behavioral biases and investment decision making

8/17/2019 Behavioral Biases and Investment Decision Making

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Impact of Behavioral Biases on Investors’ Financial Decision Making:

With a Moderator Rule of Cognitive Reflection Test

An Empirical Study in Pakistan Stock Exchanges

A research project for final semester by

Ahmad Naveed 11-NTU-1005

Hamid Raza 11-NTU-1031

Muhammad Waqqas 11-NTU-1067

BBA-8th

Supervisor: Mr. Zia-ur-Rehman

PhD. Scholar (Finance) IIUI

National Textile University Faisalabad


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Contents

Chapter 1

1. Introduction 1

Chapter 2

2. Literature Review 9

i. Overconfidence 9

ii. Illusion of Control 15

iii. Self-Attribution 21

iv. Optimism 24

v. Cognitive Reflection Test 28

Chapter 3

3. Theoretical Framework 32

4. Hypothesis 33

5. Methodology 33

6. Analysis 34

i. Pearson Correlation 35

ii. Regression Model 36

iii. Moderator Interaction 38

7. Findings and Conclusion 40

Chapter 4

8. References 42


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Abstract

The study aimed to investigate the impact of behavioral biases on investor’s financial

decision making and how Cognitive Reflection Test enhance the impact of biases.

Current research studies the behavioral biases including overconfidence, illusion of

control, self-attribution and optimism. The study includes the sample size of 107. The

study is significant for the business people, investors, policy makers, brokers, house

wives and student. Empirical data has been collected through administrating a

questionnaire. Correlation and Multiple Linear regression model techniques are used to

investigate whether investor decision making is affected by these biases. The study

concluded that overconfidence, illusion of control, self-attribution and optimism have

direct impact on investment decision and how CRT enhance the relationship of biases

and investors’ decision making. Those who attained high score in (CRT) are succeeded

to decrease the effect of these biases. This study will help the investors to overcome

these biases.

Key Words: Overconfidence, Illusion of Control, Self-Attribution, Optimism and CRT


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Chapter 1

Introduction

People are biased at some point both purposefully and unexpectedly in their standard life choices.

Psychological science is a science in which we concentrate on the human action, nature and

behavior and how human goes amiss from wise choice. Behavioral finance relies on upon the

mental choice of the speculators.

Behavioral Finance is a rising train that speaks to an accumulation of option ways to deal with,

refine the established fund meaning of financial objectivity. Specifically, BF draws on the brain

science and psychological science writings to look at why singular choice settling on frequently

are different from reasonable decisions in efficient ways. Behavioral finance is another world

view in budgetary markets, which has as of late developed as a reaction to the issues confronted

by current monetary hypothesis. Comprehensively talking, it examines that some money related

wonders are better comprehended by method for models in which operators are not completely

wise (Saidi, 2007: 12). At the end of the day, behavioral account tries to utilize introducing so as

to cut edge money related hypothesis behavioral viewpoints in choice making procedure. It

manages people and gathering and utilizing routines for data.

Behavioral fund looks to cover and expect the results of precise money related business in mental

choice making (Rhnamaye rood poshti et al, 2008: 61) Furthermore, behavioral account

concentrates on use of mental and monetary standards to advance budgetary choice level. By and

large, deviation from the right and ideal choices in estimating Stock Exchange is one of the

fundamental and most vital issues and it regularly reminds poor returns for financial specialists.


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In this way, Identifying elements that remind wrong choices and said deviations, can motivate

better choices. As per the significance of brain science and behavioral account in monetary

choices and estimating of stock trade, this study researched major behavioral tendency

(optimistic, illusion of control, self-attribution and over confidence) in Pakistan's stock trades.

Behavioral finance is to some degree a rising however quickly developing zone of account,

which study individuals' financial choice making conduct and the hypothesis of subjective brain

research joined with the understanding of the conventional fund and financial matters. The

essential assumption in behavioral fund is that, information structure merging with parts of the

business division individuals impacts the guess decisions of speculators and business sector

results. The thinking instruments don't work as PC rather; a man's brain every now and again

works information using channels or options. Standard finance expects that back areas

individuals, establishments, and even markets are observing or reasonable. Those people settle

on objective choices and build their riches. Any person who settles on unreasonable choices will

experience the ill effects of poor results.

Behavioral fund is combination of science and human conduct. It begins in 1990. As indicated by

behavioral account it is clarified that human side is additionally imperative. Behavioral finance

said in the event that you need to foresee costs then anticipate conduct of financial specialists too.

Predisposition is a reason which examines that why a conduct found in the business sector?

Behavioral tendency help to clarify any sort of marvels and irregularity that are difficult to

disclose as indicated by traditional money.

As indicated by standard fund a financial specialist is consider to be sound to settle on a choice


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utilizing accessible assets. By objective choice making he needs to expand his results. Standard

finance considers that market is productive and mirrors all data auspicious.

Behavioral account is another parameter in which another idea of monetary markets because of

the issues of the cutting edge money related position. In detail some money related reflections

have been examined to comprehend method for models player by which speculators are not

completely wise. Behavioral finance concentrates on mental elements of a man having effect on

his choice making. As indicated by Taller, behavioral fund is a sort of scholarly back which

asserts that a few specialists in monetary are not completely levelheaded. It appears that a large

portion of guess choices in stock trade were not reasonable and were influenced by feelings and

behavioral tendency (Barbizon, 2000: 73).

As per traditional money person is a reasonable leader. They take all choices soundly on the

premise of distinctive models while settling on guess choices. Established account is all around

the EMH (proficient business guess) while Fama clarify about change that why a change happen

in the business and diverse sort of documentation done on the premise of business. He said there

are a considerable measure of tendency that are not reasonable by EMH.

The disappointment of financial analysts and thoughts which they swear in result, the inquiry is

introduced on different events. Are individuals truly wise? Then again would they say they are

liable to be driven by feelings like misgiving and ravenousness which could motivate terrible

choices? Bernstein (1998) says that the "proof uncovers rehashed examples of ridiculous,

irregularity, and inadequacy in the ways individuals touch base at choices and decisions when

confronted with vulnerability".


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As indicated by (Shefrin, 2007) predisposition is nothing else yet the angle towards

disappointment. Predisposition is tendency to settle on choices while the leader is as of now

being subjected to a basic assurance. There are such a large number of sensitivities in human

brain science. This examination concentrate on optimism, illusion of control, self-attribution and

confidence. These tendency lay effect on people in a manner that they habitually deed on a

clearly senseless way, routinely dismiss ordinary thoughts of risk avoidance, and make

predictable breaches in their guesses and judgments. These predispositions have influence in

forming singular's decisions, budgetary choices in partnerships and money related markets.

Carelessness is a perceptional tendency that have an effect on human's conduct or on financial

specialist's choice making. Carelessness is essentially one's certainty level naturally judgment,

anticipating and capacities. Because of this predisposition a man overestimates its possibilities of

accomplishment and depends a lot all alone choice unquestionably or depend a lot on

unreasonable data for guess reason.

Arrogance is predisposition that influences the choice of individual and also corporate world.

