solutions of irrationality have been provided by the Behavioral
finance. And it is not that much difficult too. A smart investor can capture the essence of
Behavioral finance by just focusing on his/her decision making and the nature of his/her decision
making. However this can be a problem with Behavioral finance too, because of the irregularities
of the emotions of human beings who often behave irrationally and unwantedly they make wrong

2
decisions. Mistakes can be made by every kind of individual investors because everyone has
their own emotions on which he/she heavily relies. For a good decision maker, training of mind
is very important and mind can be trained by not to mix emotions with decisions. It can be done
by two ways (i) understanding your weaknesses and strengths (biases) and remember your past
record and (ii) understanding the irrationality of others and take benefits from it. (Parikh, 2011).
This is a vast and lengthy discussion and one study cannot conclude all the factors that affect
every country’s economy. Therefore, this study will be limited to Pakistan’s economy.
Investment has a great role in the development of economy so this study has tried to explore the
investment decision of the Pakistani individual investor’s decision making.

1.2 Problem statement:

Decision making process vary from individual to individual as it reflects self-perception of every
human being. Every individual neither has the full knowledge about the market nor they know
the full information. KPK or Peshawar not having its own Stock exchange and small individual
investors has limited information about trading and has no proper guidance. Adding to this,
individual has his/her own mentality and a rationality level. Every human being has a limited
level of rationality beyond which their decision will be biased. There are many biases i.e
Representativeness, anchoring, overconfidence, regret aversion, loss aversion and herding etc
due to which an individual investor decisions becomes irrational. This study tries to identify the
investment behavior of the individual investors keeping in account the above six behavioral
biases.

1.3 Objectives of the research:

 To identify the current investment behavior of the investor in Pakistan Stock Exchange.
 To identify different behavioral biases that small individual investors use in their
investment decision.
 To understand the impact of those behavioral biases on investment decision making of
investors.

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1.4 Research Questions:
1. What is the impact of behavioral biases on investment performance of a small individual
investor?
2. Which bias factors in above six are mostly influential while making investment
decisions?

1.5 Significance of the study:

This study has great significance for the individuals who want to invest and who want to know
about the factors that can affect their decision making while at the time of investment. For
corporations, this study will help them to understand the behavior of individuals while dealing
with them. To the students and other researchers, the findings of this study can be used in other
studies in future on this topic.

1.6 Scope of study:

Only six behavioral biases named as Representativeness, anchoring, regret aversion,
overconfidence, herding and loss aversion has been focused in this research. Since there are a lot
of other biases exist in practical as well so it is cleared from this fact that the findings can be
different of other researches due to those other biases.

1.7 Limitations of study:

Due to time constraints, only individual investors has been included in this research. It is also
necessary to conduct studies on the behavior of institutional investors such as Banks and other
securities companies. The money limitation makes this research limited to the investors who
belong to Peshawar. There are lots of investors belonging to other different areas of Pakistan too.
Another limitation of this particular study is that it only includes the investment behavior of 40
individual investors so many other investors can be selected to conduct other researches in order
to get good results.

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 CHAPTER 2: LITERATURE REVIEW
This section discusses the previous work on the topic of investment behavior and financial performance
of individual investor and also shows the hypotheses which are drawn from relevant literature review.

2.1 Background:
A relatively new field in the world of finance that came into relevance in the 1980s is Behavioral
finance and it studies the effects of psychology on the investment decisions of the investors. For
investors, the most important decision to make is investment. In simple words, an Investment
decision can be defined as” the process of choosing a particular investment mode from all
available investment alternatives”. Investment decisions has no exemptions whenever it is made,
Subash (2012) stated that high shifting in the world’s almanacs, because of fear of loss and great
anticipation in the stock price changes has made it extremely tough for a rational investor to
invest. That is why it has become necessary to understand the irrationality of the investor. It has
become more important now than ever before. The main theme of behavioral finance is that it
studies how investors read, understand and interpret information that is new to them. It does not
consider the traditional finance theories as antiquated but it explains along with those theories
that have been presented by traditional finance experts by considering the mental and
psychological effects on investors while taking investment decisions. The financial crises of bull
market from 2004 to 2007 and later after those crises results brought more importance in the
study of irrational investor. Mionel (2012) Stated the same thing by finding that the financial
markets are obviously dry and technical from a distance but their inner mechanism is
psychological. Therefore, as investors are not fully rational as traditional economists were
tending to but they behave irrationally and that is why modern view has emphasized on the study
of the psychological factors that affect the investment decisions thus it is important to study the
psychology of the investor while making investment decision (ibid).

By using convenience based sampling technique, Iqbal and Usmani (2009) found that 85.6%
investment decision is being impacted by the choice of investor. This is a big percentage. The
other thing that impacts investor decision is expected return. People invest more in a firm where
they expect that they will receive high return. Some other findings of their study were, firm’s
ethics, environmental records and family members are the factors that impact the least (6.5%,
7.8%, 8.5% respectively) on investment decision. Accounting information is also necessary for
5
investors. They take decision keeping in mind the financial position of the firm in general. It is
cleared from their study that investment decision is being taken by the individuals when they
analyzed the firm’s performance. But in Nepal capital market, this case is different where
Kadariya (2012) found that friends and Media are the main factors that highly influence the
individual’s investment decision. The least factor in this study was the past performance of the
market (trend analysis) which is quite sure in case of traditional finance. Political conditions,
Return On Investment (ROI), Return On Equity (ROE) and current Government are also in other
top most factors that influences individuals while making investment decisions. It can be
concluded from this, that investment decision differs from not only individual but from country
to country and market to market.

Paul and Bajaj (2012) study showed that the equity market investors have moderate level of
information. They also didn’t found any significant association between the ages, gender and
awareness level of the investors about existing equity market. But a significant association
between occupation, income and awareness level was found in their study. Their conclusion was
that investment in share market is influenced by the occupation and income of the individual
investor. They suggested that increase in the level of investment in equity market, awareness
among the individual investors needed to be created as these were the missing factors. But
Suman. and Warne (2012) stated exactly opposite of this where they concluded that today’s
investor is fully aware about the stock market. In their study, the factor that effects the most
investment decision is savings and the sources of savings. Using survey method, (Suman. &
Warne, 2012) concluded that annual income and annual savings are more important factors that
individual investors considers while investing in equity market. The replica of this study can be
found in the study of Azam and Kumar (2011) where they too concluded that the investor of
Karachi stock exchange ( previously, now Pakistan stock exchange) are fully aware and on the
basis of their awareness, investment decisions are being made by investors.

