Investment behavior of individual investor

E-mail corresponding author: [email protected]

UNDERSTANDING INVESTMENT BEHAVIOR OF INDIVIDUAL INVESTORS: HOW

THEY HANDLE INVESTMENT DECISIONS? DO THEY ACT RATIONALLY?

a Hayat, M. Awan

b Khuram Bukhari

c Bushra Ghufran

[email protected]

a, b,c Institute of Management Sciences

Bahauddin Zakariya University, Multan.

ABSTRACT

Efficient market hypothesis states that the recent stocks prices reflect all the available information, so the proponents of EMH

suggest a passive investment tactic of indexing that makes no attempt to beat the market. While there are investors who have

doubts about the existence of efficient markets and they believe that they can beat the market returns by adopting certain

strategies and tactics. This research examines the investment behavior of individual investors. We specifically look into the

determinants of investment behavior of individual investors and their relative importance in shaping overall investment behavior.

The impact of investment behavior on investment decisions is also studied. We collected data by obtaining direct responses from

246 individual investors having their brokerage accounts maintained with brokers listed with KSE. We also obtained responses

from 28 brokers listed with KSE. We developed two separate research instruments administered at individual investors and

brokers selected using random sampling technique from four cities: Lahore, Islamabad, Karachi and Multan. We categorized

individual investors on the basis of demographics, level of investment and investment objectives and conducted analysis of

variance among responses. Responses obtained from individual investors based on structured questionnaire were analyzed

quantitatively while responses of brokers based on open ended questions are analyzed qualitatively. Different statistical tools e.g.

AHP, ANOVA, Means, Cross tabulation, Frequencies and Regression are used to obtain the results of the study. The software

packages used are SPSS 17.0, and Spread sheet. When we fitted regression model to study the impact of investment behavior on

decision making process of individual investor we found a significant relationship between the two. Findings suggest that

behavioral dimensions of investor involvement and overconfidence are significantly related to market sentiments. Findings reveal

that the behavioral trait of involvement is most significantly related to technical analysis We also found that behavioral

dimensions of risk attitude and overconfidence are significantly associated with fundamental analysis.

Key Words: Behavioral Finance, Investor Behavior, Technical analysis, fundamental analysis, Market sentiments

INTRODUCTION

Market participants have for a long time relied on the notion of efficient markets and rational investor

behavior when making financial decisions. However, the idea of fully rational investors who always

maximize their utility and demonstrate perfect self-control is becoming inadequate. In an efficient market,

investors would be rational, unbiased and consistent. They would make investment decision without

emotion or passion. Their choices would be based on a single goal of maximizing their expected utility.

However decision makers do not act the way traditional economic models assume. Contemporary

researches reveal the aspect that the investment selection process is more human than analytical. Feeling

of loss, pride and regret often override rationality. Finance research has often ignored the individual

investor‟s decision making process while taking financial investment decisions current study attempts to

understand the issue in hand.

Behavioral finance is an emerging science, a relatively new and developing field of academic study that

exploits the irrational nature of investors. In contrast to market efficiency theory, that suggests that the

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security prices incorporate all available information about the company and economy, and prices can be

regarded as the best estimates of accurate investment value at all times in the market, the base of

behavioral finance is that humans often depart from rationality in a consistent manner. Most of our

investment decisions are influenced to some extent by our prejudices and perceptions that do not meet the

criteria of rationality.

Behavioral finance concentrates on irrational behavior that can affect investment decisions and market

prices. It attempts to better understand and explain how emotions and cognitive errors influence investors

and the decision-making process. Many researchers believe that the study of psychology and other social

sciences shed considerable light on the efficiency of financial markets as well as help explain stock

market volatility and other anomalies. In global financial markets the use of approaches based on perfect

predictions, completely flexible prices, and the complete knowledge of the all the decisions of all other

players in the market are increasingly unrealistic. The contribution of behavioral finance is not to

diminish the fundamental work that has been done by proponents of efficient market hypothesis. Rather,

it is to examine the importance of relaxing unrealistic behavioral assumptions and make it more realistic.

It does this by adding more individual aspects of the decision-making process in financial markets.

Without these contributions of behavioral finance, certain aspects of financial markets cannot be

understood. Despite the importance of individuals‟ investment decisions, however, we know little about

the factors that influence them. Finance research has often ignored the individual investor‟s decision

making process while taking financial investment decisions hence there is research gap in this area. There

is need to develop behavioral paradigm to probe into the determinants of investor behavior and their

impact on individual investor‟s financial decision making process. The current study addresses the issue.

In developing countries stock markets do offer the opportunity for substantial profits to financial investors

and that some of these are beginning to assume a major role in the flow of savings, however their

operation and the nature of their stock price behavior needs to be more fully understood. In our study out

of three Pakistani Stock Markets we have picked the Karachi Stock Market, because it is the oldest and

the most developed market among all three and moreover the KSE remains the main centre of activity and

focus of attention because 75 to 80 percent of current trading takes place here. There are different types of

investors; two major categories are individual and Institutional investors. This study is particularly

focused on the individual investor‟s of Karachi Stock market and later the impact of individual investor‟s

investment decisions is analyzed. Pakistani stock market is considered to be highly volatile as it is highly

sensitive and reactive to unanticipated shocks and news and it takes no time to impact the market

activities. However at the same time Pakistani stock market is resilient, and that recovers soon after

shocks. Psychology of local investors is also critical. As some say, it is 90 percent psychology and 10

percent fundamentals. That is the reason that served as basic motivation behind the present study.

The research problem in hand is that what are the determinants of investment behavior of individual

investors? What is their relative importance in shaping investment behavior of individual investor? What

are the decision making tools and techniques used by individual investor? What is the impact of

determinants of investment behavior on individual investor‟s decision making process? Answering to

these questions is where the role of behavioral finance comes in as the modern finance theory fail to

explain the phenomenon.

This research is an attempt to understand the investment behavior of individual investor by identifying the

determinants of investment behavior. It not only seeks to identify but also to define the relative

importance of determinants of behavior in shaping the investment behavior of individual investor. This

research also attempts to understand the investment decision making process of individual investors by

identifying different tools and techniques of investment decision. Research also seeks to define the

relative importance of determinants of investment decision in reaching an investment decision.


Furthermore present research identifies the impact of investment behavior of individual investor on

decision making process by validating the relationship between the two.

The prime objectives of the study are,

To identify the determinants of investment behavior and their relative importance in shaping the

behavior of individual investors

To study the impact of the determinants of investor behavior on investment decisions

In the light of these objectives our study tries to find answers to the following research questions,

What are the determinants of investment behavior of individual investor and their relative

importance in shaping investment behavior?

What is the impact of determinants of investment behavior of individual investor on investment

decisions?

In our study investor behavior is studied in terms of four broad behavioral dimensions of overconfidence,

investor involvement, optimism and risk attitude that are subdivided into different factors. We not only

identified the relative importance of each of the dimension in shaping the overall investment behavior but

also the relative importance of the sub-factors in shaping the dimension is also identified. We studied

three possible ways, of reaching an investment decision, opted by the investors that are: technical

analysis, fundamental analysis and market sentiments. We also identified the relative importance of each

decision making technique in reaching investment decisions. We also analyzed the variation among

responses of different groups of investors; differentiated on the basis of demographics, sociographics and

investment objectives.

This research helps identify the determinants of investment behavior of individual investor that affect the

financial decision making process of individual investor. The research helps better understand how

emotions and cognitive errors influence investors and the decision making process. The research also

helps explain that why investors make systematic errors in their investment decisions. If the investment

behavior and consistent human flaws can be predictable then it can be exploited for profit. Professional

investors if come to know about the behavioral traits, biases and errors of individual investors, they can

attempt to “get on the other side of the trade” and simply can earn profits at the cost losses of the

individual investors. Moreover such information can be useful for financial services firms in the process

of their product development and in defining their marketing strategies. This information can be very

helpful to regulators as well while formulating different policies and regulations they can apply such

knowledge to better educate the investors and to mitigate the biases to improve the welfare of individual

investors. Moreover the individual investors themselves can learn from their mistakes and behavioral

biases by identifying the cognitive biases and errors in financial decision making process individual and

can improve their investment behavior and can make optimal investment decisions. By understanding the

human behavior, attitude and psychological mechanisms involved in financial decision-making, standard

financial models may be modified to better explain the reality in today‟s developing markets.

THEORETICAL FRAMEWORK

Traditional Finance Paradigm

“Standard finance is the body of knowledge built on the pillars of the arbitrage principles of Miller and

Modigliani, the portfolio principles of Markowitz, the capital asset pricing theory of Sharpe, Lintner and

Black and the option-pricing theory of Black, Scholes, and Merton”, (Statman, 1999). These approaches

are extremely systematic and deem markets to be efficient. The traditional finance paradigm holds some


suppositions about the “individual behavior” that should be possessed by the economic agent (termed as

homo-economicus in modern finance literature) so that the financial markets can be modeled and studied.

First, the “homo-economicus” has unlimited cognitive and computational capabilities and is a super mind

who takes all likely choices and their consequences into consideration (Simon, 1955). Moreover “homo-

economicus” only values money or consumption to maximize self-interest and the value so assigned is

not prejudiced by factors as temper, familiarity with a particular state of affairs, unexpected increases in

fear or regret etc and rectifies his beliefs in the approved manner with the reception of new information.

Furthermore the „homo-economicus‟ is either risk neutral or has an aversion to risk.

Efficient Market Hypothesis: Building Block of Standard Finance

Paradigm of Standard Finance is based on the most prominent theory of efficient market hypothesis that

was initially proposed by Samuelson, (1965). Ritter (2003) put in plain words that, “EMH, the building

block of modern finance, is based on the assumption that investors compete for seeking abnormal

profits”. This rivalry between investors drives prices to their “correct” value. “Efficient market hypothesis

states that financial prices incorporate all available information and prices can be regarded as optimal

estimates of true investment value at all times. The efficient market hypothesis is based on the notion that

people behave rationally, maximize expected utility accurately and process all available information”,

(Shiller, 1998).

Emergence of New Paradigm

Conventional finance tries to explain financial decision by considering that markets and many of its

participants are rational. However, real people like you and me cannot act rationally all the time as they

are affected by their moods, emotions, beliefs that mislead them and moreover the capabilities also use to

be limited so they tend to be irrational at times if not most of the time. Kahneman and Tversky, (1974,

1979) pointed out that, “people fail to update beliefs correctly and have preferences that differ from

rational agents”. According to Simon (1957) people have limited capacity of processing information in

solving complex problems. Moreover, “people have limitations in their attention capabilities and they do

take into account social considerations (e.g. by deciding not to invest in tobacco companies)”,

(Kahneman, 1973). In addition, “rational traders are bounded in their possibilities such that markets will

not always correct „non-rational‟ behavior”, (Barberis and Thaler, 2003). Hence, traditional theories may

give an incomplete and deceptive description of financial behavior. Financial economics is, perhaps, the

least behavioral of the various sub disciplines of economics. The finance literature reveals little interest in

investor decision processes or in the quality of judgment. As a result, it is nearly devoid of 'people'. But

trend is changing, because of the presence of variations in financial markets that are unexplained by

modern finance theory; the advent of behavioral concerns in finance has become inevitable.

Thomas Kuhn‟s classic “The Structure of Scientific Revolutions”, (1970) describes the present state of

the modern finance as; “the old paradigm of an efficient market is crumbling. But the outlines of a new

paradigm, the Behavioral Finance, are visible in the resulting cloud of intellectual dust”. The first cracks

in the standard finance edifice were discovered through the application of sophisticated econometric

techniques by standard finance pioneers. As early as 1977, Roll illustrated that, “the foundation stone of

standard finance, the CAPM was almost certainly unverifiable”. In 1980s and 1990s a number of

anomalies came on the scene that the traditional finance failed to explain. That simply suggests that

traditional theory is incomplete if not faulty. Moreover in 1992, Eugene Fama, the key proponent of

CAPM, withdrew his support from the model. So we need not have waited decades for this insight as the

limitations of efficient market theory have ever been quite visible to those who wanted to look into it.

