Impact of Behavioral Factors in Making Investment Decisions and Performance: Evidence from Pakistan Stock Exchange

Abstract

Market irregularities and investors’ irrational behavior stimulates fluctuations in the stock market. Thus, it is important to examine the impact of behavioral factors on investment performance. However, we found a limited number of studies on the effect of behavioral factors on investors’ decision-making. Therefore, we empirically tested a new model which examines the impact of herding, heuristics, market, and prospects on investor decisions at the Pakistan Stock Exchange. Based on a sample size of 155 individual investors, the study concluded that behavioral factors correlate with investment decisions and investment performance. The study found that market and herding are positively associated with investment decisions. Our results also suggest that herding, market, heuristic, prospect and investment decision are significant precursors to investment performance. We also found that investment decisions mediate (i) market and investment performance, (ii) herding and investment performance. Both individual investors and institutional investors can benefit from this study by understanding the impact of behavioral factors on investors’ decisions.

Keywords

• heuristics
• prospects
• market
• herding
• investment performance