It is not important that investor will always act or react irrationally at a given time but
sometimes it differs. Like in the study of Aduda, Oduor, and Onwonga (2012) where they stated
that not every investor showed irrational behavior but some of the investors showed rational
behavior while making investment decision. In their study they used primary and secondary data
and specified that rational and irrational behavior both can be found. Due to their self-

6
confidence, they believe that they will receive negative results and this is the reason behind their
irrational behavior. Investors are not emotionless because of the fact that they are a creature.
They cannot fix their minds. The abnormality from this belief forces them (investors) to behave
irrationally though they would not want that. They actually cannot fully eliminate the risk but
they try to minimize uncertainty through their efforts. Actually because of the good reputation
and past good performance of the company, Individuals decided to go for the stock. But despite
the past experience, yet they do not have full information (Aduda et al., 2012).

Behavioral biases will certainly play an important role wherever human beings are involved and
whenever they deal in a financial transaction for making practical decisions. They must not only
have the sufficient information but they must know their-selves too in order to make their
decision right (Prosad 2014). Investors are not free of biases. This can be found from their study
and they clearly said too that an appropriate and adequate knowledge can reduce the risks of
irrational behavior.

Fernandes (2007) Concluded that the decision making process is being influenced by the culture.
Investment decisions are influenced by Prospect theory and cognitive biases. Chira, Adams, and
Thornton (2008) Accepted in their survey that many students were involved in confirmation biases
but it was almost difficult to judge the degree of attendance in student decision making. It can be
understood that age and satisfactory information are significant while making an investment
decision.

Amin, Shoukat, and Khan (2009) Analyzed one factor “gambler fallacy” in decision making among
the investors in Lahore stock exchange (now Pakistan Stock Exchange) and comprehended that
gambler fallacy effects the investor decision every none-and-then. Seppälä (2009) In his study
found that individuals assume more than real and when they see real consequences, they found
themselves that they over valued their estimated return. According to him, experience is the only
way to decrease these biases. He added that these biases are not sovereign to each other
continuously and many times it can affect each other either definitely or adversely.

Barber and Odean (2011) concluded that investor acts very contrarily than what theoretician say
usually. They trade regularly and carefully. They are careful in stock selection due to which they
have to pay the needless taxes. Many of the investors have needless collection of investment and

7
since that they have to face the needless portfolio risk. On the other hand, Birau (2012) concluded
that principles (theories) cannot be overlooked but it rests on the choice of the investors how they
like and where they like to invest. This makes them not to behave sensibly all the time.
Behavioral finance is not the perfect replacement of traditional finance but it tries to explain the
gaps of the theories that do not meet the effects on the investment decisions (Birau, 2012).

2.2 Factors:
In literature, a number of biases in Behavioral finance exist but this study will contain seven
variables (biases) only. Out of these seven, six are independent variables while one is dependent
variable.

2.2.1 Heuristics (cognitive):

By definition, Heuristic is the procedure by which people take decision on the basis of materials
that are accessible to them. It leads them to grow a thumb rule. But these decisions are always
ambiguous because of inadequate information (Chandra & Kumar, 2011). But it is not compulsory
that this rule of thumb will always lead them to take incorrect decision as Kramer (2012) defined
in his thesis that due to trial and error this rule of thumb may lead them to take correct decisions
sometimes. Lovri´c (2011) view is also the same. He specified that these heuristics can lead
individuals to make a right decision because insights sometimes work good than statistical
information. A lot of Heuristics has been explained by different scholars. Overconfidence,
Representativeness and Anchoring are the three heuristic biases that will be explored in this
study.

2.2.1.1 Overconfidence:

One of the most common biases that investors face during their investment decisions is
Overconfidence. To overestimate the skills and knowledge that one has and under estimating the
probability of the outcome from an incorrect decision is known as Overconfidence. It happens
when people overstate their capacity and undermine the importance of result which is out of their
control. A person with more self-confidence, the more He or She will be the risk taker or perhaps
the likelihoods of risk increases with unnecessary self-confidence (Jhonsson et al., 2002).

8
Overconfidence results in little variation because of the propensity to invest too much in what
one feel easy. Thus people suffer loss because of the absence of portfolio investments and the
tendency to wrongly consider their-selves as expert (Ritter, 2003).

Chira et al. (2008) Overconfidence may be a decent quality to have. One should have more
confidence in their self but the negativity concern with this bias is that individual should not
overestimate his or her knowledge and/or value. A needless experience and false estimation of
knowing everything when he/she does not in reality is always causing damage. Investors are
overconfident and empirical studies shows that they make mistakes by overrated the skills they
have which in actuality they do not have (Birau, 2012).

Barber and Odean (2011) Found two facts of overconfidence. One verity is that one knows more
than what he/she really is. This verity is labeled as “miscalibration” or “over precision”. The
other verity is one’s confidence that he/she is better than an average individual. This verity is
labeled as “better than average”. It happens when one compares his/her skills to an average
person and realizes that he/she is better than them.

Overconfidence can rise the effect of other biases too. Overconfidence is the most significant
bias in Indian equity market that effect individuals quite considerably. This increases the
transactions of the market. The personality effects also increases due to overconfidence (Prosad
2014).

Investors of Pakistan always keep an eye on the return that they will get from market. They
always want to increase their profits. Because of this hunger of receiving more profit they pay no
attention to the overall turn out of the market and results in loss because the investment portfolio
may have more risk but yet pause at confident ground. This overconfidence leads them to take
irrational decision making (Tariq & Ullah, 2013). Behaving hungrily raises the probabilities of
being overconfident and hence the chances of loss also increase.

2.2.1.2 Representativeness:
The first ones who studied this factor in 1974 were Kahneman & Tversky who found this bias
in their study (Kengatharan, 2014). “Representativeness can form up when investors either seek
to buy what they think is a ‘hot’ stock or try to label stocks which may have performed poorly in

9
the recent past as ‘bad’ and avoid them”. This issue becomes a bias when individuals
miscalculate the returns that they get in long term.

Sometimes, this is known as “the law of small numbers” and this occurs when investors put too
much load on hottest practices and disregards the future or the past records (Ritter, 2003).
Representativeness bias occurs when there is the obligation of an calculation of likelihood of a
thing “A” belonging/originating to/ from a class/ process “B”(Lovri´c, 2011).

This is the finding that is based on tagging (stereotyping). Individuals compare the circumstances
that are generally famous to them as an alternative and depend on the statistical predictions. Most
of the times due to this bias of comparing the most happening states instead of statistical facts the
more popular person are over rated while least successful are under rated (Kramer, 2012).
Representativeness relate to the tendency to observe underlying connection behind the
unintentional volatility also. It happens also when Investor’s perception of getting a trend when
there is no need to copy or to acquire that trend.

According to Subash (2012) the investors compare the good qualities of a company directly with
the decent qualities of its stock and every none-and-then that company turn out to be poor
investments performer. It is the best features of that stock which make investor to rate that
company as decent one which is not a decent one in reality.

