IMPACT OF EMOTIONAL FINANCE, MARKET KNOWLEDGE AND INVESTOR PROTECTION ON INVESTMENT PERFORMANCE

Abstract

Financial investment decisions are often presumed to be driven solely by rational analysis, but emotions play a significant role to make investor behavior. Traditional financial theories largely overlook the influence of psychological factors, yet emotions such as anxiety, optimism, and happiness can significantly impact investment performance. This study examines the impact of emotional finance, market knowledge, and investor protection on investment outcomes in Pakistan’s stock and real estate markets. Using survey data from investors, the study explores the extent to which emotions influence decision-making and how market knowledge and investor protection shape financial outcomes. The findings reveal that emotional finance is a strong determinant of investment performance, with optimism and happiness positively correlated with better financial decisions. Investors who exhibit higher emotional intelligence and awareness tend to make more strategic choices, whereas anxiety can lead to impulsive or risk-averse behaviors that may reduce profitability. Market knowledge emerges as a crucial factor in investment success. Investors with a deep understanding of financial markets, economic trends, and key industry players demonstrate superior decision-making abilities, allowing them to identify lucrative opportunities while mitigating risks. The study finds no significant relationship between investor protection mechanisms and investment performance. While regulatory frameworks aim to safeguard investors from fraudulent activities and market manipulation, their impact on financial returns appears limited in the Pakistani context. The findings suggest that regulatory policies may not be effectively enforced or may not provide sufficient confidence to investors. This indicates a potential gap in policy effectiveness, highlighting the need for stronger institutional frameworks and better investor education on legal protections. These insights offer critical implications for financial policymakers, investment professionals, and individual investors. Policymakers should focus on strengthening regulatory oversight and enhancing transparency in financial markets to build investor trust.