Individuals have a preference to overestimating their capacities and abstain from taking the

assistance of others in choice making procedure. These individuals are absolutely depend on their

capacities. Accordingly they look less help and heading amid the choice making. As per Shefrin

"relates how well the individuals comprehend their own capacities and the points of confinement

of their insight" (Shefrin 2007).

In presumption, financial specialist exchanges all the more forcefully. The Past data lead

speculator to wind up pomposity and Result says that the assumptions tendency impact in the


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financial specialists choice of Pakistan's Stock Exchanges.

Hallucination of control is a predisposition recognized by conduct fund which has sway on

exchanging conduct of a financial specialist straightforwardly or in a roundabout way in the share

trading system, i.e. under response and overcompensation of stocks. From the above expressed

articulation, according to the establishment design of Behavioral Finance EMH structure is more

prone to be influenced by financial specialist's choice, individuals (speculators) are ordinary

(Meir Statman). So the suppositions of EMH bust over yonder, i.e. business have normal

operators, implies that the business sector effectiveness hand-off upon the specialists' exchanging

conduct. In this study we might want to figure out some proof by which we can demonstrate that

market productivity is likewise effected by exchanging conduct and exchanging conduct is

impact by mental predisposition i.e., hallucination of control.

Illusion of control is essential a truth of "Arrogance" in which the financial specialist get to be

pompous about his capacities to control the occasions. In spite of the fact that in actuality he

can't, which best fits on a maxim likely "pride precedes the fall" (Mackay, n.d).

Illusion of control win in Pakistan culture because of that it's make the business wastefulness the

primary explanation for that the peculiarities exist in Pakistan economy (Sidra Ajmal, Maria

Mufti, Dr. Zulafqar Ali Shah). Fantasy of control is the limit of individuals to overestimate their

capacities about business sector.

Carelessness and Illusion of control assume an imperative part in the choice procedure of

financial specialists. In arrogance the financial specialists overestimate their capacity, they

surmise that they have preferable data over they really do "An excess of individuals exaggerate


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what they are not and underestimate what they are". Financial specialists exaggerate their own

particular capacities and make the over the top exchanging securities exchange.

Self-attribution predisposition is a long-standing idea in brain research and touches to people's

general tendency to ascribe triumphs to individual aptitudes and disappointments to calculate

outside their ability to control. Self-attribution tendency make Individuals trust that their victory

is a direct result of their common capacities and ability set and they are distant from everyone

else in charge of their prosperity and their disappointment is not their deficiency. (Hastorf et al.,

1970) demonstrated that people give credit of the great results on prevalent abilities they think

they have, while accuse diverse reasons for their disappointments. In a comparable study,

(Gervais and Odean, 2001) mulled over that. At the point when a financial specialist gets positive

results he/she attributes this accomplishment to their own capacities and along these lines

overestimates their capacities and this overestimation motivates another tendency called

carelessness.

For the aforesaid reasons, it is imperative for customer scientists to build their comprehension of

self-attribution tendency in the setting of buyer money related choice making. To date, in any

case, the presence of self-attribution tendency amongst singular financial specialists is just

accepted and not specifically observationally tried. For instance, it is assumed that self-attribution

predisposition causes effective financial specialists to become progressively arrogant about their

guess abilities and subsequently build their exchanging volume after some time (Daniel,

Hirshleifer, and Subrahmanyam 1998; Gervais and Odean 2001; Statman, Thorley, and Vorkink

2006). Whether singular financial specialists really have a self-attribution tendency, be that as it

may, is not measured. As an eminent special case, Dorn and Huberman (2005) solicit a specimen


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from individual financial specialists whether they judge their past guess victories to be for the

most part because of their own abilities, however they don't test whether these speculators in

reality credit great comes back to their aptitudes and terrible comes back to different variables,

which shapes a key segment of self-attribution tendency (Miller and Ross 1975). The present

examination builds up direct experimental proof for self-attribution predisposition in buyer

money related choice making utilizing a one of a kind mix of review information and coordinated

exchanging records of an example of Dutch rebate business customers.

Idealism is the overestimation of positive results and underestimation of negative results

(Shefrin, 2007). Individuals are overoptimistic when they trust that they won't be presented to

future occasions and things won't go outside their ability to control and individuals likewise

surmise that high likelihood positive occasion will happen to them and negative occasions will

transpire (Weinstein, 1980). In further warning he declared that individuals have propensity to

trust that it is more outlandish that they will experience the ill effects of an undesired

circumstance than the others. He mulled over that hopefulness predisposition is in numerous

areas and age bunches. People are overoptimistic before an occasion e.g. individuals before begin

of their occasions were expecting more fun and satisfaction yet amid that same occasions they

express less pleasure. People are overoptimistic when gotten some information about to suspect

their estimation of their future encounters. Positive thinking is likewise present in business

environment. Business visionaries are to a great degree hopeful in regards to their future results

when contrast with financial specialists. The good faith predisposition especially influences he

money related choice making, the fundamental driver of obligation issues today are because of

confidence of monetary administrators (Meinert, 1991). He gave most accenting on the writing


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recognizing behavioral choice making ascribes that are liable to have efficient consequences for

monetary business sector conduct.

Problem Statement

To determine the impact of behavioral biases on investors’ financial decision making in Pakistan

stock exchanges. And analyze the impact of cognitive reflection test on behavior of investors and

their financial investment decisions.

Objectives

To identify the impact of overconfidence on financial decision making of investors

To examine the effect of illusion of control on investor’s financial decisions

To analyze the influence of Self-attribution on the investor’s financial decision making

process

To investigate the influence of Optimism bias on individual’s financial decision making

To analyze the influence of cognitive reflection test on the relationship of these biases and

investors’ financial decision making

Significance and contribution of study:

The significance of the study is to contribute in literature as well as to explain the influence of

behavioral biases on the investor financial decision making. The study also included the effect of


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cognitive reflection on investors’ behavior and their relationship of biases and financial decision

making. The outcomes of study would be helpful for the business investors, policy makers,

financial advisor, and students. The individual investor can take help from the findings of this

study and can come to know which bias interrupted their decision making, by overcoming these

biases they can make good investment decisions. The contribution of this study in the existing

literature is that there was no study where all these biases including overconfidence, illusion of

control, self-attribution and optimism have been discussed with the effect of cognitive reflection

test together. This study covers the knowledge gap of the previous studies.


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Chapter 2

Literature Review

Overconfidence

Distinctive hypothetical models demonstrates that careless financial specialists will exchange

more because of their high certainty level above then normal than those speculators who take

choices wisely on the premise of rationale. A few truths of arrogance are miscallibration

(mis-course of action) dream of control, hopefulness that are should have been be considered. By

considering these realities it is reasoned that those speculators who feel that they are above

normal in term of venture aptitudes or past execution of exchanging they exchange more.

As indicated by conversional monetary hypothesis, a speculator are consider an objective

individual keeping in mind the end goal to distinguish and the utilized important data and be

effective to settle on best choice. In conventional monetary hypothesis are utilized to comprehend

the diverse issue, for example, why do a speculator treaded, how would they do their undertaking

and why do return change so quickly yet crosswise over stocks for reason other than danger.