In the words of Sinha (2015) “a biased view of some unknown events (A) by some allowed
actions (B) A resemble B” is known as representativeness. This bias discovers little new
information and leads to decision bias. It makes an investor to take decision on limited
information because of some other factors that might happen in the recent past and this is a big
problem with this bias. It is the judgmental decision of individual. It focuses so heavily on the
sample size rather than population. Individuals expect the prices upon the imaginative
background even its consistency may not be definite. People attempt to fit a new and unknown
event into an old event and then attempt to notice common basics between these two new and old
events (Konstantnidis, Katarachia , Borovas, & Voutsa, 2010).

Onsomu (2014) investor appraise the company based on confident features such as size of the
company, management of the company and its style, image of the company, recent performance
of the company and product etc. all these features must meet the choice and demands of the

10
investors in order to attract them. These all features serve as the representatives of the investment
for the investors.

2.2.1.3 Anchoring:

Kıyılar and Acar (2009) stated that this characteristic is explained by discussing to a problem
established by a psychologist Ward Edwards in 1964. With the help of an example, they
explained Anchoring by asking that” if a firm is performing exceptionally currently but in past
this exact company has performed very poorly. Now whether the investors will invest in the
stock of this particular firm keeping in view the past performance? This is the situation where
anchoring comes into play”. “It was seen that great majority claimed on 45%. These people do
not use the new information and react much less than they are supposed to and display a
traditional attitude. They anchor on the old information. Another group of respondents gave 67%
as the answer. Their answer is not correct either. The correct answer is 96.04% which no
respondent gave said (Kıyılar & Acar, 2009)”.

Konstantnidis et al. (2010) “It is the cognitive heuristics which involve decision making based on
the initial anchor”. The question of whether to invest or not and if yes then where to invest has to
be answered by the investors in a market? These kinds of questions are answered by the investors
based on the assessment by the investors through primary information that is “adjusted to
produce to final answer. This primary or initial information can be the base for the mistake of the
final answer or it may be the results of partial calculation. In either case, final adjustment tends
to be inadequate.”

Anchoring refers to a state where the valuation of investment decision is needed and this
valuation is influence by the ideas and suggestion of other people. Human being has some point
of view in their minds being a creature and they generally recall the most recent incidents good
than the past ones. Each and every time they get new information, they forget the older
performance of that particular stock but they only look at the latest performance. These older
performance might be good or might be bad for individuals but they neglect those performance
and they adjust to those performance which are new to them. These new information are always
insufficient. Anchoring is all about that how people adjust new information to the recent
information and give less importance to the older performance (Jhonsson et al., 2002).

11
Chandra and Kumar (2011) “Anchoring is individual tendency to base decision and/or estimation
on familiar positions with an adjustment relative to starting point and they are better to relative
thinking as compared to absolute thinking.” This bias has been found considerably in their study.
They found that 53.2 percent investors were affected by their recent experiences. Anchoring
arises when people relate today’s prices to the recent price changes in a financial market. This
has been proved that individuals associate the selling prices of their shares with the purchasing
price regardless the situation of the market. From this fact it is cleared that it has a connection
with representativeness bias since people try to link their selling prices with respect to their
purchasing prices (Luong & Ha, 2011)

Subash (2012) has defined anchoring as “Anchoring is a mental heuristic which can be said to
occur when investors give needless significance to statistically random and psychologically
determined ‘anchors’ which leads them to investment decisions that are not basically ‘rational’.
When essential to estimate a good buy price for a share and investor is likely to start by using an
initial value – called the “anchor” – without much analysis, say for e.g. the 52-week low of the
stock. Then they adjust this anchor up or down to reflect their analysis or new information, but
studies have shown that this adjustment is insufficient and ends producing results that are biased.
Investors exhibiting this bias are likely to be influenced by these anchors while answering key
questions like ‘Is this a good time to buy or sell the stock?’ or ‘is the stock fairly priced?’ The
concept of Anchoring can thus be explained by the tendency of investors to “anchor” their
thoughts to a logically irrelevant reference point while making an investment decision (Subash,
2012)”.

2.2.2 Prospect theory:

“Prospect theory focuses on individual decision-making influenced by the investors’ value

system”. Kahneman and Tversky presented this theory in 1979. Loss and gains are two extremes
and both are perceived oppositely. People try to avoid loss and gain profit and based on this
perception they make investment decisions. Kahneman and Tversky (1979) said “It demonstrates
that when individuals develop investing behaviour systematically, they violate the axioms of
expected utility theory”. There are some researchers who consider this theory as the base for the
understanding of behavioral finance. Chandra and Kumar (2011) Said that “among many other
pillars, prospect theory is one of them on which behavioral Economics rests” (Lovri´c, 2011).

12
Loss aversion and Regret aversion are the two prospects which are included in this research.

2.2.2.1 Loss aversion:

People behave differently under different kind of situations. Sometimes they do not show what
they actually feel or what they should. But Loss aversion is showing actual behavior every time
in general and particularly at the time of uncertainty. It shows the simple “inequality between the
values that people put on what they gain and what they lose (Jhonsson et al., 2002)”.
Kıyılar and Acar (2009) considered this as it is the feeling of the people at different times
particularly at the times of losses and gains. In their view, people feel more stress at the time of
loss than the happiness at the time of gains. Saving their-selves from losses is more important
than to earn for the people. Because of this immense importance that people give to the losses
than gains, they feel themselves under tremendous stress and tension. People faced a loss once;
they become loss takers in order to regain their previous loss. The replica of these words can be
found in the study of (Konstantnidis et al., 2010) where they said that prior losses increases the risk
taking possibilities and prior gains decreases these.

Chandra and Kumar (2011) Argued that generally individual wants to avoid losses and prefer gains
but it happens in those types of situations when they are sure about the future gains. They don’t
want to take risks when there is a sure loss. They will not take the risk of investment when they
are sure that they are going to suffer a loss.

2.2.2.2 Regret aversion:

“Regret is the emotion experienced for not having made the right decision. It is the feeling of
responsibility for loss. In a financial perspective the minimization of possible future regret plays
a key role in portfolio distribution. It is also related with preference for dividends in financing
consumer expenditures, because selling a stock that may rise in the future carries a huge potential
for regret” (Lovri´c, 2011).
As stated earlier that People valued losses three times more than gains. Gaining something is not
important but avoiding loss is. It happens because people want to keep their-selves away from
regret. Generally people hate regrets and loss, loss is one of the most prominent ways in terms of
decision making to feel regret. A right investment decision will not make one feel regret but a
wrong decision will always (Chandra & Kumar, 2011).

13
Investors cannot fully eliminate regret because there are certain factors which are out of their
control but they try to minimize it and this motivate them many times not to sell their stocks with
decreasing prices. What happens eventually? They face more loss than they could before if they
had sold their stocks. Because of avoiding the regret, they face more losses. (Kıyılar & Acar, 2009);
(Luong & Ha, 2011) stated the same in their studies about regret aversion.