Now finance is witnessing important changes, according to some even a paradigmatic shift, from the

traditional, neo classical mathematical modeling approach based on a representative, fully rational agent

and perfectly efficient markets (Muth, 1961; Fama 1970) to a behavioral approach based on


computational models where markets are viewed as complex evolving systems with many interacting,

“boundedly rational” agents using simple “rules of thumb” trading strategies (e.g. Anderson et. al., 1988;

Brock, 1994; Arthur, 1995; Arthur et al., 1997; Tesfatsion and Judd, 2006).

Behavioral Finance

Approaches based on perfect predictions, completely flexible prices, and complete knowledge of

investment decisions of other players in the market, are increasingly unrealistic in today‟s global financial

markets. Behavioral Finance is a new paradigm of finance theory, which seeks to understand and predict

systematic financial market implications of psychological decision-making, (Olsen, 1998). The new

paradigm of behavioral finance seeks not to replace but to supplement the behaviorally incomplete theory

of finance now often referred to as standard or modern finance. Behavioral finance recognizes that the

existing paradigm can be true within specific boundaries. By understanding the human behavior and

psychological mechanisms involved in financial decision-making, standard finance models may be

improved to better reflect and explain the reality in today‟s evolving markets.

Behavioral finance introduces the behavioral aspects and focuses on the application of psychological and

economic principles for the improvement of individual financial decision-making process. Shefrin (2000)

wrote a book on behavioral finance and EMH titled "Beyond Greed and Fear". It basically provides a nice

introduction to behavioral finance. The key concept conveyed in it is that people are” imperfect

processors” of information and are usually biased, commit mistakes and have perceptual problems.

Currently, no unified theory of behavioral finance exists. Shefrin and Statman (1994) began work in this

direction, but so far, most emphasis in the literature has been on identifying behavioral decision-making

attributes that are likely to have systematic effects on financial market behavior. The paradigm of new

finance, “Behavioral finance” is no more into much controversy as it was before. Now theorists have

come to acknowledge the human behavior and its impact on the decision making process and derivation

of stock prices in the market. I believe there will be time when people will look back at the articles

published in the past 15 years and wonder what the fuss was about. I predict that in the not-too-distant

future, the term "behavioral finance" will be correctly viewed as a redundant phrase. What other kind of

finance is there? In their explanation, economists will surely include as much "behavior" into their models

as they observe in the real world, after all to do otherwise would be irrational.

Understanding Investment Behavior

Social psychology provides confirmation of a variety of societal effects that help better understand the

behavior of investors in context of equity markets. Individual investors appear to invest in a manner that

is inconsistent with the traditional paradigm. Specifically, they are underdiversified (Benartzi and Thaler

(2001)), loss averse (Odean (1998)), and overconfident (Odean (1999)). Barber and Odean (2000)

document that individuals trade too much and tend to hold on to loser stocks too long while selling

winners too early. Grinblatt and Keloharju (2001) find that traders are reluctant to realize losses, and often

trade for non-rational reasons, exhibited by reference price effects. There is even evidence that investor

moods, as influenced by cloud cover or number of hours of daylight, affect financial markets (see, for

instance, Hirshleifer and Shumway, 2003 and Kamstra, Kramer, and Levi, 2003). “People are limited in

their capacity for processing information, since they possess a limited working memory and limited

computational capabilities and are limited in their attention capacity and hence ability to perform multiple

tasks simultaneously”, (Kahneman, 1973). Miller, (1956) states, “we can process only seven (plus or

minus two) pieces or chunks of information at the same time”. Therefore, the cognitive load required for

complex decision problems often exceeds people‟s cognitive capabilities. To deal with such problems

people generally adopt simplifying rules-of-thumb, or heuristics, that may result in behavior that is not

fully rational (Simon, 1955, 1979, Newell and Simon, 1972, Tversky and Kahneman, 1974, Gabaix and


Laibson, 2000). Motivated in part by the above evidence, theories incorporating cognitive biases have

found a prominent niche in recent finance literature.

The proponents of the traditional paradigm are of the view that it is quite possible that few agents in the

economy can make less than optimal investment decisions however it does not affect the overall

efficiency of the market as long as marginal investors that is, “the investor, who is making the specific

investment decision at hand, is rational”, exist in the market. Milton Friedman, one of the greatest

economists of the time raised the point that these are the rational investors who set the asset prices in the

market. But his argument has been criticized as some fundamental problems have been found regarding it.

Critics are of the view that, even if the prices of different assets are set only by “rational investors”, still

studying the practices of individual investors is of main interest. Recent market trends imply increased

participation by individual investors in the investment process. As financial markets become more

„peopled‟, their behavior, actions, reactions and perceptions have a continuous impact on the stock prices

that cannot be explained by traditional models. The behavioral quirks observed in individual investors do

manifest themselves on a much larger scale in the overall stock market in the form of pricing anomalies

and unexplainable movements in stock prices. Not only markets do not behave neatly as dictated by the

traditional market theories, but also there is strong evidence in the field of psychology and financial

research that individual decision makers do not behave in accordance with the tenets of expected utility

while making decisions under uncertainty (Kahneman and Taversky, 1979 and Machina, 1982).

Most of the financial decisions are made under situations with high degree of uncertainty and complexity.

Often we have to choose between many alternatives, with many possible uncertain outcomes and

probabilities, while many other (previous) decisions situations need to be considered as well. In such

situations the „homo-economicus‟ acts if it performs comprehensive search of all relevant alternatives and

examines all possible consequences by linking the current decision with other decisions in order select

the best possible choice. However, psychological work suggests that people are not able to behave in such

a way in many situations. People are limited in their abilities and capabilities to solve especially complex

problems (Simon, 1955, 1957, 1959, 1979, Arthur, 1994, Miller, 1956, Kahneman, 1973 and Conlisk,

1996). To deal with such problems people generally adopt simplifying rules-of-thumb, or heuristics, that

may result in behavior that is not fully rational (Simon, 1955, 1979, Newell and Simon, 1972, Tversky

and Kahneman, 1974, Gabaix and Laibson, 2000).

Theoretical Evidence on Behavioral Biases

Apparently, many investors have the tendency to believe that he or she perceives better than others

(Shiller, 1998) and also that they think of themselves to be above average and this basically result in

overconfidence and an excessive trade activity that can affect the stock prices. An influential and worth

mentioning research on the trading behavior of the individual investors has been conducted by Barber and

Odean, who obtained the record of the trade activity of some 35,000 investors, who had managed their

accounts at a discount brokerage. The authors (Barber and Odean 1999, 2000; Odean 1999) argued that

investors were found to be involved in excessive trading because of their behavioral trait of

overconfidence and that ultimately resulted in diminished returns. Asch (1956) talks about the tendency

of people to conform to the judgment and behavior of others while making an investment decision. It as

conformity bias that result in herding behavior. This herding behavior has been proposed as the source of

endogenous fluctuations (bubbles and crashes) in financial markets”, (Topol, 1991). Interestingly it

suggests that such market fluctuations are irrespective of extraordinary news or other events related to the

market rather these are the societal communication that serves the purpose. Social interactions and

recommendations exert a strong influence on the trade behavior of the investors that ultimately can have

an impact on the stock market. Shiller (1990) has highlighted the significance of the role of conversation

in diffusion of admired ideas in context of financial markets. Shiller and Pound (1989) surveyed


individual investors and observed that most of the investors are attracted towards some particular stock as

a result of interpersonal communication. Oberlechner and Hocking (2004) examined the information

sources, news, and rumors in the foreign exchange market and derived an exciting result that the

information pace is rated high, on a scale of importance, as compared to trustworthiness of the source, and

the precision of information.

Another important phenomenon documented in psychology is the representative heuristic. Many studies,

for example, Tversky and Kahneman (1971, 1973), DeBondt and Thaler (1985), Lakonishok, Shleifer,

and Vishny (1994), Barberis, Shleifer, and Vishny (1998) explain that individuals expect that recent order

of generated data can by the representation of the key population parameters from which they have been

taken. Shefrin and Statman (1995) investigate the relationship between representativeness and variables

such as book to market equity, beta, and size, and find that investors rely on representative heuristics in

forming expectations because they tend to regard good stocks as the stocks of large companies. Shefrin

and Statman (1994) talks about the phenomena where investors give more weights to the recent

observations or simply believe that recent events are reversed in such a way that short run event be similar

to long term probabilities.

Shefrin and Statman (1985) put forward the theory of disposition effect that got immense acceptance.

They argued that investors have the tendency to sell their winner stock hurriedly while they keep on

holding loser stocks for long just to avoid the regret of committing mistake. Ferris et al. (1988) and Odean

(1996, 1998, 1999) also acknowledged the same phenomena using trade data. They explained that

investors usually evade selling loser stocks just to avoid pain of regret by not confirming the errors they

make also they rush to sell winner stocks so that they may avoid the regret if stock price falls later.

According to Bell (1982), studying regret is of interest to theorists only if decision-makers take steps to

evade regret. One tactic is to shift the responsibility for a decision onto others. People are found to have

fear of unknown. Huberman and DeMiguel (2006) argue that "familiarity breeds investment” and the

familiarity bias is more observed in terms of investing in domestic stocks. Empirical studies reveal that

individuals are found to have more distrustful expectations about foreign stocks as compared to local

stocks. “In international financial markets, investors tend to hold domestic assets instead of diversifying

across countries, a puzzle known as home bias”, (French and Poterba, 1991). Research also confirms that

firms have a propensity to float their stocks in countries where investors are more known with the listed

firms and closer culture match (e.g., religious and genetic similarities). Individuals usually favor those

investments that are familiar to them, and that have geographical and linguistic proximity (familiarity,

local, or home bias), (e.g., Coval and Moskowitz, 1999; Grinblatt and Keloharju, 2001; Huberman, 2001).

Barber and Odean (2000) studied the trade data from discount brokerage firm and found that average no.

of stocks hold by the investors at that brokerage firm was just 4.3 stocks per head that confirms the

phenomenon of under-diversification of portfolio. The phenomena of “mental accounting” (see Thaler,

1980, 1999 for a more extensive overview), also has an impact on the decision making process of the

investors. It explains that people tend to formulate and assimilate decisions in a narrow fashion instead of

taking into consideration a broader frame, (see also Tversky and Kahneman, 1981, and Kahneman and

Lovallo, 1993). “Mental accounting describes the tendency of people to place particular events into

different mental accounts based on superficial attributes”, (Shiller, 1998). The main thought behind

mental accounting is that decision-makers put different types of gambles into separate mental accounts by

ignoring the likely connection between the accounts and make use of simple “prospect theoretic decisions

rules” to each account separately. Such mental accounts are mostly isolated on the basis of content, but

they can be isolated with respect to time as well (Goldberg, von Nitsch, 2001). Kahneman, Knetsch and

Thaler (1990) conducted numerous experiments and confirmed the existence of behavioral bias of loss

aversion that affects investor behavior.


Kahneman and Tversky (2000) edit the book, “Choices, Values, and Frames”, that talked about the

phenomena of decision under uncertainty. They pointed out that investors behave like risk averse in

winning situation and the same investors become risk seeker in case of losing situation and commit

mistake in their financial decisions. Kahneman and Tversky (1991) state that people gamble over their

losses and have greater inclination to hold on losers hoping that losses will be recovered soon. DeBondt

and Richard Thaler (1985) published, “Does the stock market overreact?” and stated that, “people

systematically overreacting to unexpected and dramatic news events results in sizeable inefficiencies in

the stock market”. Tetlock (2007) studied the impact of media on “Stock Market” and came up with the

finding that some pessimistic issue highlighted in media result in a momentary negative impact on the

asset returns that are reversed later more over they also observed that during media pessimism the trade

volume also use to be abnormally high or low. Grinblatt and Keloharju (2000, 2001), observed that sell

trades of individual investors are responsive to high past returns more as compared to buy trades.

To recap, we have limited time and cannot optimally analyze all information required for fully rational

decisions. Unlike the “homo-economicus” we are often not able to solve complex problems and rely on

heuristics instead. Moreover, we use mental accounting practices, where we consider decision problems

separately instead of taking into account the possible links between them, bracket decisions narrowly,

evaluate decisions too repeatedly, and use different mental accounts for different decisions. In some

situations, these heuristics and practices result in optimal behavior, but in other situations they do not,

yielding consequential biases in financial markets and thus leading towards less then optimal investment

decisions.