Standard account says that market is productive however there is some hazy area exit in business

sector because of that in viable business is not effective.

Carelessness predisposition is inability to perceive the limits of one's learning (Russo and

Schoemaker, 1992). The components, for example, self-responsibility to the undertaking and

self-presentation of capability are the reasons for pomposity in a financial specialist. At the point

when people neglect to understand the uncertainty of their capacities completely, assumptions


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has a tendency to expand (Kahneman and Tversky, 1979). Mental specialists have discovered

how carelessness predisposition influences the conduct of people. The choices identified with

unverifiable occasions are the ones which have component of arrogance.

Inflation tendency shows up as over the top positive thinking and superior to anything normal

impact. Carelessness tendency can be extremely hurtful on money related choices; In a taking

after examination (Odean, 1998) demonstrated that the financial specialists with assumptions

will over-esteem their insight, along these lines they will contribute effectively. In any case,

contributing effectively does not ensure great results. (Hairdresser and Odean, 2001) considered

in their study that the financial specialists who exchange as often as possible acquire substantially

less benefit then those speculators who exchange regularly, in this manner assumptions tendency

is unsafe for those kind of financial specialists.

Razek (2011) characterize assumptions as an overestimation of the probabilities for an

arrangement of occasions. The creator contends that the idea is operationally reflected by looking

at whether the particular likelihood allocated is more noteworthy than the bit that is right for all

appraisals administered out to the given likelihood. Agrawal (2012) prominent that assumptions

reasons individuals to overestimate their insight, underestimate dangers and overestimate their

capacity to control occasions. The creator guaranteed that carelessness begins in people’s

one-sided assessment of proof. Numerous analysts discover proof for the vicinity of the

arrogance predisposition in diverse money related choices. Studies have demonstrated that

declaration returns are lower for careless bidders when contrasted with levelheaded bidders.

The most generally perceived result of arrogance is that it actuates higher exchanging volume.


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Careless speculators, on the grounds that possibly they overestimate the accuracy of the data they

have, or on the grounds that they think they have above normal venture aptitudes, exchange more

than wise financial specialists. For De Bondt and Thaler (1995) carelessness is the key behavioral

component expected to comprehend the overtrading riddle. Odean (1998b) contends that the

abnormal state of exchanging volume is the most imperative impact of carelessness. Statman et

al. (2006) presents experimental confirmation for the US market and contends that exchanging

volume is especially higher after significant yields, as venture achievement builds the level of

arrogance. Hair stylist and Odean (2000) researches the execution of 60,000 markdown financier

speculators. The creators split the example into quintiles of portfolio turnover. Results

demonstrate that those exchanging the most have lower normal month to month return. The

confirmation reported by the creators recommends that the dealers were frequently directed by

deception of arrogant financial specialists.

As per Agrawal (2012), pomposity influences the conduct of business sector merchants as well as

speculators in the essential business sector. In a late study, Hsu & Shiu (2010) analyzed the guess

returns of speculators in prejudicial barters occurring in the Taiwan securities exchange and

found that regular applicants fail to meet expectations occasional applicants. Inflation motivated

forceful offering and higher installment for securing the sold shares. Continuous bidders likewise

turn out to be sub-par as far as stock choice execution. This infers their overestimation without

bounds income of the starting open offer (IPO) firms, or underestimation of the danger of interest

in these organizations, or both. As per Subrahmanyan (2007), pomposity about private signs

causes eruption and subsequently wonders like the book/business sector impact and long-run

inversions, though self-attribution (ascribing accomplishment to capability and disappointments


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to misfortune) keeps up carelessness and permits costs to keep on overcompensating, making

force.

Two unique measurements of pomposity may have this effect on the exchange conduct of

individual financial specialists. Speculators may be presumptuous as in they think little of the

unpredictability of money related resources and as an outcome exchange more. Those speculators

demonstrate a miscallibration tendency. This methodology is exhibited in Daniel et al. (1998)

who models assumptions as the level of underestimation of the change of data signs.

Then again, speculators might likewise be presumptuous in regards to their venture aptitudes,

especially financial specialists with high past execution. The instinct behind this contention is

that the gathering of fruitful business sector guesss makes financial specialists progressively

presumptuous and thus makes them exchange more. Because of a self-attribution tendency,

financial specialists think they are above normal (superior to anything normal predisposition)

with respect to their guess abilities. This finding is reliable with the guess that a higher level of

carelessness motivates higher exchanging volume on the off chance that we acknowledge that

high past returns are decidedly connected with assumptions. This superior to anything normal

exchanging impact has been archived exactly by Glaser and Weber (2007) who give confirmation

of a higher exchanging affinity by careless financial specialists when they recognize pompous

speculators as the individuals who think they are above normal as far as venture aptitudes or past

execution. This finding is predictable with other late studies (see Deaves et al. 2009, Graham et

al. 2009). In the same line of exploration, Barber and Odean (2001) cases that arrogance is much

higher among men than among ladies and that clarifies why men exchange more than ladies.


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Next to this exchanging impact, assumptions has likewise been connected with exorbitant danger

taking. Experimental work by Dorn and Huberman (2005) and Nosic and Weber (2010) appears

to demonstrate that pompous speculators are more inclined to assume hazard for which there is

no obvious return advantage.

A few researchers hold that "inspiration" is a main consideration of pomposity. Individuals

exaggerate their capacity with a specific end goal to keep self-regard and lessen tension and

accordingly indicate arrogance. In the hypothesis of behavioral financial matters and behavioral

fund, the accompanying researchers once considered reasons for speculators' arrogance, including

Kahnemanand Tversky (1973), Fischhoff, Slovic and Lichtenstein (1978) and in addition Fiske

and Taylor (1991) and so forth.

Carelessness might likewise influence the effect of data on people's exchanging conduct. Forbes

and Kara (2010) contends that individual speculators' self-assurance intervenes how venture

money related learning impacts financial specialists' exchanging adequacy, and Abreu and

Mendes (2012) find that the more pompous and non-presumptuous speculators put resources into

data the more they exchange, yet the exchanging conduct is delicate to the wellsprings of data

utilized. Careless financial specialists exchange less habitually when they gather data by means

of loved ones, and non-presumptuous speculators exchange all the more often when they utilize

particular wellsprings of data. Be that as it may, Kirchler's (2010) test results demonstrate the

inverse conclusion: the industrious underperformance of powerless educated financial specialists

is not because of arrogance.

Arrogance is a predisposition which mirrors the perspective in which an individual overestimates


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his/her capacities or expertise to perform a specific undertaking. In their investigation of

Overconfidence tendency (Barber and Odean, 2001) found that it impacts the balanced choice

making of financial specialists and will lead the speculator to exchange more hazardous security.

(Gervais and Odean, 2001) concentrated on that both pomposity and over good faith are identity

qualities which impact the choice making of an individual and that the arrogance strengthens the

over confidence.