2.2.2.3 Herding effect:

“Herding effect in financial market is identified as tendency of investors’ behaviors to follow the
others’ actions. Practitioners typically consider carefully the presence of herding, due to the fact
that investors rely on collective information more than private information can result the price
deviation of the securities from fundamental value; therefore, many good chances for investment
at the present can be crushed. Academic researchers also pay their consideration to herding;
because its impacts on stock price changes and influence the qualities of risk and return models
and this has impacts on the viewpoints of asset pricing theories” (Luong & Ha, 2011).
An investor is displaying Herding behavior if he/she relies more on the information that have
been collected by the large number of people rather than he/she collected his/her-self (Subash,
2012). The investor would think that a large number of people cannot be mistaken rather his own
decision can led him to take a wrong decision. Their own judgment and the ability to take
decisions get in danger if many investors are thinking in the same way. This bias can lead them
to abnormal losses for individual investors who are normally risk averse and who does not have
big stocks like institutional investors normally have. Seeking information from other sources
may increase the chances of loss.

Kengatharan (2014) said that due to herd behavior, sometimes many good decisions can turn
around to bad ones. Herd behavior can bring other biases i.e conformity, gossip and cognitive
conflicts. It may affect overconfidence, volume of investment and so on. Herding is a common
bias in stock market and especially in case of private investors, it is a well-known bias.

14
2.3 Theoretical framework:
There are one dependent and six independent variables in this study which are following in the
shape of theoretical framework.

Overconfidence

Representativeness

Anchoring
Investment performance
Loss aversion

Regret aversion

Herding

Figure 1.1

2.4 Operational definitions of the variables:

2.4.1 Investment decision making:

” The process of choosing a particular investment mode from all available investment
alternatives”.
2.4.1.1 Overconfidence:
“Investors tend to be consistently overconfident in their ability to outperform the market. Some
of them believe that based on information they have, they are able to predict the future
movements of stock prices better than others are”.
2.4.1.2 Representativeness:

15
“Representativeness can shape up when investors either seek to buy what they think is a ‘hot’
stock or try to label stocks which may have performed poorly in the recent past as ‘bad’ and
avoid them. At times, Representativeness can make investors judge based solely on past records
of accomplishment, immediate and distant. This is mainly because these conceptions are among
the easiest to recollect in a small timeframe without any immediate analysis”.
2.4.1.3 Anchoring:
“When investors tend to label logically irrelevant price levels as important and cling on to them
while making investment decisions, they are said to be exhibiting the Anchoring bias”.
2.4.1.4 Loss aversion:
"The disutility of giving up an object is greater than the utility associated with acquiring it"
2.4.1.5 Regret aversion:
“Regret Aversion occurs from the investor’s desire to avoid the pain of regret arising from a poor
investment decision. As a result of this, investors could end up holding on to poorly performing
shares because avoiding the sale avoids the recognition of associated loss and in turn, of a bad
investment”.
2.4.1.6 Herding:
“An investor would be exhibiting Herding behavior when he relies more on information
validated by a crowd, rather than on his own judgment, owing to popular perception that the
crowd cannot be wrong and also due to being wary of probable ridicule which he might face if
the crowd is actually right. If investors are heavily influenced by other investors, analysts etc.,
the ability to come up with their own analyses and judgments get hampered. For most part,
Herding may work fine but the upside is limited since, when everyone is thinking alike, it is
quite difficult to make abnormal profits. On the other hand, when a downside happens, it
amplifies the psychological biases and can lead to abnormal losses, especially to private
investors who are likely to hold on to losing stocks”.

Statistical Equation:
Y= β0 + β1 X1 + β2 X2 + β3 X3 + β4 X4+β5 X5+β6 X6+ư
Where

16
Y= investment performance

β0= constant

β1, β2, β3, β4, β5, β6= regression coefficient of the respective variable

X1= representativeness
X2= overconfidence
X3= anchoring
X4= loss aversion
X5= regret aversion
X6= herding
ư= error term

2.5 Hypotheses:

H1: There is a significant impact of representativeness bias on investment decision making.

H2: There is a significant impact of overconfidence bias on investment decision making.

H3: There is a significant impact of anchoring bias on investment decision making.

H4: There is a significant impact of loss aversion bias on investment decision making
.
H5: there is a significant impact of regret aversion bias on investment decision making.
H6: there is a significant impact of herd behavior on investment decision making.

17
 CHAPTER 3: RESEARCH METHODOLOGY

This section tells about the methodology adopted in this research study. It highlights the
source of data collection and different models used to confirm or reject the hypothesis of the
study.

3.1 Research design:

In this research the quantitative research survey method is applied with the aim to get a wider
picture of the current behavior of Pakistan stock exchange individual investors and the intentions
of the students of finance who want to invest in Pakistan stock exchange in future.. The reason
behind choosing this method was the nature of the research which was the identification of the
investment behavior of the individual investors of Pakistan stock exchange and the identification
of the behavioral biases which effect their investment decision and their performance in the view
of investors and the students.
3.2 Data source:
Primary data has been used in this research. A data which is collected for the first time and at one
point of time is known as Primary data.
3.3 Population:
A number of individual investors are registered with different brokage houses in Peshawar. It is
not possible to collect data from all the investors due to certain reasons i.e limited time, money
and references. Maximum number of respondents increase the reliability of the results. That is
why those students were selected who had a sound knowledge about the Pakistan Stock
Exchange.

3.4 Sample:
A sample of forty investors and forty students of Management Sciences department of City
University Peshawar (currently studying in the final semesters of MBA and BBA) has been taken
to overcome above mentioned problems. It must be clear that the findings may be different if
other researchers collect data from the population.

18
3.5 Sampling technique:
Snowball technique has been used. It means that next investor’s addresses have been taken from
the previous investors. This technique is widely used to collect data from a small sample size due
to its convenient, cost, time saving nature. While students were selected randomly.

3.6 Data collection tool:

 An adopted questionnaire, which was used by the Le Phuoc Luong and Doan Thi Thu Ha
in their study. As the topic of research and variables were the same, so with the consultation
of honorable supervisor, two teachers and two investors, it is decided to adopt their
questionnaire with some necessary editing.
 This questionnaire compromises of two parts. Part first contain the questions related to
personal information (demographic) of the investors while part two represents the questions
about behavioral factors and their investment performance.
 While looking at the nature of data and research, survey method is used.
 Seven variables questions were asked. The items of the questionnaire with respect to each
variable are as

3.7 Statistical tools (tests):

Three types of statistical tests have been used in this study i.e descriptive, correlation and
regression analysis.

