Behaviour Biases and Investor Investment Decisions in Pakistan Foreign Exchange Market

Abstract

Many investors in developing countries, including Pakistan, make incorrect decisions due to behavioral biases. Thus, this study examines the relationship between behavioral biases and investment decisions and the moderating role of “financial literacy on investment decisions.” Using a pre developed questionnaire, we collected 419 responses by focusing on the respondents who trade extensively in the foreign exchange market. The data analysis includes descriptive analysis, correlation, reliability, validity, and hypotheses testing using Smart PLS. The study found herding bias, overconfidence, and representativeness significantly affect the investment decision. Risk tolerance insignificantly affects investment decisions. We also found that financial literacy has a moderating effect on investment decisions. The study recommends that policymakers arrange seminars and workshops for investors on financial literacy. Such measures may reduce the investors’ decisions based on behavioral biases.

Keywords

• herding bias
• overconfidence
• risk tolerance
• representativeness