Kahneman and Tversky (1973, 1979) for the most part clarified framing reasons of pomposity

from the point of view of perception of data preparing. They observed that amid settling on

judgment and choices, individuals would have a tendency to give the unmistakable data high

weight. Therapists Lichtenstein, S. furthermore, B. Fischhoff (1977, 19780 considered people

would underrate event plausibility of the occasions they couldn't currently or envision so that

they may overlook conceivable dangers and result in carelessness and overcompensation. Master,

Ross and Lepper (1979) found in their audits that individuals would give little weight to the data

distinctive structure their thoughts or purposely disregard it. In the suppositions of Fiske and

Taylor (1991), the length of individuals trust, they would not consider whether the data is totally

right. The motivation behind why individuals trust realness or non-legitimacy of these occasions

originates from individual arrogance mindset. Griffin and Tversky (1992) found individuals as

often as possible considered amazing data or esteemed it, yet did not stress whether the data was

compelling or right.

Assumptions and over positive thinking are a touch comparable in nature, yet they are not the

same. An overoptimistic individual may not be pompous about his/her capacities but rather yet

idealistic about the event of a coveted constructive result of their activities, while a presumptuous


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individual is certain about his/her capacity, or the result of the occasion. So a presumptuous

individual is liable to be overoptimistic also on the grounds that he/she overestimate their

capacities and they feel that they have settled on the best choice which will create them greatest

positive results, therefore they get to be overoptimistic about the result too. So an arrogant

individual is exceptionally prone to be overoptimistic while an overoptimistic individual might

possibly be presumptuous (Baumeiste et al., 1989).

In behavioral fund consider individuals are ordinary. Behavioral finance is a rising field that

shows an accumulation of exchange drew closer to expand the established account meaning of

financial reasonability. Behavioral finance depicted on the brain science, attribution and

intellectual writing's to investigate why a financial specialist choice making often shift from wise

option in customary ways. In wise choice making process a speculator need to boost their wishes,

before taking a particular choice a financial specialist will regularly apply a progression of

systematic strides to discriminating survey material reality, goal and fair-minded to potential

result. Tverskey and kahneman recommended the prospect hypothesis that to clarify a financial

specialist choice making conduct under uncertain thought. The prospect hypothesis permitting

that there are numerous mental components of speculator's that cause their existent choice

making procedure to shift from wiseness, the contention of limited discernment will proceed by

Sinon (1957). As indicated by Robbins (2002) reasonable chief when all is said in done settle on

a choice on the base of under certain rationale and methodical choice procedure.

Illusion of Control

The dream of control is the tendency for individuals to overestimate their capacity to control


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occasions, for case to feel that they control results that they evidently have no impact over. At the

end of the day, the fantasy of control is overestimating the part of aptitude with respect to

fortunes in the determination of results. Likewise, the Illusion of control impact portrays the

propensity for individuals to carry on as though they may have some control over occasions or

results when actually they have none. Alongside the confidence tendency, the deception of

control is one of the positive illusions.

As per Shefrin (2007) clarify that the carelessness is concern to how well Investors understand

their own particular capacities and limit of their insight. In Pakistan economy Investors conduct

is not diverse. In Pakistan financial specialists dependably concentrate just towards the arrival

and overlook the turnover the business sector. This pomposity may motivate unreasonable

decisional making by the financial specialists and will endure a misfortune (Beenish andNaeem

Ullah Feb 2013). Tunisian speculators appear to be careless. Besides, age and wage are not

identified with self-assurance in Tunis. Presumptuous men have a tendency to exchange more

than ladies (salma zaine,Ezzeddine). Hair stylist, Gervais & Odean (2001) contended that men

are more arrogant than ladies and that carelessness diminishes with experience and kirchler and

maciejovsky in 2002 study that Overconfidence increment with their speculator's ventures

experience. High market returns make financial specialists presumptuous and therefore,

speculators exchange all the more regularly. Truth be told, exchanging exercises effected by past

business returns. There is critical positive connection in the middle of volume and instability

(Salma Zaiane and Ezzeddine Abaoub 2009).

The impact was named by therapist Ellen Langer (1975) and has been imitated in a wide range of

connections: research facility investigations, watched conduct in natural diversions of chance, for


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example, lotteries, and self-reports of true conduct. Thompson (1999) gives a complete

clarification of why fantasy of control happens. She contends that individuals utilize a control

heuristic to judge their level of impact over a result. All the more accurately individuals utilize a

straightforward tenet to achieve an appraisal of one's control over accomplishing a result with

two components: one's aim to accomplish the result and the apparent association between one's

activity and the craved result. On the off chance that one intends a result and sees an association,

then view of individual control is high. Like most heuristics this straightforward govern regularly

motivates precise judgments however can likewise motivate overestimations of control in light of

the fact that purposefulness and association can happen in circumstances in which a man has no

control.

Shefrin (2000) in an examination "Predispositions permit the distinction of business sector costs

from its crucial values."According to established money related hypothesis, a financial specialist

is viewed as capable and insightful individual to better utilization of data and can possibly take

best choice. Customary money related hypothesis utilization to figure out the reasons of a

speculator to exchange, taking hazard and settle on choices over the business sector.

The prescient part of the dream of control motivate stretches out to the more broad idea of

pomposity. In the behavioral account writing (e.g., Kyle and Wang, 1997; Odean, 1999), a

careless financial specialist has generally been characterized as one who overestimates the

accuracy of his data signals. Overconfidence is destined to show in situations with variables

connected with expertise and execution and some critical components of shot.

As of late, research in the field of behavioral fund likewise a few highlights on expert business


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sector guess. As per Shefrin (2001), business sectors can't ever be unequivocally proficient, for

the reason that financial specialists don't settle on choice and act reasonably in the business. The

monetary business proficiency relies on the financial specialist's exchanging conduct. The

shortcomings in the EMH that behavioral fund has brought under examination are called

'predispositions. 'Something willful about tendency is basic comprehension. On the other hand,

the preferences utilized by behavioral finance are not something that can be unlearned. These

tendency are referred to by behavioral financial experts and have profoundly established

characteristics of human instinct (Zimmermann, n.d).

Late studies demonstrate the capacity to tentatively control dream of control. Numerous guesses

of why people keep on betting or go out on a limb concentrate on qualities of the speculator as

the essential variable in charge of danger taking. Future after subjects had played the amusement

for various trials; wrong standards identified with this "deception of control" were presented in a

different benchmark design crosswise over subjects, later took after by exact principles. Results

demonstrate that the control heuristic may exist for subjects, yet that it can be brought under test

control through the utilization of experimenter conveyed directions.

An examination demonstrates that figment of control have an effect on people execution in

money related instruments. The creators contended that assignment and environment of a market

that are confronted by dealers are conductive to advancement of figment of control and that

affinity of a person to figment of control will conversely interlink or interfaced with the

merchants execution.

For instance, speculators playing the opening machines pull the handles with the expectation of


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getting a triumphant blend. At the point when this activity is trailed by the craved result, an

association is set up (activity – result) and players raise their levels of fantasy of control. The

same may likewise apply to guess returns.