3.7.1 Descriptive:
For personal information, i.e Age, Marital status, Monthly income, Work experience and the
participation in any course of the stock exchange, Descriptive statistics has been used. It will
help to easily understand the outputs of the personal information as it is so simple and one can
interpret these results at first look. The output of these results are in percentage form so it can be
said that it is time saving as it does not take too much time to interpret and it also take very few
minutes to understand too.

19
Descriptive is a widely used statistical technique as far as the personal information of the study is
concern. Before this study, many researchers has used descriptive statistics and argued that this is
one of most easily understandable and interpretable technique (Subash, 2012). Many researchers
including Suman (2012) had used only descriptive and no other technique in their research.
From this it is cleared that descriptive is not only easily understandable but it is important too.
Aduda, et al. (2012) used descriptive statistics for the personal information of the respondents.
Amin et al. (2009) also used descriptive statistics in their study to find out the gambler fallacy bias
in Karachi stock exchange investors. This method is also used by Gholizadeh, Shakerinia, and Sabet
(2013) in their case study.

3.7.2 Correlation:
Correlation shows the association between two or more than two variables. Correlation is one of
the most famous statistical techniques in the field of research in the world. It is important to
know the relationship (association) between/among variables. A good model is one in which the
association between independent variable is weak but the relationship between dependent and
independent variable is more.
In this study too correlation is used to find the association between dependent and independent
variable. It is the assumption that residual terms should be independent to each other. It must not
make any correlation with each other. If it makes some correlation, the problem of
autocorrelation arises. To detect the problem of autocorrelation, a technique namely Durbin-
Watson is used. According to this technique if the autocorrelation is 2, the model will be said to
have no autocorrelation. If it is less than 2, it will be positive autocorrelation and incase of more
than 2, it will be negative autocorrelation (Ranjbar, Abedini, & Shamsadini, 2013). In their study,
they used Durbin-Watson test to detect autocorrelation. Chandra and Kumar (2011) Applied
correlation to detect Criterion validity and construct validity in their study.
3.7.3 Regression:
In statistics regression shows the impact of independent variables on dependent variable. It has
two types. One type is simple regression in which there is only one dependent variable and one
independent variable. This regression is called simple regression. The other type is called
multiple regression in which there is on dependent variable and two or more than two
independent variables. In this study, where the independent variables are more than two so

20
multiple regression will be used. When constants error term and are included in regression, it
becomes linear regression. The equation is look like Y= β0 + β1 X1 + β2X2 + β3 X3 + β4 X4+ư.
where β0 is constant, β1, β2, β3, β4, = regression coefficient of the respective variable
X1, X2, X3, X4 are independent variables and ư is error term. Prosad (2014) used linear
regression for Herd behavior while Vector auto regression for overconfidence and disposition
effects. Ranjbar et al. (2013) used regression to find any impact of the independent variables on
dependent variable.
3.8 Reliability:
This test is used for the internal consistency of the items in the scale. This is one of the most
common tests that is used for the validity and consistency of the items in the world. That data
should not be used in a research which is not reliable. If there is no consistency in the items of a
Likert-scale, the results will be not either significant or it will be unreliable. The remaining tests
and findings will be biased or it will be misleading the recommendations of the research can be
questioned with no or less reliability. That is why it is important to know about the reliability of
the scale (Gliem, 2003).

Table-1 Reliability Statistics

Variable name Cronbach's Alpha Status

Representativeness 0.902 Excellent

Overconfidence 0.827 Good

Anchoring 0.369 Unacceptable

Loss aversion 0.775 Acceptable

Regret aversion 0.215 Unacceptable

Herding 0.798 Good

Investment performance 0.765 Acceptable

21
Cronbach’s alpha coefficient normally ranged between 0 and 1 but there is no lower limit exists
in reality. Reliability closer to 1 means that it has more consistency and vice versa for the closure
to 0. Two Statisticians George and Mallery (2003) provide the following rules of thumb:
“alpha > 0.9 – Excellent, alpha > 0.8 – Good, alpha > 0.7 – Acceptable, alpha > 0.6 –
Questionable, alpha > 0.5 – Poor, and alpha < 0.5 – Unacceptable” (p. 231). Based on this rule of
thumb, the consistency of two variables i.e Anchoring and Regret aversion is lower and they
both coming under the range of “unacceptable” so they both are needed to be dropped from the
further results of this study as these two will make the further results of this study unreliable.
While the remaining variables were taken forward for regression analysis. So based on the
results of reliability test, new equation of this study is:
Y= β0 + β1 X1 + β2X2 + β3 X3 + β4 X4+ư

Where
Y= investment performance

X1= representativeness
X2= overconfidence
X3= loss aversion
X4= herding
ư= error term

Descriptive statistics for personal information (demographics):

Table-1-1 Age

Frequency Percent Valid Percent Cumulative

Percent

20-29 42 52.5 52.5 52.5

30-39 22 27.5 27.5 80.0

40-49 11 13.8 13.8 93.8

50-59 3 3.8 3.8 97.5

60 and above 2 2.5 2.5 100.0

Total 80 100.0 100.0

22
Most of the investors come under the age of 20 to 29. While 27.5 percent of the investors were
having the age of 30 to 39 years. It shows that the investors of Peshawar are normally invest
before they reach to an age where they feel that they are old now. Similarly, they like to invest
when they are young. Majority of the investors’ i.e 52.5 percent were having the age of 20 to 29
years. Following Bar chart will more simplify it.

Figure 1-1

Y axis represent the percentage of number of investors while X axis represent the range of
different ages that investors have. It is clear that most of the investors come under the age of 20
to 29. While 27.5 percent of the investors were having the age of 30 to 39 years.

23
 Table-2-2 Monthly income
Frequency Percent Valid Cumulativ
Percent e Percent

0-25000 17 21.3 21.3 21.3

25001- 17 21.3 21.3 42.5

50000

50001- 17 21.3 21.3 63.8

100000

100001- 8 10.0 10.0 73.8

150000

150001- 9 11.3 11.3 85.0

200000

Above 12 15.0 15.0 100.0

200000

Total 80 100.0 100.0

Figure 1-2

24
Both the table and Bar chart shows that 63.9% of the investors were lied in the range of Monthly
income from above 25000 and under 100000. Collectively, 21.3% of the investors were earning
above 100,000 and less than 200,000 monthly. There were 15% investors whose monthly income
was above 200,000. Y axis of the Bar chart represents the percentage of monthly income while X
axis represents different ranges of monthly income.