METHODOLOGY

Out of three Pakistani Stock Markets we have picked the Karachi Stock Market, to study the investment

behavior of individual investors, because it is the oldest and the most developed market among all three

and moreover the KSE remains the main centre of activity and focus of attention because 75 to 80 percent

of current trading takes place here. The listed brokers of KSE have maintained their brokerage houses not

only in Karachi but also in other cities as well. After selecting the stock market for our study then in the

next step we divided brokerage houses affiliated with KSE into four major clusters on city basis, Karachi,

Lahore, Islamabad and Multan. Then we selected respondents randomly from each cluster on the basis of

convenience.

Unit of analysis:

i) Prime unit of analysis is Individual investor having an account maintained with the broker

listed with KSE

ii) Secondary unity of analysis are the brokers who are listed with KSE

In our research we use both quantitative as well as a qualitative method of analysis. In our study

quantitative method refers to the survey we implemented in the form of questionnaires, which are directed

at individual investor. We also opted for qualitative approach, in defining the determinants of investment

behavior and factors that may affect their financial decisions, by conducting face to face and telephonic

interviews with the brokers.

To test the above mentioned hypothesis descriptive information is collected, identifying the factors that

influence investors‟ financial decision making while taking an investment decision. Moreover stock

market outlook and their views about stock market volatility are also taken. Different statistical tools and

techniques e.g. AHP, ANOVA, Means, Cross tabulation, Frequencies and Regression Models are used to

obtain the results of the study. The software packages used are SPSS 17.0 and Spread sheet.


Data Collection

Data for our study is primarily collected through secondary researches, preliminary interviews with the

investors and brokers and a survey in form of two questionnaires one in the form of open ended questions

for in-depth interviews with the brokers and the other one in more structured form for investor survey. We

have obtained 246 complete survey responses from individual investors and 28 successful interviews with

the brokers in four major cities. The questionnaires were distributed among individual investors in four

cities; Karachi, Lahore, Islamabad and Multan. 500 surveys were distributed to individual investors

during the period of September 2010-November 2010. Some questionnaires were mailed to the

respondents via courier. An electronic version was also sent via e-mail. In few cases the survey was self

administered while in most of the cases we facilitated the respondents while getting response from them.

290 individual investors responded, for a response rate of 58 percent. However; several questionnaires

were incomplete as many questions had been left unanswered. It happened mostly in self-administered

surveys. We used 246 questionnaires for analysis purpose. The response rate obtained from brokers was

100 percent.

Preliminary In-Depth Interviews

The focus of these preliminary interviews was to identify a comprehensive set of factors that are likely to

influence investor sentiment and investment decisions. A group of 25 participants, 20 average individual

investors and 5 brokers in stock market, were interviewed on face-to-face basis. The format was mostly

open-ended, allowing the participants to free associate. A “funnel technique” was used to elicit

information and to generate a list of factors and anecdotal information that was used to develop a survey

that was tested on a large sample. These preliminary interviews and discussions were used to identify

recurring themes. Recurring themes were identified and were given distinct names. These preliminary

interviews with individual investors and brokers proved to be of great help for the development of the

research instruments, used in the study, related to individual investors and brokers.

Interviews with Brokers

A questionnaire was particularly designed to take responses from the brokers regarding investment

behavior and decision making style. The underlying objective was to probe into the characteristics and

behavioral aspects of the individual investors and that how they reach their investment decisions. The

survey gave insight about the irrational decision making process and different heuristics adopted by the

most of the individual investors. The survey was conducted also to get insight of brokers‟ view point

about the performance of the stock market and reasons of Pakistani stock market volatility. These

interviews are conducted with the help of questionnaire containing all open ended questions that were

developed as a result of the preliminary interviews with brokers and investors and also with the help of

existing research work done on the issue. About half of the interviews with brokers were completed

telephonically while in other cases brokers were sent questionnaires via courier and e mail that were well

responded.

Investor survey

Responses were taken from four cities: Islamabad, Lahore, Multan and Karachi. We used survey method

to collect primary data because it is their direct response that helps us develop an understanding of the

importance of each popular theme in overall decision making process, since no ideas and propositions are

put in the respondents‟ minds. Through the survey we strived to determine how well the practical

decision- making framework and behavior of investors in reality are consistent with the existing theories

of finance. Preliminary interviews and existing research studies helped identifying recurring themes and

factors influencing financial decision making process. These recurring themes are given distinct names


and analyzed with the help of survey instrument targeted at individual investors. The survey instrument

consisted of structured questions focusing on investor sentiment, market and individual stock features that

had been identified based on secondary research and in-depth interviews. Demographic, psychographic

and sociological factors were also taken into account. The survey instrument was based on closed-ended

questions. Respondents were given multiple choices to choose their response from. Some rating questions

were also part of the survey where respondents were asked to rate their response on a 7 point likert scale.

There were some situational questions in the survey as well where respondents were asked to choose

between different options based on different situations. Some questions were related to the factors that

play an important role in the stock selection process. Some questions were targeted to probe into the

personality traits of the investors.

DATA ANALYSIS

This section presents the detailed discussion and analysis of the questionnaires administered to brokers

and individual investors. The purpose of each question as well as the results obtained from individual

investors and brokers are described. It also includes statistical analyses of the questions. The data

collected to study investment behavior and decision making style of individual investor is analyzed using

software packages SPSS and Spread Sheet. We used AHP to find the relative importance of different

behavioral traits of the investors in contributing overall investment behavior. We applied AHP on

determinants of investment decision. Analytic Hierarchy Process (AHP) is one of Multi Criteria decision

making method that was originally developed by Prof. Thomas L. Saaty (***). In short, it is a method to

derive ratio scales from paired comparisons. We did AHP with Spread Sheet. To analyze and represent

responses of the investors we also made use of frequency tables that is basically a representation, either in

a graphical or tabular format, of observations within a given interval. We made use of cross tabulations to

check of the relationship between specific variables. We conducted regression analysis to determine the

nature of the relationship between two or more variables; it is concerned with the problem of describing

or estimating the value of the dependent variable on the basis of one or more independent variables.

DISCUSSION OF THE INTERVIEWS WITH BROKERS

In order to probe into the investment behavior of individual investor we conducted detailed interviews

with the brokers listed with KSE. The main thought behind it was to find out brokers‟ views about

investors‟ decision making style with its link to investment behavior. A separate questionnaire was

developed that was composed of open ended questions in order to probe into the minute details of the

whole phenomena. Here is the discussion of the responses of the brokers.

We asked brokers to discuss about individual investors that in their opinion how individual investors

make their investment decisions, do they go for „fundamental analysis‟, „technical analysis‟ or „market

sentiment‟ for selecting a stocks and that what is more important to them. We got mixed responses

regarding this question but we‟ll discuss what majority says. Majority of the investors stated that

investors do go for fundamental analysis, technical analysis and also follow market sentiments. They said

investors do not follow a single technique for making a stock selection rather their investment behavior is

influenced by all three techniques for reaching an investment decision but they also clearly stated that

some give more importance to fundamental analysis some give more importance to other methods of

reaching an investment decision according to their investment objectives and behavioral traits. Some

brokers stated that majority of investors follow market sentiments, even one broker said that roughly 60

percent of the investors follow sentiments and do not conduct fundamental analysis and technical

analysis. Some brokers stated that individual investors believe that market goes after news and there is no

use of fundamental analysis or technical analysis.


Few brokers stated that investors can be categorized into two main categories on the basis of their

investment horizons: short term investors and long term investors. They further stated that investors who

have short term investment horizons are more actively involved and they give more importance to

sentiments in terms of news and technical analysis in terms of looking into daily price fluctuations and

trade volume while those with long term investment horizons give more importance to fundamental

analysis while making an investment decision. They also stated that big investors with greater level of

investment give more value to fundamentals as compared to technicals and sentiments while making an

investment selection decision. They also stated that some unsophisticated investors with lack of education

usually go after market sentiments and ask for advice and recommendations from other investors and

brokers while those who are well educated do analyze company statements a little if not in detail. To

conclude we can say that investors do not follow fundamental analysis or any other method solely but

they follow all the three fundamental analysis, technical analysis and market sentiments for an investment

decision varying in degree of intensity of importance. The level of importance depends on their

investment horizon and objectives, their investment level and their level of sophistication in terms of

education. Brokers were asked about the sources of information of investors and that from where they get

ideas, tips and recommendations for investment. Responses to this question revealed that some investors

search for proper information from established sources e.g. Books of companies, Business Recorder,

Newspapers, CNN, BBC etc. Brokers stated that for ideas, tips and recommendations investor usually

contacts the brokers with whom he has opened his investment account and shares his views with them

before making an investment decision. They further stated that investors make discussions with other

investors and friends to get investment ideas and to seek for investment recommendations.

Brokers were also asked about the risk preferences of investors. Majority of the brokers were of the view

that investors are risk averse usually but as there are individual differences and few investors are risk

takers as well who make risky investments for enjoyment but majority has been found to have an aversion

to risk until and unless they are well compensated for bearing extra risk. They further explained that this

is the risk averse nature of investors due to which they make investments in less risky sectors and buy the

stocks of companies they are familiar with because they have the fear of unknown. This fear of

uncertainty leads them to make less risky investments.

Brokers also confirmed the existence of the tendency to have self-attribution for profits and blaming

others for less successful investment in investor behavior. They stated that there are very few investors

who consider themselves responsible for their less successful investments usually they are found claiming

that they have been given wrong recommendations, the market in general performed poorly, political

turbulences played their role or it was mere bad luck that make them face losses. They further stated that

in case if they make profits over their investments they take all the credit by themselves and consider that

the success is due to their own prudence and better decision making ability. They further stated that very

few investors give credit of successful investment to market conditions or better recommendations. To

conclude brokers‟ statements in one sentence we can state that investors have self attribution tendency in

case of profitable investments and others attribution in case of less successful investment.

During our preliminary interviews with brokers and investors we found investors claiming losses over

their investments. We asked brokers about the reasons of less successful investments by individual

investors. Majority of the investors attributed it to greed and fear factor that leads investors make

irrational decisions and ultimate result is losses. Brokers also revealed that inexperienced and less

sophisticated investors tend to follow market sentiments more than others and make investment decisions

by looking into the behavior of other market participants without properly evaluating all the possible

investment opportunities and make less than optimal investment decision. Moreover brokers clearly stated

that investors sell and buy stocks being emotional and thus make losses.

INVESTOR SURVEY


Responses were taken from four cities: Islamabad, Lahore, Multan and Karachi. 25.2% of the total

responses were obtained from Islamabad and 27.2% each from Lahore and Multan and rest of the

responses (20.3%) were taken from Karachi.

Investor Profile

Following is the background description of the individual investors, Table: 1

Gender

Male 97.2%

Female 2.8%

Age

<30 20.7%

30-50 55.3%

>50 24.0%

Marital Status

Single 27.5%

Married 62.5%

Divorced 7.0%

Widowed 3.0%

Education

Primary-Middle 5.3%

Matriculation-Intermediate 23.2%

Bachelor-Master 71.5%

Occupation

Salaried Individual 46.3%

Self Employed 36.2%

Retired 14.2%

Student 1.6%

Un-employed 1.6%

Income

<5 63.4%

5-10 22.0%

10-30 11.8%

>30 2.3%

Investment Experience

<10 63.4%

10-20 32.9%

>20 3.7%

No. of Accounts

1 59.9%

2 20.9%


3 16.2%

4 3.0%

Investment Age

<20 2.3%

20-30 60.6%

30-40 14.6%

41-50 7.6%

50+ 14.9%

Determinants of Investment Behavior of individual Investor

The in-depth interviews and secondary research identified 4 multi-items broad dimensions of investor

behavior that could have an impact on their investment decisions. These 4 dimensions of investment

behavior are; Overconfidence, Investor Optimism, Investor Involvement and Risk Preferences, that are

further divided into different factors and respondents were asked to rate each factor. On the basis of the

overall responses of the investors and the ratings that they assign to the factors of the each dimension

“Analytical Hierarchical Process” (AHP) determined the relative weights for each dimension of the

investment behavior and priorities them in terms of their level of contribution in the formation of behavior

of the investor. AHP determined that overconfidence carries more than 50% weight, so it is the most

prominent behavioral dimension that has greater impact in the formation of overall behavior of the

investor while other three dimensions have relatively similar weights between 10 to 20 percent.