Other than this heuristic different elements add to the hallucination of control. Individual

contribution is fundamental for the figment of control on the grounds that generally the

association can't be set up. Achievement arranged undertakings build fantasy (in light of the fact

that they lead individuals to overestimate the association), disappointment encounters and the

emphasis on losing have the inverse impact.

Those distinctive types of carelessness are interconnected. Case in point, individuals have a

tendency to be arrogant about both their capacities and their insight. Individuals who are

presumptuous about their capacities overestimate their impact over results.

Individuals who are arrogant about their insight have a tendency to think they know more than

they really do. Specifically, individuals who are careless about their insight have a tendency to

build up unnecessarily limit certainty interims. Such individuals wind up being amazed at their

slip-ups more frequently than they had expected. However these distinctive indications of

assumptions don't gauge the same thing and examination appears to demonstrate that they don't

motivate the same blunders in the money related conduct of individual financial specialists.

Langer (1975) characterizes the dream of control as "an anticipation of an individual

achievement likelihood improperly higher than the target likelihood would warrant." Langer

finds that decision, undertaking commonality, rivalry, and dynamic contribution all lead to

swelled certainty convictions. For instance, Langer found that individuals why should allowed


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the degree to which they straightforwardly influence results."

As indicated by Pompian (2012), fantasy of control tendency is which individuals have a

tendency to trust that they can control or impact results when, truth be told, they can't. A survey

by the creator showed that decisions, assignment recognition, rivalry and dynamic inclusion can

all blow up certainty and produce such illusions. This may lead speculators to either exchange

more than is reasonable or insufficiently expand portfolios, for example, in view of commonality

because of, for occurrence, having worked in the organization. Subrahmanyan (2005)

additionally displays proof that individual financial specialists lean toward stocks with high

brand acknowledgment, supporting the nature theory.

All things considered, there is a feeling that a few individuals do have some tendency for direct

control, for instance, numerous poops players’ care who moves the craps at the table, and some

unequivocally want to move the shakers themselves.

Two late trial studies explore pomposity in venture conduct and utilize more straightforward

estimation of assumptions. Dittrich, Güth & Maciejovsky (2001) permit members to pick a guess

portfolio, and characterize pomposity as the reliably higher assessment one could call one own

decision over the ideal portfolio, and in addition hazard loath and danger looking for portfolios.

They find that assumptions increments with errand unpredictability and declines with instability.

Biais, Hilton, Mazurier & Pouget (2002) unequivocally measure one's attitude toward

assumptions by controlling mental tests, and find that pompous dealers do have a tendency to

overestimate the accuracy of their signs and acquire generally low benefits in the going with

exploratory exchanging session.


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In any case, none of the studies said expressly address the dream of control, and as far as anyone

is concerned this wonder has not been tried in a guess test in which choices are actualized with

genuine cash. There are various reasons why an individual may be presumptuous (e.g., a general

tendency, or a conviction particular to a specific circumstance), and we are intrigued rather in the

impact of direct investment in the process motivateing a monetary result on the relating danger

states of mind and portfolio decision. Our configuration obliges both the control and expectation

parts of the hallucination of control.

Self-Attribution

At the point when individuals relate their prosperity with their own capacities and abilities and

hold outside strengths or misfortune for their disappointments is self-attribution predisposition

(Shefrin, 2007: p. 101). (Gervais and Odean, 2001) contended that individuals judge their

aptitudes not through self-examination but rather by evaluating their achievements and

disappointments. Individuals basically assume a lot of acknowledgment for their own

accomplishments, they additionally found that self-attribution predisposition influences the

impression of individuals with respect to their capacities and occupies them from gaining from

past victories.

Self-Attribution Bias uncovers that individuals decode achievement and disappointment in an

unexpected way: Individuals have a tendency to credit accomplishment to their own capacities.

Interestingly disappointment is frequently ascribed to outer elements which they can't impact

(Miller & Ross, 1975). In this way, individuals normally don't gain from their mix-ups on the

grounds that they really are not mindful of those mix-ups or don't recollect that them. Lau and


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Russell (1980) study Self-Attribution Bias for competitors and their chiefs. They find that

competitors and their director’s credit 80% of the triumphs they could call their own group to

interior components. Inside elements are connected to the accomplishment and abilities they

could call their own group.

Then again, misfortunes are clarified by interior components in just 53% of cases. Rather, outer

reasons, for example, officials' choices or the climate, are regularly rebuked for thrashings.

Moreover, Lau and Russell study the clarifications given by columnists in daily papers. On

account of a triumph, writers property achievement 70% of the time to inside elements. Yet,

columnists characteristic just 57% of thrashings to inside variables. Consequently, writers clarify

achievement more frequently by inward components than disappointment, too, yet the

Self-Attribution Bias of columnists is weaker than that of competitors or chiefs.

Pompian (2012) clarified predisposition as the propensity of people to credit their victories to

intrinsic viewpoints, for example, ability or premonition, while all the more regularly faulting

disappointments for outside impacts, for example, misfortune. Thusly, self-attribution

speculators can, after a time of fruitful contributing, trust that their prosperity is because of their

discernment as financial specialists as opposed to components out of their control. This can

motivate taking a lot of danger because of certainty. Self-attribution tendency is a long-standing

idea in brain science research and alludes to people's general propensity to ascribe victories to

individual aptitudes and disappointments to calculates outside their ability to control (see e.g.,

Feather and Simon, 1971; Miller and Ross, 1975).Recently, self-attribution predisposition is

likewise picking up exploration consideration in the field of family unit fund. In such manner,

this tendency is thought to underlie and fortify individual speculator assumptions (Barberand


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Odean, 2002; Dorn and Huberman, 2005).

Singh (2012) watched that more often than not individual is represented not by the good

judgment but rather by its feelings. As indicated by Qawi (2010), the human hereditary makes us

to act quicker than reasonably, because of the natural reaction time inside of our brains in testing

circumstances.

Choi and Dong (2008) study Self-Attribution Bias in budgetary markets. They understand that

institutional financial specialists ascribe accomplishment to their own capacities while

disappointment is regularly clarified by outside components. Choi and Dong archive that in the

event of progress, financial specialists get to be arrogant. Carelessness motivates putting

resources into commercial enterprises which are not in the circle of ability of those speculators.

Doukas and Petmezas (2007) additionally discover a relationship between Self-Attribution Bias

and Overconfidence for institutional financial specialists. Carelessness motivates over the top

exchanging, which is in charge of poor guess results (Doukas & Petmezas, 2007).

Pompian (2012) clarifies that a feeling may be considered as a mental state that emerges

suddenly instead of through cognizant exertion. Feelings need to do with how individuals feel as

opposed to what and how they think. Passionate predispositions stem from motivation or instinct

and may be considered to come about because of thinking affected by emotions. Then again, in

light of the fact that enthusiastic predispositions stem from motivation or instinct – particularly

individual, they are less effortlessly amended. Feelings are identified with emotions,

observations, or convictions about components, items or relations between these things and they

can be an element of reality or of the creative energy. Feelings may be undesirable to those


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tendency them; they may wish to control the feelings however regularly can't. Along these lines,

it might just be conceivable to perceive an enthusiastic predisposition and adjust to it.

