The Psychology Of Risk Tolerance And Investor Behavior In Market Volatility

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The Psychology Of Risk Tolerance And Investor Behavior In Market Volatility

The Psychology Of Risk Tolerance And Investor Behavior In Market Volatility

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The Psychology Of Risk Tolerance And Investor Behavior In Market Volatility

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The Psychology Of Risk Tolerance And Investor Behavior In Market Volatility

Pdf) Retail Investors’ Financial Risk Tolerance And Risk Taking Behaviour: The Role Of Psychological Factors

Received: 13/04/2023 / Revised: 19/05/2023 / Approved: 29/05/2023 / Published: 06/06/2023

Using a unique sample of 600 investor responses to a structured survey, we investigate the impact of behavioral biases on investors’ investment decisions in the Pakistani stock market and the role of market anomalies and financial literacy in decision making. production process. We first document empirical evidence supporting that behavioral biases and market biases are closely related and that these two factors significantly influence investors’ investment decisions. Additional analyzes confirm the mediating role of certain market anomalies in the relationship between investor behavioral biases and investment decision making. Furthermore, empirical evidence reveals that financial literacy moderates the link between behavioral biases and market biases and ultimately influences investors’ investment decisions. Overall, although the results are inconclusive about the relationships between certain variables, the results highlight the importance of financial literacy in individuals’ optimal investment decisions and overall stock market stability.

The Psychology Of Risk Tolerance And Investor Behavior In Market Volatility

Investors exhibit irrational behavior in different circumstances due to different situations, emotions, feelings and perceptions. They may incorporate false judgments into their investments and treat them as perfectly rational choices in the stock market (Babajide and Adetiloye 2012). Some investors’ feelings and emotions are related to dispositional effects or other psychological reasons, and psychological factors can in turn significantly influence their investment decisions (Summers and Duxbury 2012; Ahmad et al. 2017b; Barberis and Thaler 2003). In addition, most investors use various tools, techniques and models such as CAPM, capital budgeting technique, arbitrage, etc. to process available information and make investment decisions, while these models ignore the investor’s feelings, emotions and conflicts during investment decision making (Sanfey et al. 2003).

Pdf) Insights From Psychology And Psychometrics On Measuring Risk Tolerance

Some factors have little effect on investor behavior, while others can have a significant effect on investor behavior (Iqbal et al. 2014). These factors strongly influence the irrational behavior of investors when investors’ investments are based on personal experience and characteristics (Kudryavtsevs et al. 2013). Certain behavioral biases such as herd bias, anchoring, mental calculations, and overconfidence significantly affect investors’ investment decisions (Ullah 2019). For example, overconfidence is more likely to occur in active investors, while passive investors follow the herd in the financial market (Abdin et al. 2018). Since financial markets consist of investors, the aggregate behavior of investors in the market reflects the behavior of the entire financial market. If a large proportion of investors in the market have biases about the investment decision, certain market anomalies may appear. Stock market deviations are generally associated with certain types of financial securities, causing the securities to perform better or worse (Giles et al. 2014; Thaler 2005). These anomalies explain events (such as certain stock price movements) that cannot be explained by the efficient market hypothesis (Silver 2011).

The Psychology Of Risk Tolerance And Investor Behavior In Market Volatility

In turn, the occurrence of stock market anomalies can affect investor behavior and general stock market developments (Barber and Odean 2008; Brealey et al. 2012; Daniel et al. 1998). In particular, three types of anomalies such as fundamental, technical and calendar anomalies are known to exist in stock markets for a long time (Lam et al. 2008). Many investors lack the necessary technical skills and knowledge of the stock market (Frydman and Rangel 2014). These investors always follow other investors or brokers in making investment decisions, which is due to information generalizations and the inability of investors to overtrade (Shefrin 2002). Therefore, it is important to create the most effective financial advisory services and policies for a strong and secure financial system.

Most developed countries, such as the United States, have more developed financial markets. In contrast, emerging market countries such as Pakistan have experienced rapid economic growth, but their financial markets are less developed. Since most of the existing literature focuses on investment decision-making in developed countries, investment decision-making in emerging markets can help us better understand the behavior of investors and financial markets. The Pakistani stock market in particular has faced many ups and downs recently. Many investors blame behavioral factors and market manipulation by large investors for this scenario. These factors are caused by prominent investors who are biased in their investment decisions (Hayat and Anwar 2016). Many studies have found a direct link between behavioral biases and investment decisions of individual investors. Investors may follow the portfolios of other investors when making investment decisions and ignore their own perceptions due to greed or fear of loss (Landberg 2003). In certain scenarios, investors may overestimate their estimates and believe that their beliefs are correct and ignore the advice of other investors (Dar et al. 2021; Larrick et al. 2007). It is also worth noting that studies show that financial information has an important effect in minimizing unreasonable behavioral biases in investment decisions (Hsiao and Tsai 2018; Al-Tamimi and Kalli 2009).

The Psychology Of Risk Tolerance And Investor Behavior In Market Volatility

Pdf) Determinants Of The Risk Tolerance Of Individual Investors

As Pakistan is a developing country, individual investors in the country may not receive sufficient financial education. Thus, most of the individual investors in Pakistan do not know or fully understand the concept of rationality and this scenario can significantly affect their investment decisions (Akbar et al. 2016). They are behaviorally biased, making them less risk averse in some scenarios and more risk averse in others (Kim and Nofsinger 2008). Most studies have been conducted to investigate the direct effects of behavioral biases on the investment decisions of individual and institutional investors (Hayat and Anwar 2016). Few studies have been conducted in Pakistan to investigate the multimedia mechanism between behavioral biases and investment decision making. Thus, one of the main goals of the study is to close this gap by focusing on examining the multimedia mechanism that further explains the relationship between behavioral biases and investment decisions. By looking at alternative mediation mechanisms, we can gain a better understanding of the decision-making process (Abdin et al. 2018), potentially address some of the analytical process problems identified in the existing literature (Peloza 2009), and clarify their nature. on the relationship between behavioral biases and investment decisions. To the best of our knowledge, Abdin et al. (2018) is the only study that uses the media mechanism between perspective factors and investment returns, but no other studies have been conducted to examine the role of financial literacy and the media mechanism between behavioral biases and investment decisions.

This study examines the role of behavioral biases in investors’ investment decisions. For this purpose, we developed and distributed a questionnaire among stock market investors in 2021. Then we collected the responses of various survey respondents and used the data to analyze the relationship between behavioral biases, anomalies, financial reasons. literacy and investment decisions. This study is particularly characterized by investigating the mediating role of three modules of stock market deviations (fundamental, technical and calendar deviations) between behavioral deviations and investment decisions, especially behavioral deviations that enter into their speculative choices and lead to illogical investments. In addition, the study examines the moderating role of financial literacy between prejudice and stock market anomalies.

The Psychology Of Risk Tolerance And Investor Behavior In Market Volatility

The current analysis contributes to the available literature by summarizing new recommendations

What Is Investor Psychology?

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