BEHAVIORAL BIASES AND INVESTMENT DECISION-MAKING: EVIDENCE FROM AN EMERGING STOCK MARKET USING PLS-SEM

Abstract

Conventional financial theories believe that most investors respond rationally while making decisions, considering the maximum expected returns only with minimum risk. On the other side, growing empirical evidence suggests the existence of psychological and behavioral factors which play an important and significant role in re-shaping investment decisions, particularly in emerging financial markets. This study examines the impact of heuristic bias, prospect bias, and market-related factors on individual investment decision-making in the Pakistan Stock Exchange (KSE). A quantitative research design was employed, and data were collected through a structured questionnaire administered to individual investors. The final sample comprises 400 valid responses, which were analyzed using a partial least squares structural equation modeling (PLS-SEM) approach to capture the complex relationships among latent behavioral constructs. The findings reveal that heuristic-driven behavior and market-related factors exert a positive and significant influence on investment decisions, whereas prospect-related biases demonstrate a negative and significant effect. The proposed model explains a substantial proportion of the variance in investors’ decision-making behavior, highlighting the explanatory power of behavioral finance factors. This study contributes to the behavioral finance literature by providing recent empirical evidence from an emerging market context and offers important insights for investors, financial advisors, and policymakers seeking to improve investment outcomes in developing capital markets.