Table-3-3 Working Experience

Frequency Percent Valid Percent Cumulative
Percent

No experience 22 27.5 27.5 27.5

1-4 14 17.5 17.5 45.0

5-8 13 16.3 16.3 61.3

9-12 13 16.3 16.3 77.6

13-16 7 8.8 8.8 86.4

17-20 7 8.8 8.8 95.2

21 and above 4 5.0 5.0 100.0

Total 80 100.0 100.0

Figure 1-3

25
Most of the investors were experienced but as there were a number of students included in the
survey that is why they are not shown. There were some students who has the experience of any
work (job and/or business) but majority of them were not having any experience as shown in the
chart and table.. Most of the investors were having the experience of above 9 year to 20 years.
As above table and Bar chart is representing that 33.9 percent of the respondents were having the
experience of above 1 and less than 9 years. The remaining 31.3 percent of the investors were
having the experience of above 5 years to 12 years. The Y axis of the Bar chart represents the
percentage of working experience and X axis represents the number of years of working
experience.

Table-4-4 How long you attended stock market

Frequency Percent Valid Percent Cumulative
Percent

1.00 24 30.0 30.0 30.0

3.00 31 38.8 38.8 68.8

5.00 11 13.8 13.8 82.5

7.00 5 6.3 6.3 88.8

10.00 9 11.2 11.2 100.0

Total 80 100.0 100.0

26
 Figure 1-4

Among those eighty investors, 31 had attended stock exchange for years (38.8% of overall
sample) while 30 of them had attended stock exchange for 1 year (30%).it can be said that
majority of the investors were new in the stock market. 25 of them were attended the stock
exchange for above 5 years to under 10 years (31.4%). So it’s a mixture of both new and
experienced investors.

Table-5-5 Attended any course of stock exchange

Frequency Percent Valid Percent Cumulative
Percent

No 23 28.8 28.8 28.8

YES 57 71.3 71.3 100.0

Total 80 100.0 100.0

27
 Figure 1-5

57 of them has been the attendee of any course which has been presented by the stock exchange
to them. This is 71.8% of overall sample. 23 of them i.e 28.3% not yet attended any course of
stock exchange. So majority of the investors were having the knowledge of stock exchange.

28
 Table-6-6 Money investment in stock Exchange
Frequency Percent Valid Cumulative
Percent Percent

70000.00 24 30.0 30.0 30.0

150000.00 24 30.0 30.0 60.0

200000.00 7 8.8 8.8 68.8

250000.00 10 12.5 12.5 81.3

300000.00 15 18.8 18.8 100.0

Total 80 100.0 100.0

Figure 1-6

24 investors were those who invested70,000 Rs in stock Exchange while 24 investors were those
who has invested 150,000 Rs in stock exchange. This is 60% of overall sample. 15 of them
(18.8%) had invested above or exactly 300,000 Rs. The remaining 17 investors had invested in
the range of 200,000-250,000.

29
 Table-7-7 Marital status
Frequency Percent Valid Percent Cumulative
Percent

Single 38 47.5 47.5 47.5

Married 42 52.5 52.5 100.0

Total 80 100.0 100.0

Figure 1-7

When asked from respondents about their marital status, 38 of them were single
while 42 of them were married. It shows that both the single and the married people invest in
stock exchange as far as their current status was concern, 52.5% of the respondents were married
and 47.5% were single.

30
 Table-8-8 Gender
Frequency Percent Valid Percent Cumulative
Percent

Male 53 66.3 66.3 66.3

Female 27 33.8 33.8 100.0

Total 80 100.0 100.0

Figure 1-8

One interesting finding of the survey was there was no female investor found in Peshawar. It
does not mean that the women of Peshawar do not invest in stock exchange but it means that
women are not in a great number among the investor or they may not want to take part in the
surveys. Above table and graph shows few females but remember those 27 were the students and
not the real investors.

31
 Table-9-9 Education
Frequency Percent Valid Percent Cumulative
Percent

Master 40 50.0 50.0 50.0

Bachelor 38 47.5 47.5 97.5

intermediate 1 1.3 1.3 98.8

Matric 1 1.3 1.3 100.0

Total 80 100.0 100.0

Figure 1-9

78 among those eighty were having the education level of Bachelor and Masters which is 97.5%
of the whole sample. Among those, 50 were Master’s Degree-Holders. It means that the
respondents were highly educated.

32
 CHAPTER 4: ANALYSIS AND DISCUSSION

This part of the study will analyze the results and then will discuss the overall findings.
Table-2 Correlations
Representativeness Overconfiden Loss aversion Herding Investment
ce performance
Pearson
1 .675 .072 .321 .424
Correlation
Representativeness
Sig. (2-tailed) .000 .526 .004 .000

N 80 80 80 79 80
Pearson
.675 1 .119 .383 .324
Correlation
Overconfidence
Sig. (2-tailed) .000 .293 .000 .003
N 80 80 80 79 80
Pearson
.072 .119 1 -.010 .235
Correlation
Loss aversion
Sig. (2-tailed) .526 .293 .928 .036
N 80 80 80 79 80
Pearson
.321 .383 -.010 1 .320
Correlation
Herding
Sig. (2-tailed) .004 .000 .928 .004
N 79 79 79 79 79
Pearson
.424 .324 .235 .320 1
Investment Correlation
performance Sig. (2-tailed) .000 .003 .036 .004
N 80 80 80 79 80

33
Correlation shows the association or relationship among the variables. A good model is one in
which the association among the variables is not 1. One rule to explain the association is if the
association is 0.5, it will be moderate relationship, if it is below 0.5, it will be significant and
weak correlation. In case it exceeds 0.5 then it will be insignificant or strong correlation. As can
be seen that the variable loss aversion has very strong and insignificant association with other
three independent variables. The detail of association is that loss aversion has 0.72 correlations
with representativeness, 0.293 with overconfidence and -0.010with herding and these all are
insignificant at 10% level of association. But it has a significant association with dependent
variable investment performance at 5% level. Remaining all variables has significant association
at 5%.
4.1 Regression analysis:

As explained I the methodology section that Regression shows the dependency or impact of an
independent variable on dependent variable. This part of the chapter will explore the dependency
of dependent variable investment performance on the independent variables.

Table 3-1 Model Summary

Model R R Square Adjusted R Std. Error Durbin-
Square of the Watson
Estimate

1 0.502a 0.252 0.211 1.86269 2.247

Above table shows that there is 50.2 percent relationship between the dependent and
independent variable. One rule of thumb of R statistics says that if the value of R is 0.5, it will
be moderate relationship, if the value is above than 0.5, it will be strong and insignificant
relationship and when the value of R statistics is above than 0.5, it will be weak and significant
relationship. In above table where the value of R is 0.502 means that there is a moderate
association between dependent and independent variables as it is more 50 percent but not by a
good or long distance. It is very near to the range of moderate relationship. If it would had