Investment

Behavior

Overconfidence

50.42%

Risk Attitude

17.80%

Optimism

13.96%

Involvement

17.84%

Market Knowledge

17.48%

Stock Picking

21.96%

Self-Control

28.15%

Specific Skills

32.41%

Price Increase

Expectation 22.20%

Keep Invested

47.06%

Index Recovery

13.19%

Increased Inve-

stment 17.55%

Enjoyment from

Risky Trade 8.49%

Risk Taking

23.81%

Stable Returns

28.80%

Familiarity Bias

38.89%

Quick Money

79.61%

Trade Activity

20.39%


Figure1: Graphical Presentation of the AHP results of Q no. 18

First section of question no. 18 probes into the behavioral dimension of overconfidence. This dimension

is divided into four main factors. These four factors are measured with the help of four separate

statements. Again with the help of analytical hierarchical process we determined the relative weieghts of

each factor of the dimension of overconfidence. In the overall dimension of overconfidence the most

prominent factor is the confidence on specific skills that result in successful investment, as greater

weights (approx 32%) are assigned to this factor, while on second rank there comes factor of self-control

with approximate weights of 28%. On third rank is the stock picking ability with weights of 21.95% while

on fourth rank there comes the factor of confidence on market knowledge with weights 17.48%. Second

section is about investor optimism that is measured in terms of investor‟s outlook of the stock market.

The analytical hierarchical process determined that investors‟ determination to stay invested in the stock

market is the most important behavioral factor that shows their optimism about stock market. So

according to AHP this factor is assigned first rank with weights of 47.06%, while on second rank there

comes investors‟ expectations about an increase in the stock prices with weights of 20.20%. Investors are

not found to be much interested in increasing their investments and not much hopeful about the recovery

of the index if there comes a down fall. So these two factors are not much contributing towards the

formation of optimistic behavior of the investor rather these two factors depict investors to be little

pessimistic about the market so these factors (increasing investment and index recovery) are given third

and fourth rank with 17.54% and 13.20% respectively. In the third section of we studied the dimension of

involvement. To measure the overall level of involvement of investor in trading in stock we picked two

factors, level of trade activity and inclination towards making quick money. On the basis of the responses

of the investors AHP determined that the attitude of making quick money has the highest weights

approximately 80% while trade activity is at second rank with weights of 20% approx.

Fourth section measures the fourth dimension of the investor behavior that is risk preferences/attitude. We

measured this dimension using different factors whose relative weights are determined using AHP. We

found that investors have greater fear of un-known and uncertainty and to avoid it they make investments

in the stocks of the companies they are familiar with. The factor of familiarity bias gets the highest rank

among all four factors with weights of 38% approx. The analytical hierarchical process assigns second

rank to the tendency of investing in stocks with stable returns with weights of about 28%. These two

factors basically reveal the tendency of risk aversion of the investor. While the other two factors that are

assigned with third (risk taking) and fourth (enjoying risky trade) measures the risk loving attitude of the

investors. The low weights of these factors basically tells us that investors are not risk loving rather the

tendency of risk aversion is higher among the investors as compared to risk loving attitude. If we look at

the risk preferences as a whole, these four factors and their relative weights tell us that investors are risk

averse not risk seeking or risk indifferent.


We also calculated the Global Weighted Indices of the determinants of investor behavior. Results are

summarized below,

Figure 2: GWI of Behavioral Dimensions

In Q no. 18 investors were asked to rate different statements, regarding investment behavior, on

1(Strongly disagree) to 7(Strongly agree) point likert scale. Results are summarized here,

Table 2: Frequency Results for Behavioral Dimensions Behavioral Dimensions Statements 1 2 3 4 5 6 7 Total Frequency

Overconfidence 18A1 1.6 1.2 3.3 17.9 19.9 27.2 28.9 100%

18A2 2.0 2.0 0.8 7.7 11.8 25.6 50.0 100%

18A3 1.6 3.7 5.7 9.3 21.5 19.1 39.0 100%

18A4 6.1 5.3 11.8 17.9 17.1 17.9 24.0 100%

Optimism 18B1 1.2 2.8 6.5 8.5 19.5 19.9 41.5 100%

18B2 26.4 9.3 9.3 12.2 16.3 11.8 14.6 100%

0.5042

0.163371026

0.141875811

0.110661184

0.088120845

0.1784

0.14201856

0.036363852

0.178

0.069223845

0.051261062

0.042388171

0.01511982

0.1396

0.065697285

0.030989385

0.024492525

0.018416628

Overconfidence

Specific Skills

Sel-Control

Stock Picking

Market Knowledge

Involvement

Quick Money

Trade Activity

Risk Attutude

Familiarity Bias

Stable Returns

Risk Taking

Enjoyment from Risky Trade

Optimism

Stay Invested

Price Increase Expectation

Increased Investment

Index Recovery

GWI of the Investment Behavior Dimensions


18B3 26.4 9.3 9.3 12.2 16.3 11.8 14.6 100%

18B4 25.6 17.5 11.4 28.5 6.9 5.7 4.5 100%

Involvement 18C1 3.7 2.8 7.3 12.2 17.9 16.3 39.8 100%

18C2 2.0 2.0 11.4 13.8 19.1 23.6 28.0 100%

Risk Preferences/Attitude 18D1 53.3 15.0 8.9 6.5 7.3 6.1 2.8 100%

18D2 1.6 4.9 6.1 15.0 16.7 26.8 28.9 100%

18D3 9.3 18.7 10.6 11.0 29.3 15.0 6.1 100%

18D4 9.8 14.2 19.1 4.9 4.9 21.5 26.6 100%

Respondents were asked to rate four factors, described in statements from 18A1 to 18A4, on a 1(Strongly

disagree) to 7(Strongly agree) point scale. If the investors give high ratings to these statements it means

they have high level of overconfidence that can impact their investment behavior. In first statement about

the confidence of investor in having better stock picking ability than others, 28.9% (highest frequency) of

the investors showed strong agreement with the statement by giving a rating of 7 while just 1.6% of the

investors strongly disagreed with the statement. Majority of the investors (76%) agreed about their better

ability of making stock selection better than others by giving ratings of 5 or more. In 18A2 investors were

asked about how much they are agreed that they control their investment decisions and are fully

responsible for them, 50% of investors gave the highest rating of 7 while just 2% gave the lowest rating

of 1. Majority (87.4%) of the investors gave rating of 5 or above. In 18A3 39% (highest frequency) of the

respondents gave a rating of 7 and showed that they are strongly agreed with the statement that their past

investment successes were, above all, due to their specific skills. Just 1.6% (lowest frequency) of the

respondents showed that they strongly disagree with the statement and gave a rating of 1. 20.3% of

respondents gave it a rating of 4 or less while 79.7% of investors showed they agree with the statement

and gave a rating of 5 or above.

Respondents were also asked that how much they agree with the statement that they have complete

knowledge of the stock market. 24% (highest frequency) of the investors showed that they are strongly

agreed and gave a rating of 7 while just 6.1% of the investors gave a rating of 1 thus showing they are

strongly disagreed. 41.1% of the respondents gave a rating of 4 or less while 58.9% of the respondents

gave it a rating of 5 or above thus by agreeing with the statement. The frequency results of these four

statements tell us that investors have high level of overconfidence as there is greater level of confidence

on their stock picking abilities (18A1), high level of self control (18A2), greater level of self-attribution of

successes (18A3) and greater confidence of having market knowledge (18A4) as majority of investors

gave rating of 5 or above in case of each statement.

Optimism of investors is measured with the help of four statements from B1 to B4. First statement asks

investors that do they think they will stay invested in the stock market. In response to this statement

41.5%, the highest frequency in this case, of the investors were strongly agreed that they will stay

invested in the stock market while just 1.2% of the investors strongly disagreed and gave the lowest

possible rating of 1. However majority of the investors, 80.9%, gave rate of 5 or above. In statement 18B2

investors were asked about the likelihood of increasing investment in next 12 months. 26.4% of the

investors strongly disagreed depicting that they do not have any plan to increase their investments in stock

in next 12 months. However 14.6% investors strongly agreed with the statement. We observed that

majority (57.2%) of the investors gave rating of 4 or less. When asked whether they agreed that stock


prices would rise for the next 12 months, 26.4% of the investors gave the lowest possible rating of 1 and

showed their strong disagreement with the statement while 14.6% of the investors were strongly agreed

with the statement. But on the whole more than 50% of the investors gave rating of 4 or less. Investors

were also asked about their opinion about a decrease in index and that do they think it will recover in few

days. 25.6% of the investors strongly disagreed with the statement and gave it a rating of 1 while 4.5% of

the investors gave it a rating of 7 and showed that they are strongly agreed. 83% of the respondents gave a

rating of 4 or less while 17% of the respondents gave a rating of 5 or more. If we analyze the whole

behavior and responses to these statements we can conclude that majority of investors do not believe that

stock prices will increase in next 12 months, also they do not think that if index has decreased in last 3

years it will be recovered soon so they do not want to increase their investments in stock in next 12

months rather they just want to keep their existing investments in stocks. So investors are not much

optimistic about the market rather they are seemed to be pessimistic. One possible reason can be the

dismal market conditions at the time the responses were taken.

Third section of Q no. 18 is composed of two statements. In the first statement investors were asked that

how much they are agreed with the statement that they are actively involved in trade activity. In response

to this statement 39.8% of the investors gave the highest rating of 7 while just 3.7% strongly disagreed

with the statement however majority agrees with the statement. In the second statement investors were

asked that do they agree with the statement that they make investment for making money quickly. 28% of

the investors strongly agreed with the statement that they make investment for making more money

quickly while just 2% of the investors strongly disagreed. 70.7% of the investors agree with the statement

and gave rating of 5 or more. By analyzing frequencies of responses we can conclude that most of the

investors are actively involved in trade activity because they want to make quick money and want to get

rich quickly.

In last section of Q no. 18, four statements from 18D1 to 18D4 were formulated to measure the risk

preferences of the investors. In first statement investors were asked that do they make risky investments

for enjoyment, in response to this statement 53.3% of the investors strongly disagreed with the statement

and gave lowest rating of 1 while just 2.8% of the investors gave a rating of 7. However 83.7% of the

investors gave rating of 4 or less. This shows majority disagrees with the statement that their motivation

behind trading in stocks is not enjoyment. This finding is also consistent with the previous finding that

investors trade for getting rich quickly not for fun. In response to the statement 18 D2, 28.9% of the

investors were strongly agreed with the statement that they prefer investing in companies they are familiar

with while just 1.6% showed strong disagreement. 72.4% of the investors gave rates of 5 ore above

showing that majority has the tendency to investing in familiar companies only. In response to statement

18D3, 9.3% of the respondents strongly disagreed with the statement while 6.1% of the investors strongly

agreed that they are risk takers. 29.3% (highest frequency) of the investors gave rating of 5, thus by

agreeing that they are risk takers. On the whole 50.4% of investors gave rating of 5 or above while 49.6%

of investors gave rating of 4 or less. 25.6% of investors gave the highest ratings and showed strong

agreement with the statement that they prefer investing in companies with stable returns even if lower

while just 9.8% of the investors gave the lowest rating of 1 and showed that they are strongly disagreed

with the statement. 52% of the investors gave ratings of 5 or above. If we analyzes the results of these

four statements collectively we can conclude that majority of investors are risk averse who do not prefer

making riskier investments. Rather they prefer investing in familiar companies that give stable returns

even if lower.

We also obtained ANOVA results to check the responses of investors from different age groups,

occupation groups, education level, income level, investment experience, investment level and age of

investment etc. The significant differences about the dimension of overconfidence among these groups

are mentioned here. When we analyzed the responses of each age group about each statement from 18A1


to 18A4 then we observed significant differences in their responses to the statements 18A1 and 18A4. We

found that investors from age group 50+ gave higher rating to the statement 18A1 as compared to the

other two age groups (<30 and 30-50 with p values 0.020 and 0.022 respectively). It simply depicts that

investors (50+) have greater level of confidence in their stock picking ability as compared to other two

age groups (<30 and 30-50). No significant differences among responses of the other age groups

regarding this statement came into notice. In case of statement 18A4 (p values .005 and .002

respectively), investors with ages 30-50 and 50+ gave higher rating, showing their opinion about having

complete knowledge of stock market as compared to investors with ages <30. We can state that investors

with ages 50 or above are having higher level of overconfidence as compared to the other two age groups

while in other two age groups (<30 and 30-50 with p values .013 and .029 respectively) no significant

differences regarding the dimension of overconfidence came into observation. We also probed into the

responses of investors from different occupation categories and found that salaried individuals have

greater tendency of believing that their past successes are because of their own specific skills as compared

to self-employed and retired individuals (p values .020 and .033 respectively).

