Factors influencing Individual Investor behavior: A study on KSE

Dissertation (Written & Compiled by Sarah)

Executive Summary

Behavior of Individual Investor plays significant role in the process of decision making of private investor. Rather than taking prudent decision, which is expected by the individuals in the field of finance, it has been observed that the individual tends to focus their decisions on their behavior rather than being rational. For the purpose of this study, 100 participants from the population of Karachi has been randomly selected in order to investigate their behavior in decision making. The investors were provided with the closed ended questionnaire for taking the responses. It was observed that the behavioral factors do plays role in the individual decision making. It was further observed that not single behavior was found dominant and that participants provided mixed responses.

 

Table of Contents

Chapter One- Introduction. 4

1.1 Background. 4

1.2 Research Problem.. 4

1.3 Aim of the Study. 5

1.4 Objective of the Study. 5

1.5 Hypothesis. 5

1.5 Significance of Research. 6

1.6 Contribution of the Study. 7

Chapter Two- Literature Review.. 8

1.      Behavioral Finance. 8

1.1        Heuristic theory. 10

1.2        Prospect theory. 10

1.3        Market factors. 11

2.      Behavioral Biases. 12

2.1        Overconfidence Bias. 13

2.2        Herding Effect 13

2.3        Mental Accounting Bias. 15

2.4        Past Performance. 16

2.5        Market Information. 16

3.      Behavioral factors and its influences on the investment decisions of private investors. 17

4.      Conceptual Framework. 19

Chapter 3: Research Methodology. 21

3.1.       Research Philosophy. 21

3.2.1.       Positivism.. 21

3.2.       Research Approach. 21

3.3.       Research Design. 22

3.4.       Research Strategy. 23

3.4.1.       Survey. 23

3.5.       Sampling Strategy. 24

3.6.       Data Collection Method. 24

3.6.1.       Primary Data. 24

3.6.2.       Secondary Data. 25

3.7.       Data Analysis Method. 25

3.7.1.       Qualitative Analysis. 25

3.7.2.       Quantitative Analysis. 26

3.8.       Limitations to the Research Study. 27

3.9.       Ethical Consideration. 27

3.9.1.       Plagiarism.. 28

3.9.2.       Informed Consent 28

3.9.3.       Validity and Reliability. 29

Chapter Four Results and Analysis. 29

4.2 Analysis. 40

Chapter Five Conclusion and Recommendation. 41

5.1 Conclusion. 41

References. 44

Appendix. 46

 Chapter One- Introduction

1.1 Background

It has been observed that a number of the financial and economic theories presumes that while making the decision related to investment, the individuals tends to adopt rational behavior by considering all the information that is available to them. However, it has been observed that individuals depict repeated pattern of irrationality in the way they arrive at the decisions regarding the investment when they are faced with uncertain circumstances.  Consider the irrational behavior of the individuals while making investment decisions, behavioral finance, a study of market that is based on the psychology, provides the insight about the reason behind the buy and sell of stocks and reason behind the individual takes such decisions. Investment decision is the most challenging area that is faced by the investors.

It has been observed that when it comes to investment in Karachi Stock Exchange, the losses or profit is highly dependent upon the decision-making abilities of an individual.   In Karachi Stock Exchange, even the well-educated and professional investors get affected by the collapse of the speculative bubble. Considering the repeated and random decisions of the individuals, it was observed that from the traditional models of rational market behavior, something was significantly missing. 

1.2 Research Problem

It has been argued that investment decision in the current market requires a better understanding of the behavioral biases of individual investors. However, there are a number of economics experts who believes that, in the investment decision making, only the traditional theories have a role to play and hence do not give much importance to the irrational behaviors of the individual investors. Pakistani professional investors have also been unable to determine why the individual investors decid to invest in the stock market or why an individual is not interested at all to make investment in the stock portfolios. It therefore, makes it relevant to investigate whether the behavioral factors have influence on the decision-making process of the individual investors in Karachi stock exchange

1.3 Aim of the Study

This research study is aimed at establishing the importance of behavioral factors due to different psychological biases while making the investment decisions.  

1.4 Objective of the Study


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