Behavioural errors and stock market investment decisions: recent evidence from Pakistan

Abstract

Purpose – This study examines the role of behavioural factors, such as confidence, optimism, pessimism and rational expectation, in affecting investment decisions in the Pakistani stock market. Design/methodology/approach – Using daily trading data of Karachi Stock Exchange-100 index from January 2012 to December 2015, different regression models, including descriptive statistics and stationarity tests, are performed. Findings – Results indicate that stock market trading has suffered from pessimistic behaviour of investors. In the first model, the authors find a positive sign of confidence and negative sign of optimism with the trading volume. The second model shows a positive role of confidence and rational expectations in affecting the trading volume in daily, Monday and Friday samples. The results of the third model show a negative sign of both optimism and rational expectation with the trading volume. Furthermore, the next model shows a negative sign of confidence combined with pessimism while testing their relationship with the trading volume. Finally, results of the final model suggest that optimism negatively affects the trading volume, and on the other hand, pessimism has a positive impact on the trading volume. Research limitations/implications – The method and empirical testing of behavioural biases and their relationship with economic variable used in this study seem to be a promising way to better understand the role of psychology in deriving financial decisions for academics and policymakers. Originality/value – This study uses secondary data for measuring behavioural biases and decomposes the effect between rational expectation and behavioural biases.

Keywords

• Behavioural biases
• Behavioural finance
• Confidence
• Investments
• Optimism
• Pakistan