Self-attribution predisposition influences the capacity of a man to gauge his/her capacities

furthermore influences the gaining from past exhibitions of that individual to gauge his/her

capacities furthermore influences the gaining from past exhibitions of that individual. (Gervais

and Odean, 2001) chipped away at the impacts of past exhibitions of the financial specialists on

their conduct, and found that achievement reinforces the carelessness. At the point when a

financial specialist is fruitful, he/she acknowledge this accomplishment for their own particular

capacities and aptitudes and firms their convictions in regards to their capacity excessively,

therefore they get to be careless. It was observed that People experiencing self-attribution

tendency turn out to be more pompous after a win and it influences the origination about own

abilities as it prevents the assessment of past execution, this motivates carelessness (Seppälä,

2009).

At the point when gone up against with instability financial specialists have a tendency to be

expanding one-sided self-attribution, which eventually affect arrogance in them (Yosef and

Kumar, 2012). It was found that people turn out to be more presumptuous as opposed to going

for self-appraisal when influenced without anyone else attribution tendency (Cova et al., 2001).

(Tversky, 1995) concentrated on that assumptions produces from Phenomena like

self-improvement, locus of control and recklessness of consistency rightness, all these are the

bases of pomposity in a person. Speculators are presumptuous about the occasions which they

trust will produce constructive results and will exemplify them (Weinstein and Klein, 2002);


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(Weinstein, 1980). So self-improvement triggers arrogance in speculators.

Optimism

Optimism is an individual contrast variable mirroring the degree to which individuals hold

summed up great anticipations for their future. More elevated amounts of positive thinking have

been connected tentatively to better subjective prosperity in times of misfortune or trouble

(Carver, Scheier, & Segerstrom, 2010)2. Individuals who are more hopeful work harder, hope to

resign more seasoned (subsequently hope to live more and more content with his/her

occupation), and are more prone to remarry, and they put more in individual stocks and spare

more (Puri & Robinson, 2007). In any case, McKenna (1993) contended that there was clear

confirmation for the fantasy of control, yet there was no proof for (unlikely) idealism as a

consequence of his exploration. As per De Meza and Southey (1996), if confidence emerges from

the deception of control, it is far-fetched that priors will be legitimately fused.

As indicated by Manglik (2006), examination on behavioral predispositions, for example,

idealism, in money related choice making started to assemble energy in financial matters just in

the seventies. Researchers started to recognize an example of peculiarities in the monetary

markets, for example, size impact and energy impact. At first, behavioral finance hypothesis was

considered as deficient and 'no hypothesis', while balanced decision is considered normatively

unrivaled by customary financial experts (Manglik, 2006). Just as of late has money related

conduct and its effect on monetary hypothesis turn into an acknowledged truth, and different

measurements of behavioral hypothesis been investigated. Behavioral issues are demonstrated to

influence the money related business. For instance, Shefrin and Statman (1985) find that mental


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bookkeeping, misgiving, and discretion are the behavioral predispositions that motivate the

behavior to offer victors too soon and ride failures too long in budgetary markets. Hair stylist and

Odean (2001) find men bring down their profits more than ladies in light of the fact that they are

presumptuous and exchange too much.

In money related financial matters, idealistic people are characterized as the individuals who

tendency or overestimate the likelihood of good results and belittle the likelihood of contrary

results, hence motivateing more hazard taking conduct in monetary choice making (Kahneman

and Lovallo, 1993; Heaton, 2002).

One of the best reported of every mental blunder is the tendency to be over-hopeful. Exorbitant

hopefulness happens when individuals overestimate the return of ideal results and belittle the

recurrence of unfavorable results (Shefrin, 2007). Case in point, people underrate the possibility

of getting separated, being in a fender bender of anguish from a noteworthy disease, while they

hope to live more than others, overestimate their achievement in the work drive and trust that

their youngsters are particularly skilled (Sharot, 2011). Good faith is vital for budgetary

intermediation; it can influence corporate monetary and bookkeeping choices; it can swell

security costs in the vicinity of short-deal limitations; and it can motivate over-and under

response in stock returns. Puri and Robinson (2007) presume that more idealistic individuals

work harder, hope to resign later, put more in individual stocks, and spare all the more, on the

other hand, amazing self-assured people show budgetary propensities and conduct that are for the

most part not thought to be reasonable.

Hopeful predisposition in choice making is among the heartiest discoveries in exploration on


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social observations and comprehensions in the course of the most recent two decades

(Helweg-Larsen & Shepperd, 2001). Different information recommend that individuals have a

tendency to be unreasonably idealistic about the future (Weinstein, 1980). Studies concerning car

crashes (Robertson, 1977), wrongdoing (Weinstein, 1977), and ailment (Harris & Guten, 1979)

find that numerous individuals trust their danger is not as much as normal, yet a couple think

their danger is more prominent than normal. At the point when individuals are solicited to

anticipate the result from social and political occasions, their expectations have a tendency to

correspond with their tendency (McGuire, 1960). Notwithstanding for simply risk occasions, for

example, a supposition of heads or tails, individuals at times presentation idealistic

predispositions (Langer & Roth, 1975).

Idealism is key for survival, despite the fact that there are occurrences in which confidence

neglects to pass on favorable position and occasions in which even it may pass on an

inconvenience (Carver et al., 2010). The purposes behind the last case may be because of

incorrect self-assurance practices, in spite of self-hobby. The resultant impact is the worry in this

exploration, instead of the examination of the reasons.

A person who is hopefully one-sided judges his or her own particular danger as not exactly the

danger of others. Such blunders in judgment of anticipating that others should be casualties of

setback yet not themselves, and intuition themselves as insusceptible are marked as unreasonable

good faith by

Weinstein (1980) taking into account his studies. Weistein (1980) led two studies that examined

the tendency of individuals to be unreasonably idealistic about future life occasions.


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People who fill in as business experts or take part in the capital market reliably make wrong

evaluations of probabilities, and especially, people regularly overestimate the likelihood of good

results in budgetary choice making (Camerer & Lovallo, 1999; Rosen R. J., 2003; Lee, Shleifer,

& Thaler, 1991). Hackbarth (2007) found that idealistic administrators overestimate corporate

assets‟ development rate and think little of the assets‟ hazard. They lean toward value to

obligation to finance new undertakings. Most business people in the test directed by Camerer and

Lovallo (1999) think the aggregate benefit earned by all participants will be pessimistic, yet their

own particular benefit will be sure. At the point when social state of mind is high, there is higher

volume of union and acquisitions (Nofsinger & Kim, 2003). Lowry and Schwert (2002) find that

more firms open up to the world in the wake of watching high IPO returns for different firms.

Easterwood and Nutt (1999) find that budgetary investigators underreact to negative data,

however go overboard to positive data.

