The Financial Decision Making of Retail Investors in Pakistan Stock Exchange: A Comprehensive Analysis of Key Factors

Abstract

In recent years, field of behavioral finance has gained increasing attention, with numerous studies investigating impact of various factors on investors' decision-making. However, there remains a critical gap in literature when it comes to a comprehensive understanding of the factors that influence retail investors' decision-making. This gap presents a chance for further research to explore factors that affect retail investors' decision-making, particularly in developing nations like Pakistan. The study examines both behavioral and external factors that impact the financial decision-making of retail investors in Pakistan. The research includes a sample of retail investors who invest in the Pakistan stock market, and data is collected using the simple random sampling technique. 1000+ questionnaire were distributed & 545 responses were received. The researcher used Smart-PLS for the purpose to analyze both measurement model and structural model. Results reveal that all exogenous variables have a significant influence financial decisions of retail investors in Pakistan stock market. Results hold significant implications & limitations for behavioral finance.

Assessment of Investors' Investment Behaviour: Mediating Effect of Risk Tolerance: A Case of Pakistan Stock Exchange

“…Risk tolerance refers to an investor's willingness to take on risk or uncertainty in their investment choices. It plays crucial role in shaping the investment behavior and act as a mediator between various factors and investment decisions (Khurshid & Ahmad, 2023). Hussain et al (2017) identified three heuristics that expectedly influence investors' decisions, with higher-educated and more experienced investors being less susceptible to these heuristics.…”

“…The importance of institutional and individual investors in Pakistan's stock market should not be underestimated (Ahmad, 2017). Although institutional investors have larger portfolios compared to retail investors, understanding retail investors is vital as they have disproportionate impact when shared (Khurshid & Ahmad, 2023). Those studying financial markets often assume that the institutional investors are better informed and actively counteract excessive interest of retail investors.…”

“…In this connection, extent of investors' past experiences in making investment decisions and their exposure to different market conditions. Although, the impact of behavioral biases upon investment choices has been extensively studied in the advanced economies, only limited research is available for the emerging nations like Pakistan (Khurshid & Ahmad, 2023).…”

“…The risk tolerance refers to an investor's willingness to take on risk or uncertainty in their investment choices. It plays crucial role in shaping investment behavior and act as mediator between various factors and investment decisions (Khurshid & Ahmad, 2023). The financial objectives investors aim to achieve over their investments, such as capital growth, income generation, or risk mitigation.…”