We also analyzed the responses of investors, regarding overconfidence and found that investors with

income 10 to 30 lac gave higher rating, as compared to other investors with incomes <5 and 5 to 10 lac, to

statement 18A1( p values 0.06 and 0.048 respectively) and 18A3 (p values 0.021 and 0.038 respectively),

depicting that they have higher level of confidence on better stock pick ability and specific skills. The

mean differences clearly depicts that investors with incomes 10 to 30 have higher level of overconfidence

as compared to those with income <5 lac and 5 to 10 lac (p values 0.001 and 0.025

respectively).Responses to the statements 18A2 (p value 0.038) and 18A4 (p value 0.036) revealed that

investors with income 10 to 30 lac have higher level of self-control and also they are more confident

about having complete knowledge of the market as compared to investors with income <5 lac.

We also found significant differences in responses of the investors with different level of experience of

investing in stocks. The mean differences, at statistically significant levels, suggest that investors with

investment experience of 10 to 20 years and more than 20 years are more overconfident as compared to

the investors with investment experience of less than 10 years (p values 0.001 and 0.016 respectively).

Responses of statements 18A1 and 18A4 clearly reveal the behavioral aspect of investors with experience

of more than 20 years as compared to investors with experience of less than 10 years have higher level of

confidence on stock picking ability (p value 0.016) and on having complete market knowledge (p value

0.000). Though investors are not much optimistic but among all three age groups investors with ages

more than 50 are more optimistic as compared to the other two age groups <30 and 30-50 (p values 0.001

and 0.028 respectively). In response to the statement about keeping investment in stocks, investors with

ages 50+ and 30-50 gave relatively higher rating as compared to investors with ages >30. Findings also

suggest that investors with ages 50+ plan to increase investments in stocks in next 12 months and also

they believe that if index has decreased it would be recovered soon, as compared to investors with ages.

When we analyzed investors from different income groups we found that investors with income >30 lac

believe index will be recovered in few days by giving higher rating to statement 18B4 as compared to

investors with income 5 to 10 lac and 10 to 30 lac (at the statistical significance level of .045 and .006

respectively). Also investors with income >30 lac plan to increase their investment in next 12 months, as

they gave higher rating to statement 18B2 as compared to investors with income <5lac and 5 to 10 lac

(significance levels .032 and .027 respectively). However no significant differences among investors with

>30 and 10-30 lac, about increasing investment in next 12 months came into notice. When we analyzed

the responses of investors with different occupations then interestingly retired individuals are found to be

more optimistic than self-employed individuals and salaried individuals (p values 0.002 and 0.003

respectively). Findings revealed that retired individuals strongly endorsed that they will stay invested in

stocks as compared to self-employed and salaried individuals. This is also because retired individuals are


not much involved in short term profit seeking investment objectives. They mostly invest for long term or

for dividend purposes. Retired individuals plan to increase their investments in the stocks as compared to

students. This finding is also consistent with the previous finding that investors with ages 50+ are more

optimistic as compared to those with ages <30 years.

We also studied the responses of investors with different level of experience of investing in stocks and

observed that investors with investment experience of 10 to 20 years are relatively more optimistic as

compared to those with <10 years (p value 0.000), and they plan to keep the existing investment and also

plan to increase their investments in stocks in next 12 months because they believe that prices of stocks

are likely to increase in next 12 months. Again this finding is consistent with the previous finding that

investors with ages 50+ are more optimistic. We also studied the responses of investors from different age

groups, income levels, education levels, experience levels and occupation groups etc. Significant

differences are discussed here. We found no significant differences among investors at different level of

education regarding their opinion about level of involvement except that investors with Matriculation-

Intermediate and Bachelor-Master level of education gave higher rating to the statement 18C2 as

compared to the investors from education group of Primary-Middle (p values .030 and .044 respectively).

When we analyzed the level of involvement of investors from different occupation categories we found

significant difference (with p value .004) among salaried individuals and self-employed individuals.

Salaried individuals gave higher rating to the statement 18C2 than self-employed individuals, that simply

depicts that. No significant differences among the opinion of investors having different level of

experience of investing in stocks except that investors with 10 to 20 years of experience of investing in

stocks greatly endorsed that they are more actively involved in trade activity as compared to those with

investment experience of <10 years (p value .023)

When we analyzed the risk preferences of investors from different age groups we found that investors

with ages 50+ are more risk averse as compared to investors with ages <30 and 30-50 (p values 0.000 and

0.008 respectively). Findings also suggest that investors with ages 50+ have relatively higher preference

for investing in familiar companies that offer stable returns. We also analyzed the risk preferences of

investors at different levels of education and found statistically significant differences among the opinion

of investors belonging to Group 1 (Primary-Middle) and other two Groups (Matriculation-Intermediate

and Bachelor-Masters). Investors from Group one gave higher rating to the statement 18D 3 as compared

to other two groups (p values .046 and .012 respectively). However no further significant differences

came into notice. We also evaluated the responses of investors with different level of experience of

investing in stocks and found that investors with investment experience of 10 to 20 or >20 years are more

risk averse and have higher preference for stable returns as compared to those with <10 years (p values

0.031 and 0.010 respectively). Interestingly this finding is also consistent with the previous finding that

investors with ages 30-50 and 50+ are more risk averse and have higher preference for stable returns as

compared to investors with ages <30 years.

We also analyzed the risk preferences of investors from different occupation categories for some

occupation categories we found statistically significant differences of opinion about risk. There is

difference of opinion about statement 18D1 between salaried individuals and self-employed. Finding

suggest that salaried individuals tend to be more risk aversive than that of self employed individuals (p

value 0.007). In response to statement 18D4, retired individuals gave significantly different responses as

compared to self-employed, un-employed, salaried-individual and students (p values .001, .031, .008 and

.059 respectively). Mean differences revealed the aspect that retired people gave higher rating to the

statement that showed they are prefer stable returns even if lower and thus are more risk aversive in their

response about this statement as compared to all other occupation groups.

Investment Objectives


We inquired investors about their investment objectives. As it is quite likely that a single investor can

have more than one investment objectives so we asked investors to reveal the relative proportion of their

investments in case they have more than one investment objectives. By analyzing the obtained responses

we found that 40.24% of the investors have totally short term profit seeking investment objectives to take

benefit from the daily price fluctuations, 2.33% of the investors make 100% of their investment to earn

steady income in the form of dividends, 10.98% of the investors make 100% of their investment for long

term profit objectives by investing in growth stocks, while rest of the investors have more than one

investment objectives, different combinations of short term profit seeking objectives, long term objectives

and investment for steady income but in these mixed combinations the proportion of investment for short

term profit seeking is much higher as compared to other investment objectives. It simply reveals that

investors have disposition of making investment for short term profit seeking and more people have the

mentality of getting rich quickly instead of waiting for long time period by investing in growth stocks.

We got an interesting finding by probing into the investment objectives of investors from different age

groups. We found that investors from different age groups have got significant differences in their

preferences for investment objectives. One-way Anova results revealed that the investors from age groups

of <30 and 30-50 have significant differences (with statistical significances of 0.037 and 0.023

respectively) , from investors belonging to age group of 50+ in terms of their opinion about investments

for dividend purposes. By looking into mean differences we came to know that the group of investors

with ages more than 50 years are more inclined towards making investment for generating steady stream

of income in the form of dividends as compared to investors who belong to age groups of <30 and 30 to

50 years while no significant differences among age groups of <30 and 30-50 regarding investing for

dividends are found.

Furthermore analysis of variances revealed that investors having different occupation categories have

significant differences among their preferences for investment objectives. When we compare retired

individuals with salaried individuals we got an interesting finding that both have significantly different

opinion about making investment for dividends. By analyzing mean differences we came to know that

retired individuals are more inclined towards investing for dividends as compared to salaried individuals.

By comparing investment preferences of salaried individuals with self-employed individuals we found

that both have significant differences about short term profit seeking objective and long term investments

(at the significance level of 0.001 and 0.012 respectively). We found that salaried individuals are more

inclined towards making investments for short term profit seeking as compared to self-employed

individuals. While self-employed individuals have greater preference for long term investments as

compared to salaried individuals.

When we compared investment objectives of students with that of self-employed individuals we found

that students have greater tendency towards investing for short term profit seeking than that of self-

employed individuals though the difference was not highly significant. No significant differences

regarding investment objectives were found among other groups. Investors with different education level

are also found to have significant differences among their preferences regarding investment objectives.

When we compared group 1 (investors with education Primary-Middle) with Group 2 and 3(investors

with education level of Matriculation-Intermediate and Bachelor-Masters) we found that Group 1 has

greater preference for making investments for dividend purposes as compared to other two groups, while

other two groups are more inclined towards making investments for short term profit seeking. This

finding makes a link to the previous findings that suggest that investors with education level of Primary-

Middle and having ages 50+ and self-employed individuals are more likely to make investments for

dividend purposes. We further probe and analyzed that whether type of education (Business related or

Non-Business education) got has an impact on investment objectives or not but we got no significant


differences. We also analyzed whether investment experience (in years), marital status, no. of children,

level of income and investment level has an impact on their investment objectives and found no

significant of differences.

We also investigated the impact of investor behavior on investment objectives and got interesting

findings. We conducted regression analysis to find the nature of relationship of dimensions of investment

behavior (Involvement, Risk attitude, Overconfidence and Optimism) with investment objectives.

Dimensions of investment behavior are taken as predictor variables while investment objectives are taken

as dependent variables. We analyzed each investment objective individually and significant results are

summarized in the table below,

Table 3: Regression Analysis of Investment Behavior and Investment Objectives

Dependent Variable Predictor Variable Beta t value p value Short term profit seeking Involvement .499 4.170 .000

Short term profit seeking Overconfidence -2.58 -3.991 .000

Investing for Dividends Involvement -.494 -3.629 .001

Long Term Investments Involvement -.336 -3.870 .000

Significant at 5% level.

The statistical findings and level of significance suggest that among all four investment behavior

dimension of investor involvement and overconfidence have highly significant relation with short term

profit seeking. The beta values suggest the direction of the relationship. Negative beta for overconfidence

shows that as investors‟ level of overconfidence increases their propensity to make investment for short

term profit seeking decreases. Negative betas for dimension of involvement reveals a negative

relationship between level of involvement and making investment for long term or for dividend purposes.

But level of involvement is found to have positive relationship with short term profit seeking that shows

that more involved investors prefer short term profit making objectives.

Monitoring Behavior

When we probed into the monitoring behavior of investors, we found that 84.6% of the investors daily

monitor their investments in stocks it is also because majority look for short term profits from favorable

price moves. In order to capture benefits from favorable stock price moves they need to monitor more

frequently this finding is also consistent with the finding in our previous discussion on investment

objectives revealed that majority of investors invest for short term profit seeking. 4.7% of the investors

monitor their investment weekly, 5.6% of the investors monitor monthly, 1% of the investors monitor

quarterly while 0.7% of the investors monitor semi-annually and same percentage of investors monitor

their investments in stocks annually. These frequencies are relatively small as relatively less proportion of

investors invest for long term. Investors with different level of investments are observed to have

significantly different monitoring behavior. We found that the investors with high level of investments

tend to monitor their investments more frequently as compared to those with little investments. But at the

same time investment objectives change the monitoring behavior of the investors with short horizon

monitor more frequently as compared to those with long term investments and investments for dividend

purposes.