From over analysts' writing it can be gathered calm effortlessly that carelessness, dream of

control self-attribution and confidence drives speculators to overstate and overestimate their

insight and afterward they such choices that are problematic as well as motivates serious

expenses furthermore it demonstrates that how self-attribution gets to be main driver for

assumptions tendency, and arrogance gets to be fundamental reason for positive thinking along

these lines one predisposition motivating another tendency. The writing survey additionally

recognizes the exploration hole that the original reason is available among the predispositions

and this is the principle motivation behind the study.

In this paper, we characterize assumptions, figment of control self-attribution and idealism as the

overestimation of the positive result in a future occasion. In particular, in our study this is a


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behavioral predispositions Oechssler et al. (2009) found that CRT is connected with conjunction

paradox, conservatism, subjects' timing and danger tendency. Conjunction false notion or what is

currently known as "Linda issue" is the predisposition where the likelihood of the collaboration

of two or more occasions or their conjunction is thought to surpass the likelihood of the single

general occasion. Tversky and Kahn (1983) were the pioneers in building up a strategy for testing

such a predisposition. They found that 85% of the members fall into the conjunction deception.

So also Oechssler et al. (2009) discovered a noteworthy distinction between diverse intellectual

gatherings as far as conjunction deception. Then again conservatism alludes to truth that

individual have a tendency to think little of high probabilities and overestimate low ones

(Hilbert, 2012).

Nofsinger and Varma (2007) referred to proof that proposes a connection between intellectual

reflection and relative insusceptibility from behavioral tendency. They additionally did a review,

which observed that expert money related consultants (individual budgetary organizers) were

above normal as far as subjective reflection. Frederick had introduced confirmation that proposes

a connection between hyperbolic reducing (i.e. overemphasis on the present) and low intellectual

reflection. Nofsinger and Varma gave confirmation to bolster that perception. Individuals with

low intellectual reflection neglect to see the premium rate certain in a decision between two

distinct wholes of cash at diverse purposes of time (the present and a future date).

The balanced of this study is gotten from Albaity, Rahman and Islam (2014), Albaity and

Rahman (2012a) and Albaity and Rahman (2012b) who study a few behavioral characteristics of

the Malaysian public and the relationship in the middle of CRT and demographic variables. Their

discoveries express that distinctions existed in the middle of race and sexual orientations.


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Halpern et al. (2011) and Reily (2012) considered the sexual orientation contrast stereotyping and

found that the existed however was belittled.

Individual money related counsels ought to have the capacity to see the understood premium

rates keeping in mind the end goal to give a word of wisdom to their customers. All the more for

the most part, customers with low psychological reflection are more needing direction since their

capacity to comprehend options and to pick between them would have a tendency to be

moderately low.

CRT mirrors two sorts of subjective procedure over the span of choice making: one sort indicates

alert execution with minimal aware consultation, and the other one shows slower execution and

more intelligent (Frederick, 2005). We all can have these two sorts of procedure, while the point

to get right answers is whether we can overcome the rash mistaken answers. Tying down impact,

delegate tendency, accessibility predisposition, encircling impact, crowding impact and lament

and other mental tendency mulled over by behavioral account, every one of them show up amid

the procedure of guess choice making (Shefrin, 2000). In this way, utilize an intellectual capacity

test that attention on choice making to gauge predispositions throughout choice making would be

an ideal choice.

"Cognitive Reflection Test" (CRT) as a straightforward measure of one kind of subjective

capacity. I will demonstrate that CRT scores are prescient of the sorts of decisions that

component noticeably in tests of choice making guess, as expected utility hypothesis and

prospect hypothesis. Without a doubt, the connection is once in a while so solid that the tendency

themselves successfully work as articulations of intellectual capacity an exact certainty asking for


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a hypothetical clarification.


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Chapter 3

Theoretical Framework

Key Words:

OVC: Overconfidence

IOC: Illusion of Control

SAT: Self-Attribution

OPM: Optimism

INVD: Investor Investment Decision Making

CRT: Cognitive Reflection Test


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Developing Hypothesis:

Hp1: There is an impact of overconfidence on investor’s financial decision making.

Hp2: There is an influence of illusion of control on investor’s financial decision making.

Hp3: There is an effect of self-attribution bias on investment decision making.

Hp4: Optimism has effect on investor’s financial decision making.

Hp5: CRT effect the relationship of overconfidence and investor’s financial decision making.

Hp6 : CRT effect the relationship of illusion of control and investor’s financial decision making.

Hp7 : CRT effect the relationship of self-attribution and investor’s financial decision making.

Hp8: CRT effect the relationship of optimism and investor’s financial decision making.

Methodology:

The aim of the study is to identify the effect of behavioral biases (overconfidence bias, illusion of

control, self-attribution bias, and optimism bias) on investor’s decision making. In the study

primary data was used and collected through questionnaire from sample size of 120 respondents

including teachers and students of finance and psychology disciplines and business men. 120

questionnaires were distributed, out of which 107 were received back, the rest are uncollected.

SPSS software was used for analysis and 107 observation were analyzed.


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Questionnaire consists of two sections 1st for demographic variable and 2nd of question related

to behavioral factors. Questionnaire consists of 25 questions, 10 question for measuring of

investment decision and 4 question to measure overconfidence and 4 for optimism relatively.

Illusion of control and self-attribution are measured by 2, 2 questions relatively. CRT is

measured by using standard declared questions. Sample size in the study included 50 business

men, 32 employees, 14 students and remaining are related to other professions. From 107

respondents there are 68 male and 39 female, in which 88 respondents were married and 19 were

single. Out of 107 respondents, 15 belong to the age group below 28, the 40 respondents have

age group of 29-48 and remaining belongs to the age above 48. Educational level of 7

respondents is doctorate, 32 from Masters, 45 Bachelors while remaining has education level of

below graduation. Investment experience of 9 respondents is less than 1 year, 57 respondents

have 1-4 years’ experience and reaming have above 4 years. There are odfgdfgdfnly 27

respondents who invest by self in stocks remaining respondents invests through broker. Out of

107 respondents 41 trades in Karachi stock exchange, 58 in Lahore Exchange and remaining

trades in Islamabad stock exchange.

Descriptive Statistics

N Minimum Maximum Mean Std. Deviation

Investment Decision 107 1.90 4.30 3.4383 .41678

Overconfidence 107 1.75 5.00 3.7313 .57739

Illusion of control 107 1.50 5.00 3.5748 .79445

Self-attribution 107 1.00 5.00 3.7009 .83231

Optimism 107 2.00 4.25 3.3949 .47711

CRT 107 3.33 5.00 4.1558 .30135

Valid N (list wise) 107


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Table 2. Reliability Analysis

Sr. Variables No. of Items Cronbach’s Alpha

1 Investment Decision 9 .659

2 Overconfidence 2 .535

3 Illusion of control 2 .628

4 Self-attribution 2 .611

5 Optimism 3 .716

Cronbach alpha is used to measure the reliability and validity of data. The results of Table 2

showed that all variable Cronbach alpha was greater than 0.5. Overconfidence bias has 0.535,

illusion of control has 0.628, self-attribution has 0.611, optimism has 0.716 and Investment

Decision has 0.659.

