BEHAVIORAL BIASES AND INDIVIDUAL INVESTORS INVESTMENT DECISIONS: MEDIATION ROLE OF RISK TOLERANCE AND FINANCIAL LITERACY

Abstract

The study examines the Pakistani equity market, where many investors unknowingly fall prey to these biases, affecting both individual investment outcomes and the investor-advisor relationship. The study is carried out by considering that humans are not fully rational agents and their decision making is based on heuristic and shortcuts. Primary data were collected using a structured questionnaire from the 1015 individual equity investors. The data were analyzed by using the multivariate analysis, followed by the Confirmatory Factor Analysis (CFA) and Structural Equational Model (SEM). The results show that there is statistically significant effect of representative bias, overconfidence bias, anchoring bias, and availability bias on investment decision making whereas optimism bias is no effect of investment decision making. The behavioral biases including representative bias, overconfidence bias, availability bias and optimism bias significantly influence the investment decision making through the mediators like risk tolerance and financial literacy. The behavioral biases including representative bias, overconfidence bias, availability bias and optimism bias significantly influence the investment decision making and anchoring bias does not affect the investment decision making.