When we studied monitoring behavior of investors from different occupation categories we got

statistically significant findings that retired and un-employed individuals more frequently monitor their

investments more frequently as compared to other occupation categories of students, retired individuals,

self-employed and salaried individual (p values .024, .024, .015 and .010 respectively). It simply reveals


the aspect that they have got ample free time and they get themselves engaged in tracking their

investments despite the fact that they do not invest for short term profit seeking. We also studied the

monitoring behavior of investors belonging to different age groups and found strange results. Statistically

significant results suggest that investors from age group of 50+ more frequently monitor their investments

as compared to other two age groups of <30 and 30-50 with statistical of significance of .001 and .005

respectively. The investors from age group of 50+ are mostly retired individuals and are more inclined

towards investing for dividend purposes while other two age groups are found to have inclination towards

short term profit seeking. The reason of this finding is basically linked to another finding related to the

monitoring behavior of investors from different occupation categories.

We also found the impact of investment objectives on the monitoring behavior of investors. Crosstab

results at the significance level of .012 showed that as the proportion of investment for short term profit

seeking increases from 20% to 100% the number of investors who monitor investments daily increases

from 5 to 91. At statistical significance of .000 it is found that with the increased proportion of long term

investment from 20% to 100% the number of investors monitoring daily decreases from 23 to 15 while

the frequency of monitoring monthly increases from 0 to 9. It simply shows that investors with short term

profit seeking objectives monitor their investments more frequently as compared to those with long term

investments.

Investment Decisions

As a result of preliminary interviews and secondary research we three ways of making an investment

decision; Technical Analysis, Fundamental Analysis and Market Sentiments/Psychology. These 3

dimensions are measured with the help of different factors.

Figure 3: Graphical Presentation of the AHP results of Q no. 19

Analytical hierarchical process helped us determine the relative weights of the three dimensions in the

formation of overall investment decision. Relative weights for the factors of each dimension are also

determined using AHP. The dimension of technical analysis is ranked at number one with weights of

Decision

Making Style Fundamental Analysis

32.72%

Technical Analysis

38.34%

Market Sentiments

28.94%

Active Trade Volume

39.88%

Daily Price Fluctuation

29.58%

Past Price Information

13.94%

Patterns, Charts,

Trends 16.60%

Herd Behavior

37.30%

Rumours

30.08%

Media Stories

19.65%

Recommendations

12.97%

Company Information

28.51%

Financial Ratios

50.33%

Government Regula-

tions 11.56%

Management Quality

9.60%


38.34% while fundamental analysis and market sentiments are at second and third ranks with weights of

32.73% and 28.94% respectively. It basically reveals the aspect that investment decision is neither based

on fundamental analysis solely nor on technical analysis or market sentiments rather all these three

dimensions help investor reach at an investment decision. But with different level of importance given to

each decision method as the weights suggest.

AHP helped us determine that in technical analysis the factor that is ranked as number one is the active

trade volume and turnover with weights approximately 40%. On second rank there comes daily price

fluctuation with weights of 29.58% while past patterns, charts and trends at third and past price

information of the company at fourth rank with relative weights of approximately 16% and 14%

respectively. By using AHP we ranked the factors of fundamental analysis on the basis of their level of

importance to the investors and found the hierarchical order; 1 Financial Ratios (50.33%), 2 Company

Information (financial statements) (28.51%), Government Regulations (11.56%) and 4 Management

Quality (9.60%). This hierarchical order reveals that in fundamental analysis investors give more

importance to the financial ratios as compared to other factors. The factor of Financial Ratios is further

divided into four sub-factors. Again we used AHP to determine the relative weights and level of

importance of each ratio to the investor. AHP helped us determine the ranking of the ratios, 1 Dividend

per share (21.82%), 2 Price to Earning Ratio (15.70%), 3 Debt to Equity Ratio (7.38%) and 4 Return on

Equity (5.43%). Market sentiments are measured in terms of four factors that are prioritized in

hierarchical order; 1 Herd Behavior with weights 37.30%, 2 Rumours with weights 30.08%, 3 Media

Stories with weights 19.65% and 4 Recommendations with weights 12.97%.

We also calculated the Global Weighted Indices of the determinants of investor decisions. Results are

summarized below,


Figure 4: GWI of dimensions of Investment Decisions

In Q no. 19 investors were asked to rate different statements, regarding investment decisions, on 1(Least

Important) to 7(Most Important) point likert scale. Results are summarized here,

Table 4: Frequency Results of Dimensions of Investment Decisions

Decision Making Styles Statements 1 2 3 4 5 6 7 Total Frequency

Technical Analysis 19A1 6.9 11.8 13.4 21.5 22.4 7.3 16.7 100%

19A2 20.0 2.8 2.8 14.2 15.4 18.7 45.9 100%

19A3 7.7 15.0 19.1 24.0 15.0 8.5 10.6 100%

19A4 0.0 0.0 5.7 6.9 38.6 26.8 22.0 100%

Fundamental Analysis 19B1 2.8 2.4 6.9 13.8 44.7 16.7 12.6 100%

19B2 4.1 4.9 6.9 9.3 22.0 22.8 30.1 100%

19B3 1.6 0.8 4.9 10.6 18.3 20.7 43.1 100%

19B4 18.7 19.1 17.5 20.3 10.2 8.5 5.7 100%

0.383374753

0.152881097

0.113419316

0.063648311

0.053426029

0.327249938

0.093287825

0.071414813

0.051380644

0.037836541

0.031425269

0.024136939

0.017767907

0.289375309

0.107946798

0.08705329

0.056855706

0.028606349

Technical analysis

Active Trade Volume

Daily price Fluctuation

Patterns, Trends, Charts

Past price Information

Fundamental Analysis

Company Information

Dividemd Payout Ratio

Price to Earning Ratio

Government Regulation

Management Quality

Debt to Equity Ratio

Return on Equity

Market Psychology

Herd Behavior

Rumours

Media Stories

Professional Advice

GWI of the Dimensions of Investment Decision


19B5 17.1 18.3 10.2 26.0 13.0 8.5 6.9 100%

19B6 2.8 4.1 5.3 23.2 24.8 24.4 15.4 100%

19B7 7.7 11.4 9.3 11.4 20.7 21.1 18.3 100%

Market Psychology/

Sentiments

19C1 0.8 1.6 8.9 19.9 20.3 30.9 17.5 100%

19C2 3.7 2.4 6.1 23.6 26.4 23.6 14.2 100%

19C3 12.6 4.1 4.1 18.3 30.9 22.8 7.3 100%

19C4 50.4 15.0 6.9 7.7 13.4 4.1 2.4 100%

19C5 8.5 2.8 5.3 9.8 23.2 28.5 22.0 100%

Investors were asked to rate the four statements, regarding technical analysis, from 19A1 to 19A4 on a 1

(Least Important) to 7 (Most Important) scale. In response to the first statement, “Use of past price

movements to predict future price movements and returns of stocks” 16.7% gave it a rating of 7, i.e. they

considered it as the most important factor while only 6.9% considered it the least important factor. 21.5%

of the respondent gave it rating of 4 while 46.4% of the respondents agreed with the statement that they

make use of past price movements and returns to predict the future prices and returns of the stock and

gave it rating of 5 and above. According to 32.1% of the respondents it is not an important factor and they

gave it rating of 3 and below. On the whole 53.6% of investors gave rating of 4 or less while 46.4% of

investors gave a rating of 4 or less. 45.9% of the investors regarded daily price fluctuations of the stocks

as an important factor while just 2.8% of the investors regarded it as the least important factor. Majority

(80%) of the investors gave a rating of 5 or above. When investors were asked about the importance of

historic price charts, patterns and trends they considered it not much important factor to be taken into

account for stock selection. 65.8% of the investors gave a rating of 4 or less while just 10.6% of the

investors considered it among the most important factors for stock selection. 22% of the investors

considered daily active trade volume and turnover as the most important factor to be taken into account

before making stock selection. Interestingly not a single investor considered it to be least important. Just

12.6% investors gave a rating of 4 or less while according to all other investors it as an important factor

worth considering while making stock selection.

Investors were asked to rate seven statements, regarding fundamental analysis, from 19B1 to 19B7 on a 1

(Least Important) to 7 (Most Important) scale. When we asked to the investors that do they use company

information, annual statements, and financial ratios to predict future prices and returns of stocks 22.4% of

the respondents showed strong agreement with the statement and gave a rating of 7 while only 7.3% of

the respondents showed strong disagreement and gave a rating of 7.3%. 30% of the respondents gave

rates of 4 or less while 70% of the investors gave rates of 5 or more. 30.5% (highest frequency) of

respondents gave it a rating of 5. In the first statement investors were asked to rate the importance of price

to earnings ratio. 30.1% of the investors regarded as the most important factor for selecting stock for

investment while just 4.1% of the investors regarded as the least important factor. 74.9% of the investors

gave rating of 5 or more regarded as an important factor for picking stocks before making investment.

43.1% of the investors considered dividend paying ability of the company to be the most important factor

in stock selection while 1.6% of the investors considered it as the least important factor. However

majority i.e. 82.1% of the investors gave rating of 5 and above to this factor.

When investors were asked about debt to equity ratio most of the investors did not considered it to be an

important factor for selection of the stocks. 18.7% of the investors regarded it as a least important factor


in the way of selection and 75.6% of the investors gave a rating of 4 or less. Same is the case of debt to

equity ratio majority of the investors gave rating of 4 or less. According to 17.1% investors the ROE is

not an important factor for stock selection while just 6.9% considered it the most important. Majority

(71.6%) gave rating of 4 or less depicting that they do not give much importance to ROE from stock

selection point of view. Investors were also asked about the level of importance of government

regulations before making stock selection. They were asked do they look for government regulations

before investing in a particular sector. 15.4% of the investors considered it to be the most important factor

while 2.8% considered it to be the least important factors. 64.6% of investors gave a rating of 5 or above

while 35.4% gave a rating of 4 or less. Investors were also asked about the importance of the factor of

management quality before making stock selection. 18.3% of the investors gave it a rating of 7 and

considered as the most important factor while according to 7.7% of the investors it is among the least

important factors. 60.1% of the investors gave a rating of 5 or more.

In the last section Investors were asked that to them how important it is to consider the rumours before

selecting stock of some particular company. 30.9% of the investors gave a rating of 6 to this factor while

0.8% of the investors considered it to be the least important factor. However 68.7% of the investors

considered it an important factor, worth noticing while selecting stock. When investors were asked about

importance of news stories in the media, 64.2% of the investors gave a rating of 5 or above and thus

considered it an important factor to be looked for before making stock selection while 35.8% of the

investors gave a rating of 4 or less and thus considered un-important. Investors were also asked about the

level of importance of the professional advice and recommendations of the brokers and analysts. 12.6% of

the investors considered it the least important factors however 61% of the investors gave a rating of 5 or

above. Investors were also asked about the level of importance of the advice of some friend, family, peer

etc. 50.4% of the investors were of the view that it is among the least important factors while just 2.4 of

the investors considered it to be among the most important factors. According to majority it is not

important factor. Investors were also asked that how much important is the factor that majority is buying

the stocks of the company. 22.0% of the investors gave a rating of 7 to this factor while 8.5% of the

investors considered it as least important factor. However according to majority it is among an important

factor as 73.7% of the investors gave a rating of 5 or above.

We also conducted the analysis of variance of responses regarding decision making styles. When we

analyzed the responses of investors from different income level groups, regarding technical analysis, we

observed significant difference of opinion of investors with income >30 lac from other investors. When

we looked into the mean differences we found that investors with income >30 lac give more importance

to the factor of daily price fluctuations as compared to all other investors with incomes <5 lac, 5-10 lac

and 10-30 lac (p values .042, .044 and .005 respectively). When we analyzed the responses of investors

from different occupation groups regarding technical analysis we found that salaried individuals gave

high rating to the factors used to measure technical analysis as compared to self-employed and retired

individuals (p values 0.000 and 0.004 respectively). Salaried individuals gave high rating to the past price

information as compared to self-employed individuals (p value 0.013). Moreover we found that salaried

individuals look into charts, patterns and trends more than those who are students, retired and self-

employed individuals (p values 0.000, 0.009 and 0.035 respectively).

Analysis of variance suggested that there are no meaningful differences about fundamental analysis

among responses of investors from different age groups, education level, investment age and occupation

categories. However some significant differences among responses of investors with different income

levels have been noticed. Findings suggest that investors with incomes 10 to 30 lac give more importance

to fundamental analysis as compared to investors with income <30 lac (p value 0.014). When we probed

into the factors of fundamental analysis, we found that investors with income level of 10 to 30 lac give

more importance to company information and dividend payout ratio as compared to those with <5 lac (p

values 0.002 and 0.002 respectively). When we compared investors with investment experience of 10 to


20 years also found significant differences of opinion regarding fundamental analysis. Analysis of

variance revealed that investors with investment experience of 10 to 20 years or more than 20 years give

more importance to fundamental analysis as they gave high rating to the factors of fundamental analysis

as compared to those with experience of less than 10 years (p values 0.015 and 0.024 respectively).