34
above 51 or more than that, it would had been a strong relationship. However, only 25.2 percent
effect is on dependent variable by the independent variable has been explained. Normally the
value of R Square less than 0.2 means that the variation is weak, between 0.2 and 0.4 means
that variation is moderate and above 4 means that the variation is strong. In above case the
value of R Square is .253 which means that the moderate level of variation has been explained
by the variables of this study while remaining 74.8 percent effect on dependent variable is from
other factors. This 74.8 percent effect is unexplained variation. Value of the R square Adjusted
is 0.211 which means that that total model variability is 21.1 percent. The more the variability
in a model the good the model is. If the value of R square adjusted is 0.5, it will be sufficient
variability. Below this (0.5) will be weak and above this will be strong variability. In the case of
this study the variability is weak as its value is less than 0.5. 2.247 value of Durbin-Watson
shows that there is very weak autocorrelation in the model. The standard for Durbin-Watson
autocorrelation detection is 2. Above 2 means that the autocorrelation is negative. In above
model, the autocorrelation is above 2 but it is very near to 2. That is why it can be said that the
model is free from autocorrelation or no autocorrelation (Gujrati 2009)

Table3-2 ANOVA
Model Sum of Df Mean F Sig.
Squares Square

Regression 86.315 4 21.579 6.219 .000b

Residual 256.751 74 3.470

Total 343.066 78

ANOVA table shows the significance level of F statistics. F statistics of this table shows that
model as a whole is statistically significant.

35
 Table3-3 Coefficients
Model Unstandardized Standardi t Sig.
Coefficients zed
Coefficient
s

B Std. Error Beta

(Constant) 3.714 1.269 2.926 0.005

Representativenes 0.136 0.053 0.350 2.572 0.012

s

Overconfidence -0.017 0.078 -0.030 -.215 0.830

Loss aversion 0.136 0.067 0.207 2.042 0.045

Herding 0.135 0.067 0.221 2.018 0.047

The value of the constant shows that if all the independent variables become zero, still 3.714
variation will be recorded in dependent variable and this variation is significant at t= 1%. As far
as independent variables are concern if one unit change occurs in representativeness bias the
investment decision making will be change with 13.6% and this change is significant at t=5%. So
the research hypotheses Hi1 is accepted which is there is a significant impact of
representativeness on investment performance. One unit change in the overconfidence bias will
reduce the decision making -1.7%. It impacts negatively the decision making of an investor.
From this, it is cleared that the more the investor is overconfident the lesser will be his

36
investment decision making. And this is the only factors among all 5 which is not significant. It
is insignificant at t <10%. For this finding, H2 is rejected. Other independent variable which loss
aversion shows that it will impact the investment decision making by 13.6% if one unit change
occurred in this variable and this change is significant at t =5%. Or this variable, H4 hypotheses
is accepted. The last variable in this study is Herding behavior. The results shows that one unit
change in the herding will affect the investor’s investment decision by 13.5% and this change is
significant at t=5%. So hypotheses Hi6 is accepted. Representativeness is the most leading
factor that affects the investor performance of investment in Pakistan stock exchange while
overconfidence affects this negatively.

4.2 Discussion:
This study was aimed to find the investment performance based on the behavioral biases of the
investors of Pakistan stock exchange. For that purpose, a sample of forty investors has been
selected for the survey while to improve the reliability and predict the future behaviors of the
investors, forty those students were included in the survey who has a sound knowledge about the
Pakistan stock exchange and who has the intentions of investment in Pakistan stock exchange in
future. A lot of work has been done on this topic in the past in different countries of the world
but still there was a sufficient work needed to be done. From that past work which had been done
in the past on this topic, seven variables were selected for this study. The results found after
running the reliability test that there were two variables which were not consistent. Those two
variables were no more reliable to go forward with because the reliability of those two variables
i.e Anchoring and regret aversion was 0.369 (36.9%) and 0.215 (21.5%) respectively. That is
why these two variables were dropped from further study. In none of the study it was found that
the reliability of these two variables was this much low rather in the study of Kengatharan (2014)
found that anchoring has very strong impact on the investment performance of the individual
investors. It is exactly the opposite of the findings of this study because in his study this variable
was the leading factor that affects the investment performance but in case of this study this
variable has no effect on the investment performance of the individual.

In correlation it was found that one independent variable i.e Loss aversion was having
insignificant association with remaining other independent variables but it was having a
significant association with dependent variable investment performance. To detect the chances of

37
autocorrelation Durbin-Watson test has been used and it was found that the value of Durbin-
Watson was 2.247. The standard for this problem is if the value of Durbin-Watson is 2, it will be
free from autocorrelation and if it exceeds 2, there will be the problem of autocorrelation. As the
value of Durbin-Watson is not equals to 2 but it is very much near to 2 so based on this it is
stated that there was no autocorrelation found among the variables.

As for as the explained variation of the model is concern so 25.2 % of the variation has been
explained by these variables while the remaining variation was happening due to other factors
that were not taken under the consideration of this study. Rule of thumb says that a model is
reliable if it explains 21% of the variation while this research explains 215% variation so it is a
reliable variation.

The coefficient table shows the impact of individual variable on investment performance. It was
found that representativeness bias is the leading factor that affects the investment performance of
the individual investor. Subash, (2012) also found that this bias has significant impact on the
investment performance of both young and old individual investors. The aim of this research was
to find the impact of this bias regardless of their age so it this finding also support the finding of
the study of Subash (2012). Chandra and Kumar (2011) also support this finding that investors take
into account the recent performance of the stock and normally buy “hot stocks” and I future
majority of the investors tend to be happy from their investment performance. This study found
that the more n investor is overconfident the poor the investment performance will be. As can be
seen that the investment performance or being impacted by overconfidence bias negatively.
Prosad (2014) stated the same that the overconfidence investors do not perform will and
overconfidence negatively impact the decision making of the investors. As a result they face
losses. But Chandra and Kumar (2011) said exactly oppositely. They said that the overconfidence
can increase the confidence level of the investors and hence their investment performance also
increases.

Another variable that seems to one controversial because of the association in the correlation
table shows that it has significant impact on the investment performance. The investors want to
avoid the loss as much as they can. Loss aversion comes after the investment is being made but
normally investors analyze the investment mode and then select the investment decisions. The
results show that it significantly impacts the investment performance of the individual investors.

38
(Chandra and Kumar (2011)) also said that 55% o the respondents replied that they are risk averse
when the situation is uncertain but they become greed when they see sure profits.

The last independent variable in those studies was Herding behavior. Regression analysis shows
that this is the second leading factor after the representativeness that affects the investment
performance of the individual investors. It shows that investors who believe in the collective
decision making are the most satisfied from their investment performance than those who do
believe that investment decisions must be taken individually. These findings support the findings
of Kadariya (2012) where he too found that herding behavior is impacting investment
performance but the point of difference is He stated that it has moderate impact but here it has a
leading impact on investment performance. On the other hand the studies of Aduda et al. (2012),
Prosad (2014) and Subash (2012) fond that there was no impact of herding on the investment
performance. One other researcher Kengatharan, L (2014) found significant impact but that
impact was negative. It can be said that this bias has a mixed response in different countries and
in different markets.

