PSYCHOLOGICAL DRIVERS OF INVESTMENT BEHAVIOR: EXAMINING OVERCONFIDENCE, SELF-ATTRIBUTION, AND HERDING

Abstract

The purpose of the present study is to quantify the effect of instrumental biases of over confidence bias, self-attribution bias and herding behavior on investment decisions of business graduates in Lahore city (a city in Pakistan). This study suggests that psychological factors have a role in the creation of financial inefficiencies, rather than classical finance paradigm that assumes rational (economic) behaviour. The research design used was quantitative, cross sectional and the method used was to have 400 business graduates respond to self-completed questionnaires. The measurement model and the structural model was tested by using Partial Least Squares–Structural Equation Modeling (PLS–SEM). Results show that there is a positive significant effect between overconfidence bias and self-attribution bias and herding behavior on investment decisions. The results point to the broad effects of psychological factors on financial choices, particularly in an emerging market where such actions are likely to be greater. The study makes significant theoretical contributions to the behavioral finance by generalizing it up to an under-studied sample in Pakistan, and practical implications for individual investors, financial advisors, regulators, and educational institutes to promote rational and informed investing decisions