When we studied the responses of investors from different age groups, we found that investors with ages

50+ relatively give more importance to market sentiments while making an investment decision as

compared to those with ages <30 and 30-50 years (p values 0.038 and 0.032). We found that to investors

with ages 50+ news stories in media are relatively more important as compared to other investors.

Findings suggest that investors with ages <30 give relatively more importance to recommendations as

compared to investors with ages 50+. When we analyzed the responses of investors at different education

levels we found that investors with Primary-Middle level of education rely on rumors more than investors

with Bachelor-Master level of education (p value .012). We also concluded from the mean differences

that investors with Bachelor-Master level of education give more weight to the opinion of family, friends

and peer as compared to investors with Matriculation-Intermediate level of education (p value .003). We

also probed into the behavior of investors with different levels of income. There were not many

differences among their opinions except that (p values .064 and .039) investors with income levels 5 to 10

lac and 10 to 30 lac showed significantly different opinion about statement 19C5. Mean differences

revealed that investors with income level 5 to 10 lac and 10 to 30 lac follow the majority investors (herd

behavior) as compared to investors with income <5 lac.

When we analyzed the responses of investors from different occupation groups we observed that retired

individuals believe on rumors more as compared to self-employed individuals (p value .046). We also

found that un-employed individuals take into account the recommendations of friends, family and peer as

compared to self-employed individuals (p value .012). While self-employed individuals give more

weights to the professional advice of some analyst or brokers more than retired individuals (p value.049).

We also studied the responses of investors at different level of investment experience in stocks. We found

that investors with investment experience of >20 years give relatively more importance to media stories

as compared to investors with investment experience of <10 years and 10 to 20 years (p values of .009

and .012 respectively). We also found that investors with investment experience of <10 years and 10 to 20

years, give relatively more importance to professional advice and recommendations as compared to

investors with investment experience of >20 years. These findings are also consistent with the previous

findings that investors with ages 50+ give more importance to media stories and less importance to

recommendations as compared to investors from other age groups.

To analyze the impact of the determinants of investor behavior on decision making style we fitted regression model.

Findings are summarized in the table below,

Table 5: Regression Results showing the Relationship between Determinants of Behavior and Investment Decision

Explanatory variables Unstandardized Coefficients SE of Coeff. Beta t value p value

Intercept 3.010 .248 12.153 .000

Involvement .085 .023 .214 3.749 .000

Risk.Attitude .092 .039 .136 2.383 .018

Optimism .039 .030 .074 1.303 .194

Overconfidence .195 .032 .356 6.062 .000


R square .273 Adjusted R square .261 F value 22.499 Durbin-Watson 1.601 Degrees of freedom

245


Regression model helps us identify that out of four broad dimensions of investor behavior which

dimension is most closely related to the investment decision and that what are the behavioral dimensions

have greater impact on the overall decision making process of an individual investor. Regression model

revealed that the behavioral dimensions of investor involvement, risk attitude and overconfidence are

three dimensions that are significantly associated with the investment decision making process as the p

values for these dimensions (.000, .018 and .000) are less than the alpha value (.05) that supports our

argument that investor behavior has greater impact on investment decision. Moreover if we look into the

values of R square and adjusted R square we can state that investor behavior casts an impact of up to 26

to 27 percent on the overall investment decision making process.

Table 6: Regression Results showing the Relationship between Determinants of Investor Behavior and Technical

Analysis

Explanatory variables Unstandardized Coefficients SE of Coeff. Beta t value p

value

Intercept 3.643 .359 10.138 .000

Involvement .110 033 .212 3.324 .001

Risk Attitude .082 .056 .093 1.453 .147

Optimism .030 .044 .044 .695 .488

Overconfidence .078 .047 .110 1.680 .094

R square .090 Adjusted R square .074 F value 5.906 Durbin-Watson 1.799 Degrees of freedom 245


Regression model suggests that out of four broad dimensions of investor behavior the dimension of

Investor Involvement has significant relationship with the technical analsyis because p value (.001) for

the dimension of involvement is less than alpha value (.05) that supports our argument about the influence

of investor behavior on technical analysis. Here findings basically show that investors who have greater

level of involvement tend to conduct technical analysis more as compared to the rest. Moreover if we look

into the values of R square and adjusted R square we can state that 7 to 9 percent is the influence of

investor behavior on the phenomena of conducting technical analysis.

Table 7 Regression Results showing the Relationship between Determinants of Behavior and Fundamental

Analysis


value

Intercept 1.857 .492 3.772 .000

Involvement .012 .045 .017 .275 .783

Risk Attitude .181 .077 .142 2.360 .019


Optimism .036 .059 .036 .606 .545

Overconfidence .077 .064 .367 5.916 .000

R square .187 Adjusted R square .173 F value 13.851 Durbin-Watson 1.506 Degrees of

freedom 245


Regression model suggests that out of four broad dimensions of investor behavior two dimensions,

investor‟s risk preferences and overconfidence have significant relationship with the fundamental analsyis

because p values for the dimensions of risk preferences and overconfidence (.019 and .000 respectively)

are less than alpha value (.05) that supports our argument about the influence of investor behavior on

fundamental analysis. Here findings basically show that investors who have greater level of risk aversion

and those with high level of overconfidence tend to conduct fundamental analysis more as compared to

the rest. Moreover if we look into the values of R square and adjusted R square we can state that 17 to 19

percent is the influence of investor behavior on the phenomena of conducting fundamental analysis.

Table 8: Regression Results showing the Relationship between Determinants of Behavior and Market Sentiments


value

Intercept 3.475 .385 9.015 .000

Involvement .136 .035 .017 3.857 .000

Risk Attitude .007 .060 .142 .120 .905

Optimism .053 .046 .036 1.142 .255

Overconfidence .142 .050 .367 2.840 .005

R square .125 Adjusted R square .111 F value 8.628 Durbin-Watson 1.577 Degrees of freedom 245


Regression model suggests that out of four broad dimensions of investor behavior two dimensions,

investor involvement and overconfidence have significant relationship with the market analysis because p

values for the dimensions of risk preferences and overconfidence (.000 and .005 respectively) are less

than alpha value (.05) that supports our argument about the influence of investor behavior on making

investment decision by taking market sentiments into consideration. Findings show that investors who are

highly involved and those with high level of overconfidence tend to make investment decision on the

basis of market sentiments as compared to the rest. Moreover if we look into the values of R square and

adjusted R square we can state that 11 to 12 percent is the influence of investor behavior on taking

investment decision by looking into market sentiments.

Some other aspects of Investor Behavior

Attitude toward risk in case of winning/losing situation: By analyzing results we found that 83.7% of the

investors opted not to take risk in case of wining situation while just 16.3% of the investors opted to take

risk in favor of increased returns. Our findings suggest that just13.8% of the investors opted not to take

risk while rest of the 86.2% preferred to gamble over their losses and to take risk in the loss situation.

Reasons for Less Successful Investments: When we asked investors about the reasons of less successful

investments 37.8% of the investors blame generally poor market performance for less successful

investments. According to them poor market performance in general is the most important reason of their


less successful investment. 23% of the investors consider incorrect recommendations or advice from

analysts as the second most important factor leading to less successful investment. Furthermore 15% of

the investors recognized that their own errors were the main cause of their less successful investments.

14.2% of the investors were of the view that they had incurred losses because of sheer bad luck. 9.3%

gave other reasons for less successful investments such as “Bad policies of Government”, “Political

turbulences”, “Manipulations by big investors” and “Foreign investors”. This is contrary to the survey

conducted by Erlingsson and Björklund (2001), where 47% of the private investors considered own errors

to be the most important factor and only 12% blamed analysts compared to the 15% and 23% respectively

indicated in this survey. The current poor market conditions might explain the difference and the tendency

to blame analysts for less successful investments. Market conditions were better when Erlingsson and

Björklund performed their survey. Analyst recommendations and a general poor market performance

were indicated among private investors as important factors for failed investments instead of own errors.

The failure of investments brings with it the feeling of regret. Investors may try to avoid this regret by e.g.

blaming investment advisors and recommendations from analysts or by avoiding the realization of losses.

Generally investors avoid realizing losses by not closing less successful accounts but if they close their

accounts at losses they simply blame others for their losses instead of admitting their own errors.

Investors have the tendency to attribute their losses to others.

Reasons for Profitable Investments: When investors were asked about the reasons of the successful

investments 54.1% of the investors told that their investments were successful because of their own

specific skills and prudence. 25.2% of the investors attributed their successful investments to better

performance of the market in general. 17.5% of the investors were of the view that it was sheer good luck

that their investments proved to be successful, while just 3.3% attributed this success to the proper

recommendations of the analysts. By analyzing these results we can draw conclusion that if investors

incur losses they attribute those losses to others instead of accepting their own errors while in case of

successful investments their exists self-attribution and they take all the credit by themselves. This is also

consistent with the responses of the brokers and literature also confirms the existence of self attribution

for profits and others attribution for losses.

RESEARCH FINDINGS

In this dissertation Investment behavior of individual investor is studied in terms of four broad behavioral

dimensions of overconfidence, investor involvement, optimism and risk attitude that are measured in

terms of different factors. Our findings suggest that the dimension of overconfidence plays an important

role in the determination of overall behavior. Then comes the role of involvement, risk preferences and

optimism.

We measured overconfidence in terms of four factors: self control, market knowledge, stock selection

ability and specific skills. We found that majority of investors believe that they have better stock picking

ability better than other investors. They are found to be confident of their specific skills that lead them to

earn profits over their investments. They also believe that they have complete knowledge of market

particularly those investors who have many years of investment experience. The dimension of investor

involvement is measured in terms of their trade activity and tendency to make quick money. We found

that investors having short term profit seeking objectives are found to have greater level of involvement

as compared to those with long term investment objectives as they have greater tendency to make quick

money in short time periods. When we studied the level of optimism among investors in terms of their

outlook of future of the market we found that investors are not much optimistic about the future of


market. We found that some investors want to keep their investments in the stock markets only because

the stock prices have declined and they do not want to sell their stocks at losses. Very few showed

willingness to increase their investments in the stock market in next 12 months because they do not

believe that stock prices will increase in the next 12 months. When we measured risk preferences of

individual investors we found that investors exhibit risk averse behavior and they prefer investing in

familiar companies with stable returns. But there are some investors who showed a strong preference for

taking risk. We found that investors with long term investment objectives and those with ages above 50

are more risk averse as compared to others.

Our results show that individual investors do not behave in accordance with the tenets of expected utility

theory. They are not always rational. The prospect theory and heuristics further help in explaining other

psychological factors affecting the investment decision-making process and how these processes can lead

to market volatility. Prospect theory offers an alternative to the theory of expected utility maximization

according to which investors are risk averse at all levels of wealth. On the contrary, the prospect theory

asserts that people are risk lovers for losses and risk averse only for levels of wealth above a certain

reference point. The answers received seem to conform that majority of investors seem to prefer to

gamble with a possibility for a gain when faced with a certain loss. Our dissertation shows that

individuals have inconsistent attitudes towards risk in making investment decisions. They exhibit risk

aversion in a profit making situation while risk seeking behavior is exhibited in a loss making situation

that explains the phenomenon of mental accounting. Moreover the presence of disposition effect and

representativeness are also confirmed by our study.

Our research also studies the decision making process of individual investor. We studied three possible

ways of reaching an investment decisions that are opted by the investors. These three techniques are:

technical analysis, fundamental analysis and market sentiments. Our findings suggest that investors make

use of all the techniques but varying in intensity of use of each technique. They look into technicals,

fundamentals and market sentiments before making an investment decision but some give more

importance to fundamentals, technical analysis is given importance over other methods by some while

few consider market sentiments as more important for making an investment decision. It basically

depends on their investment experience, level of investment, investment objectives and investment

horizons. The behavioral traits play an important role in choosing between different investment decision

processes and their relative importance in some particular investment situation in hand. This finding is

also consistent with the views of brokers as they shared during interviews. Our findings suggest that

people give more importance to technical analysis over other tools one possible reason for such finding is

that most of the investors that we surveyed are found to have short term profit seeking objectives who

give more importance to daily price fluctuations and trends and daily trade volume and market turnover.