Pearson Correlation

Table 3. CorrelationsINVD OVC IOC SAT OPM

INVD Pearson Correlation 1Sig. (2-tailed)

N 107

OVC Pearson Correlation .573** 1

Sig. (2-tailed) .000

N 107 107

IOC Pearson Correlation .360** .551** 1

Sig. (2-tailed) .000 .000

N 107 107 107

SAT Pearson Correlation .443** .504** .419** 1Sig. (2-tailed) .000 .000 .000

N 107 107 107 107

OPM Pearson Correlation .507** .459** .341** .484** 1

Sig. (2-tailed) .000 .000 .000 .000

N 107 107 107 107 107


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**. Correlation is significant at the 0.01 level (2-tailed).

The results of table 3 showed that overconfidence, illusion of control, self-attribution and

optimism have positive and significant relationship with investor decision making at (P < 0.01)

level with points (0.573**), (0.360**), (0.443**) and (0.507**) respectively. It’s mean that all

behavioral biases have positive and significant relationship with the investor’s decision making.

Liner Regression Model

Table 4. Model SummaryModel R R Square Adjusted R

Square

Std. Error of the

Estimate

1 .642a .413 .389 .32566

a. Predictors: (Constant), OPM, IOC, SAT, OVC

The results of Table 4 show that 64.2% change in the dependent variable is due to independent

variable. The variation in the investor’s decision making 64.2% is predicted due to behavioral

biases (Overconfidence, illusion of control, self-attribution and optimism). 35.8% change in the

dependent variable is due to other variables which are not included the study. It is close to 1 so

we can say that model is valid for prediction. The model is fit for the prediction of the investor’s

decision making.

Table 5. ANOVAb

Model Sum of

Squares

Df Mean Square F Sig.

1 Regression 7.596 4 1.899 17.905 .000a


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Residual 10.817 102 .106

Total 18.413 106

a. Predictors: (Constant), OPM, IOC, SAT, OVC

b. Dependent Variable: INVD

The 5th table of analysis of variance it shows that model is fit because the P-value is less than α

(P


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Interaction of Cognitive Reflection Test

Table 7. Model SummaryModel R R Square Adjusted R

Square

Std. Error of the

Estimate

1 .692a .479 .431 .31441

a. Predictors: (Constant), OPM_CRT_Interaction, OVC_centerd,

CRT_centerd, SAT_CRT_Interaction, OPM_centered, SAT_centered,

OVC_CRT_Interaction, IOC_centered, IOC_CRT_Interaction

The results of Table 7 show that 69.2% change in the dependent variable is due to interaction of

cognitive reflection test with independent variable. The variation in the investor’s decision

making 69.2% is predicted due to Moderator interaction with behavioral biases. 30.8% change in

the dependent variable is due to other variables which are not included the study. It is close to 1

so we can say that model is valid for prediction. The model shows that high CRT score effects

relationship biases and decision making. So model is fit for the prediction of the investor’s

decision making.

Table 8. ANOVAb

Model Sum of

Squares

df Mean Square F Sig.

1 Regression 8.824 9 .980 9.918 .000a

Residual 9.589 97 .099

Total 18.413 106

a. Predictors: (Constant), OPM_CRT_Interaction, OVC_centerd, CRT_centerd,SAT_CRT_Interaction, OPM_centered, SAT_centered, OVC_CRT_Interaction,

IOC_centered, IOC_CRT_Interaction

b. Dependent Variable: INVD


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The 8th table of analysis of variance it shows that model is fit because the P-value is less than α

(P


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Findings:

The result of the Pearson correlation showed that there is a positive and significant relationship

between behavioral biases and investor decision making. Overconfidence and optimism have

more affected the investor’s decision making as compared to the illusion of control and

self-attribution. The finding of this study showed that there is a significant relation and impact of

overconfidence and optimism on investor decision making and there is a significant relation of

illusion of control and self-attribution but having no impact on investor decision making

according to regression model. The finding of the study showed that hypothesis 1st and 4th are

accepted, overconfidence and optimism have impact on investor’s financial decision making. All

behavioral biases have significant relationship with investor’s financial decisions. The finding of

CRT shows that the effect of CRT with optimism is significant and having impact on relationship

of optimism and investor decision making. The impact of CRT on Illusion of control, over

confidence and self-attribution is insignificant so moderator has no influence in the relationship

with investor decision making. 8th hypothesis is accepted and 5th 6th and 7th are rejected.

Conclusion:

The study aimed to investigate the impact of behavioral biases on investor’s financial decision

making. The study concluded that overconfidence bias and optimism have impact on investor’s

financial decisions. And illusion of control and self-attribution have no effect on it according to

given data. The previous literature support the findings of the study like studies Park and Konana


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et.al (2007) and Kosnik (2007) investigated that overconfidence influenced investor’s decision

making and optimism also effect investor’s decisions examined by Seppala (2009), and Poluch

(2011).

It has been observed that Pakistani people mostly don’t give their own opinion; they neither

utilize the available resources nor the all information. The rigidity of believes found in Pakistan’s

people, they make their decisions following other’s views instead of their own. The results of

CRT shows that who scores high number are less effected by the behavioral biases. Most of the

people are unable to give the right answers of CRT. That might have due to giving the answers

unintentionally or by nor understanding the question clearly.


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Control Biases, Impact on Investor’s Decision Making: An Evidence from ISE. European

Journal of Business and Management , 6 (14), 38-44.

R. Subash, and Dr. K. Báťa, “Role of Behavioral Finance in Portfolio Investment Decisions:

Evidence from India” Faculty of Social Sciences Charles University Prague 2011/2012

Mooreland II, J. J. (2011). The Irrational Investor’s Risk Profile (Doctoral dissertation,

UNIVERSITY OF MINNESOTA).

Ajmal, S., Mufti, M., & Shah, Z. A. (2012). Impact of Illusion of Control on Perceived

Efficiency in Pakistani Financial Markets. Abasyn University Journal of Social

Sciences, 5(2).

Fellner, G. (2004). Illusion of control as a source of poor diversification: An experimental


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approach. Max Planck Inst. for Research into Economic Systems, Strategic Interaction

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the desirability bias. Journal of Behavioral Decision Making , 8(2), 109-125.

Frederick, S. (2005). Cognitive reflection and decision making. Journal of Economic

perspectives, 25-42.

Shi, X., & An, N. (2012). Cognitive Ability and Psychological Biases: Perspective from Chinese

stock individual investors.

Albaity, M., Rahman, M., & Isa, C. R. (2015). Individual differences in ethno-gender as a

function of cognitive style and behavioral biases. International Journal of Information

Processing & Management , 6 (2).

Orlov, A., & Roufagalas, J. (2012). Performance Determinants in Undergraduate Economics

Classes: The Effect of Cognitive Reflection. International Review of Economics

Education, 11(2), 28-45.

Redhead, K. (2011). A Behavioral View of How People Make Financial Decisions Economic,

finance and accounting, Applied Research Working Paper Series


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behavioral biases and investment decision making

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