39
 CHAPTER 5: CONCLUSION AND RECOMMENDATIONS
This section presets the conclusion of the study on the basis of the main findings from the
analysis of the data used in the study. Moreover it also highlights the recommendations and
direction for future researches in this area.

5.1 Conclusion:

This study was designed to find the investment and its impact on investment return. For that

purpose, six independent behavioral biases were selected while investment performance was

selected as dependent variable. It was found that representativeness bias was the leading bias that

affects the investment performance while overconfidence has negative impact on the investment

performance. It was also found that two variables i.e anchoring and regret aversion were not

common among the investors of Pakistan stock exchange and that is why those both were

dropped from the analysis of the study. So in the response of first Question of the study, it is

stated that the biases Representativeness, Loss aversion and Herding has positive impacts on the

investment performance of the individual investors while Overconfidence has negative impact on

investment performance. In the response of second question it can be said that representativeness

and Herding are the most common biases that can affect the individual performance positively

while overconfidence is important bias because of its negative impact.

5.2 Recommendations:
Based on the findings, it is recommended for those who has invested in Pakistan stock exchange
that they:

40
  Must not be overconfident.
 They must believe in collective decision and they must analyze the past performance of a
particular stock or the company of which they are going to invest
 For those who wish to invest in Pakistan stock exchange in future it is recommended
that they must get a sound knowledge of the related stock and company in which they
are going to invest.

5.3 Direction for future research:

Behavioral finance is relatively new field of study. It needs many researches with respect to
conventional finance theories and practices. It focuses on the psyche of individual and there are a
lot of people who has invested and who are investing in different stock markets of the world.
Many studies are required to analyze theories behaviors as well. 0.24 R square shows that there
are many other factors as well which affect the investor performance of an individual investor.
Beside this, there are many other behavioral biases exist in literature. It is needed to conduct
studies on those biases as well to get different, up to date and valid results.

41
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 Appendix

Questionnaire:
Topic: Investment behavior and financial performance of individual investor.

This research is for the requirement of the degree of Master in Business Administration (MBA 3.5)
from City University of Science and Information Technology (CUSIT) Peshawar and all the data will
be used for research purpose only. Your co-operation in this regard will be highly appreciated.

Thanks and regards: Irfan Ullah

Student of MBA (3.5).

I. PERSONAL INFORMATION

1. Gender: Male Female

2. Age: years

3. Marital Status: Single Married Divorced

4. Education level:

5. Years of working: years

6. Please estimate your average monthly income (Rs)

25000 or below B/W 25,000 – 50,000 B/W 50,000

-100,000

B/W 100,000- 150,000 B/W 150,000 – 200,000 above

200,000

7. How long have you attended the stock market

Under 1 year 1 - under 3 years 3 - under 5

years

5 - under 7 years 7-Over 10 years over 10 years

45
 8. Have you attended any course of Stock Exchange?

Yes Not yet

9. The total amount of money (Rs) that you have invested at the Pakistan Stock
exchange.

Under 70,000 above 70,000 and under above

150,000 and under
150,000 200,000

Above 200,000 and under above 250,000 and under above

300,000
250,000 300,000

BEHAVIORAL FACTORS INFLUENCING YOUR INVESTMENT DECISIONS

Please evaluate the degree of your agreement with the impacts of behavioral factors on your
investment decision making:

Factors Extremely Highly Somewhat Somewhat Highly Extremely

disagree disagree disagree agree agree
agree

1. You buy 1 2 3 4 5 6
‘hot’ stocks
which are
performing
very well at
present.

2. you use 1 2 3 4 5 6
trend analysis
of some
representative

46
stock to make
investment
decisions for
all stocks that
you invest.
3. You don’t 1 2 3 4 5 6
want to buy
stocks which
have
performed
poorly in the
recent past.
4. Current 1 2 3 4 5 6
performance
of stock is
more
important for
long term
profit than
past
performance.
5. while 1 2 3 4 5 6
making
investment
decisions, the
investors
compare the
good qualities
of a company
directly with
the good
qualities of its
stock
6. You 1 2 3 4 5 6
believe that
your skills
and
knowledge of
stock market
can help you
to outperform

47
the market.
7. You 1 2 3 4 5 6
believe that in
yourself that
you have all
the skills to
earn as much
as you can.
8. you believe 1 2 3 4 5 6
that you will
earn more
than a median
(normal)
investor.
9. you want 1 2 3 4 5 6
to invest in
every kind of
stocks.
10. You 1 2 3 4 5 6
rely on
your
previous
experiences in
the market for
your next
investment.
11. You 1 2 3 4 5 6
forecast the
changes in
stock prices
in the future
based on the
recent stock
prices.
12. you use 1 2 3 4 5 6
initial
information
for your
decision
making.

48
13. you are 1 2 3 4 5 6
influenced by
other’s
suggestions
while
investing.
14. After a 1 2 3 4 5 6
prior gain,
you are more
risk seeking
than usual.
15. After a 1 2 3 4 5 6
prior loss, you
become more
risk averse.
16. at the 1 2 3 4 5 6
time of
investment,
you see the
risk
attachment
with a
particular
stock
17. you show 1 2 3 4 5 6
your actual
behavior
especially at
the time of
uncertainty.
18. you give 1 2 3 4 5 6
more
importance to
the losses
than to gain.
19. you avoid 1 2 3 4 5 6
selling shares
that have
decreased in
value and

49
readily sell
shares that
have
increased in
value.

20. You feel 1 2 3 4 5 6

more sorrow
losing stocks
too long than
about selling
winning
stocks too
soon.

21.you do 1 2 3 4 5 6
not sell your
stocks with
decreasing
prices and
eventually
face more
loss than you
could before
if you had
sold your
stocks.
22. other 1 2 3 4 5 6
investors
decisions of
choosing
stock types
have impact
on
your
investment
decisions.

23. other 1 2 3 4 5 6
investor

50
decision of
stock volume
have impact
on your
investment
decisions.

24.other 1 2 3 4 5 6
investor
decision of
buying and
selling stocks
have impact
on your
investment
decisions
25. you 1 2 3 4 5 6
usually react
quickly to the
changes of
other
investors’
decisions
and follow
their reactions
to the stock
market.

51
 III. YOUR INVESTMENT PERFORMANCE
Please give your opinions about the levels of agreement for the following
statements:

Statements Extremely Highly Somewhat Somewhat Highly Extremely

disagree disagree disagree agree agree
agree
26. The 1 2 3 4 5 6
return rate of
your recent
stock
investment
meets your
expectation.
27. Your rate 1 2 3 4 5 6
of return is
equal to or
higher
than the
average
return rate of
the market.
28. You feel 1 2 3 4 5 6
satisfied with
your
investment
decisions in
the last year
(including
selling,
buying,
choosing
stocks, and
deciding the
stock
volumes).

52
53