This research also tries to establish an association of the dimensions of investment behavior with the

investment decision with the help of regression model. Findings suggest that out of four behavioral

dimensions the dimensions of involvement, risk attitude and overconfidence are significantly associated

with the investment decision.

We also studied the preferences of investors for using technical analysis for making an investment

decision in detail. We studied technical analysis in terms of daily price fluctuations, active trade volume,

past prices, historic patterns, charts and trends. We found that among all these factors more importance is

given to active trade volume and daily price fluctuations. When we tried to develop the link between

technical analysis and determinants of investment behavior we found that the behavioral dimension of

involvement is most significantly related to technical analysis. Our findings suggest that those who are

actively involved in the investment processes more look into the technicals particularly in terms of

looking into daily price fluctuations and active trade volume.


We also studied the preferences of investors for fundamental analysis in detail. We examined

fundamental analysis in terms of four broad dimensions: company information and financial statement,

financial ratios, government policies and management quality. The dimension of financial ratio was

further divided into four factors: return on equity, debt to equity, dividend per share and price to earnings

ratio. Findings suggest that investors give more importance to financial ratios among all the dimensions

and among ratios dividend per share and price earnings ratios are considered more important by the

investors. When we used regression model to find the link between the determinants of investment

behavior and their preferences for fundamental analysis we found that behavioral dimensions of risk

attitude and overconfidence are significantly associated with fundamental analysis.

We also conducted detailed analysis of the importance of market sentiments in reaching an investment

decision. We studied the market sentiments in terms of four factors: rumors, recommendations, herd

behavior and media stories. Our results reveal that herd behavior among investors has greater impact in

determining market sentiments. Many investors are found to have the tendency to look into the

investment behavior of other big investors before making an investment decision. Then comes the role of

rumors in the market and media stories in determining an investment decision. We also found that

investors do get recommendations from professionals, brokers, analysts and also from family friends. But

more importance is given to professional advice very few give importance to the recommendations of

family, friends and peers. We used regression model to define a link between the determinants of

investment behavior and market sentiments. Findings suggest that behavioral dimensions of investor

involvement and overconfidence are significantly related to market sentiments. That reveals that investors

with high level of involvement in terms of their inclination towards making quick money and

overconfidence, in terms of confidence on market knowledge, specific skills, better stock picking ability

and self control, are more prone to take investment decisions on the basis of market sentiments.

CONCLUSIONS

Market participants have for a long time relied on the notion of efficient markets and rational investment

behavior when making financial decisions. However, the idea of fully rational investors always

maximizing their utility and demonstrating perfect self-control is becoming inadequate as examples of

market inefficiency in the form of anomalies and irrational investor behavior have been observed more

frequently during the past decades. The results obtained from the questionnaires carried out in our

research suggest that the behavior of individual investors is indeed to some extent irrational when

considered from a standard finance point of view. We found that individual investors have high level of

involvement and overconfidence while they are not much optimistic about the future outlook of market

moreover they have been found to have an aversion to risk. Findings revealed that technical analysis is

given more importance as compared to fundamental analysis and market sentiments to make an

investment decision. We found that investors do follow all the three ways in making their investment

decisions but investor behavior plays an important role in choosing a particular decision making style.

RESEARCH IMPLICATIONS

Behavioral findings relating to personal financial issues have a number of practical implications.

Professional investors could use knowledge of the biases and mistakes of individual investors in attempts

to “get on the other side of the trade” and make profits at the expense of the individual investors.

Alternatively, financial services firms could use knowledge of such biases to inform their product

development and marketing departments. Finally, regulators could apply the knowledge to informing

regulation and education that can be used to mitigate the biases and improve the welfare of individual


investors. Moreover the individual investors themselves can learn from their mistakes and behavioral

biases and may avoid repeating them and thus by doing so can reach optimal investment decisions.

RESEARCH LIMITATIONS AND RECOMMENDATIONS FOR FUTURE RESEARCH

Our research has the limitation that it just looks into the behavioral determinants of one type of investors.

We have examined individual investors. There are other classes of investors such as institutional investors

and professional money managers. Most of the money managers and institutional investors have formal

quantitative models that help them select stocks from all the listed stocks. Professional investors and

institutional investors exhibit different kind of behavioral aspects and adopt different ways of making an

investment decision and their portfolio management behavior is also altogether different from that of

individual investors. They can affect the market differently. So in future some comparative studies can be

conducted where more than one class of investors can be studied at a time to better analyze their

behavioral differences and their impact on investment decisions, portfolio management and on the overall

market in terms of not only volatility but also other anomalies.

In our study we got no access to trade activity data of the individual investor that could have helped in

better analysis of investment behavior. We can drive interesting results with the help of both the primary

data and secondary data in order to analyze that what investors say and what they really do. Moreover we

need to keep in mind the timing of this research. This research was conducted during the time period

when there was a visible down trend in the stock market and market was going through slump. The

market index was in declining trend. Investors were losing their confidence on the market and pessimistic

behavior was prevailing among investors. According to newspaper sources, most individual investors

faced devastating losses in the bearish market. Such declining trends in the market could have distorted

their behavior. It would be interesting to examine the determinants of investment behavior and their

impact on investment decision, portfolio management and stock market in a bull market.

Our study was a cross-sectional study in a given period of time. However, investor behavior is likely to

change as market conditions, macroeconomic factors and environmental influences change. It would be

interesting to study a panel of investors over a period of time and examine the shifts in investor behavior

and the factors that influence it.

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Appendix-A Survey on Investment Behavior

Personal Information

1. Sex: � Male � Female 2. What is your age? (In years) � < 30 � 30 - 50 � 50+

3. Marital status? � Single � Married � Divorced � Widowed

4. Do you have children? � Yes � No

If yes please specify � No. of children >20 years:__ � No. of children <20 years:__

5. What is your occupation? � Student � Retired � Self-employed � Un-employed

� Salaried Individual (specify job title/designation) __________________

6. What is your level of education? � Primary - Middle � Matriculation - Intermediate � Bachelor – Masters


� Please Specify Majors you studied ______________________

7. What is your average gross annual income? (In PKR, M=Million)

� < 0.5 M � 0.5M – 1M � 1M – 3M � > 3M

8. What is the distribution of investment across different securities? (Please specify in terms of percentage)

� Govt. securities__ Fixed deposits__ � Bonds___ � Mutual Funds ___ � Stocks ___ � Other ___

9. What is the source of investment? (In case of more than one source describe their relative

proportions/percentages)

� Savings ___ � Inherited amount ___ � Money extracted from business___ � Personal Borrowing ___

� Margin Financing

10. What are your investment objectives? (If more than one objective describe relative proportion/percentage

of investment for each)

� Short term profit seeking __ Steady income (Dividends) __ � Long term Profit seeking ___ � Others ___

12. I was ___ years old when I started investing in stocks 13. Total no. of accounts with Brokers: ___

14. Investment Experience in Stocks (In years):___

15. How many different types of Stocks do you own on the average?___

16. What is your total investment (In all type of securities)? _______________

17. How frequently do you monitor your investment in stocks?

� Daily � Monthly � Quarterly � Bi- Annually � Annually � Other (Specify the frequency in times) ____

18. Determinants of Investor Behavior

Please rate the following statements from 1(S.DA=Strongly disagree) to 7(S.A=Strongly Agree).

18A. Overconfidence 1 2 3 4 5 6 7

18A1. I am confident of my ability to do � � � � � � �

better than others in picking stocks.

18A2. I control and am fully responsible � � � � � � �

for the results of my investment decisions.

18A3. My past investment successes were, � � � � � � �

above all, due to my specific skills.

18A4. I have complete knowledge of stock market � � � � � � �

18B. Investor Optimism 1 2 3 4 5 6 7

18B1. Presently I will stay invested in the Stock market � � � � � � �

18B2. I plan to increase my investment in the stock market in � � � � � � �

next 12 months


18B3. The prices of stocks will increase in next 12 months � � � � � � �

18B4. If the KSE index drops by 3% tomorrow, I would suggest � � � � � � �

that it will recover most of its losses in a few days

18C. Involvement 1 2 3 4 5 6 7

18C1. I am actively involved in trade activity � � � � � � �

18C2. I make investment for making money quickly � � � � � � �

18D. Risk Attitude 1 2 3 4 5 6 7

18D1. I make riskier investments for enjoyment � � � � � � �

18D2. I usually invest in companies I am familiar with � � � � � � �

18D3. I am a risk taker � � � � � � �

18D4. I invest mostly in companies with stable expected returns � � � � � � �

19 Investment Decision Please rate the following factors in terms of how important they have been in your

stock selection process from 1(Least Important) to 7(Most Important).

19A. Technical Analysis 1 2 3 4 5 6 7

19A1.Use of past price movements to predict future price � � � � � � �

19A2. Daily price fluctuations � � � � � � �

19A3. Use of charts, patterns and trends � � � � � � �

19A4. Active trading volume/turnover � � � � � � �

19B. Fundamental Analysis 1 2 3 4 5 6 7

19B1. Use of company information, statements and financial � � � � � � �

19B2. Price to earnings ratio � � � � � � �

19B3. Company‟s dividend paying ability � � � � � � �

18B4. Debt to equity ratio of the company � � � � � � �

18B5. Return on Equity/Ret. on investment � � � � � � �

18B6. Government Regulations/ Interventions � � � � � � �

18B7. Management Quality of the company � � � � � � �

19C. Market Psychology 1 2 3 4 5 6 7

19C1. Rumour driven market � � � � � � �

19C2. News stories in the media � � � � � � �

19C3. Recommendation/advice of professional investor/broker � � � � � � �


19C4. Recommendations/advice of some friend, family, peer � � � � � � �

19C5. Major institutions & corporations currently buying the stocks � � � � � �

of the company.

22. If you have realized losses, according to you, what is generally the reason for loss?

1. Incorrect recommendations or advice from broker/analyst/banker

2. Incorrect recommendations or advice from family/ friends.

3. The market has, in general, performed poorly

4. Own errors

5. Sheer Bad luck

23. If you have made profits, according to you, what is generally the reason for profits?

1. Proper recommendations or advice from broker/analyst/banker

2. Proper recommendations or advice from family/friends

3. The market has, in general, performed well

4. Own Prudence

5. Sheer Good luck

24. Choose from among the following options.

1. Option A: Win Rs.80 for sure

2. Option B: Win Rs. 100 with a probability of 80% and receiving nothing with a

probability of 20%

25. Choose from among the following options.

1. Option A: Lose Rs. 80 for sure

2. Option B: Lose Rs. 100 with a probability of 80% and lose nothing with the probability

of 20%

Thank you for all the Cooperation!

Regards

__________________

Researcher,

Bushra Ghufran

MBA Finance

________________________

Supervisor,

Prof. Dr. Hayat Muhammad Awan

Director, Institute of Management Sciences,

Bahauddin Zakariya University, Multan


Appendix-B: Research Instrument for Brokers Survey on Investment Behavior

1) What are your views about individual investor? How do you think he/she makes investment decisions? Is he/she

considers „fundamental analysis‟, „technical analysis‟ or „investor psychology/sentiment‟? What is more important

to him/her?

_____________________________________________________________________________________________

_____________________________________________________________________________________________

2) In your opinion, what are the sources of his/her information? Where does he/she go to get

ideas/tips/recommendations about trade decision?

_____________________________________________________________________________________________

_____________________________________________________________________________________________

6) What is your opinion about the risk preferences of individual investors? Are they risk takers?

_____________________________________________________________________________________________

_____________________________________________________________________________________________

7) The individual investor in the market is driven by emotions rather than rational analyses. Do you agree or

disagree with the statement? Argue in any case.

_____________________________________________________________________________________________

_____________________________________________________________________________________________

Thank you for all the cooperation!

Regards

___________________

Researcher,

Bushra Ghufran

MBA Finance

___________________________________

Supervisor,

Prof. Dr. Hayat Muhammad Awan

Director, Institute of Management Sciences,

Bahauddin Zakariya University, Multan

_____________________________________