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  • 1. UNDERSTANDING INVESTMENT BEHAVIOR OF INDIVIDUAL INVESTORS: HOW THEY HANDLE INVESTMENT DECISIONS? DO THEY ACT RATIONALLY? a b Hayat, M. Awan Khuram Bukhari c Bushra Ghufran khurambukhari@bzu.edu.pk 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 E-mail corresponding author: bushraghufran@gmail.com
  • 2. 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. E-mail corresponding author: bushraghufran@gmail.com
  • 3. 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 E-mail corresponding author: bushraghufran@gmail.com
  • 4. 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 “homoeconomicus” 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 E-mail corresponding author: bushraghufran@gmail.com
  • 5. 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 E-mail corresponding author: bushraghufran@gmail.com
  • 6. 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 E-mail corresponding author: bushraghufran@gmail.com
  • 7. 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. E-mail corresponding author: bushraghufran@gmail.com
  • 8. 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. E-mail corresponding author: bushraghufran@gmail.com
  • 9. 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 E-mail corresponding author: bushraghufran@gmail.com
  • 10. 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. E-mail corresponding author: bushraghufran@gmail.com
  • 11. 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 E-mail corresponding author: bushraghufran@gmail.com
  • 12. 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 Male 97.2% Female 2.8% <30 20.7% 30-50 55.3% >50 24.0% Single 27.5% Married 62.5% Divorced 7.0% Widowed 3.0% Primary-Middle 5.3% Matriculation-Intermediate 23.2% Bachelor-Master 71.5% Salaried Individual 46.3% Self Employed 36.2% Retired 14.2% Student 1.6% Un-employed 1.6% <5 63.4% 5-10 22.0% 10-30 11.8% >30 2.3% <10 63.4% 10-20 32.9% >20 3.7% 1 59.9% 2 20.9% Gender Age Marital Status Education Occupation Income Investment Experience No. of Accounts E-mail corresponding author: bushraghufran@gmail.com
  • 13. 3 4 3.0% <20 2.3% 20-30 60.6% 30-40 14.6% 41-50 7.6% 50+ Investment Age 16.2% 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. Market Knowledge 17.48% Quick Money 79.61% Trade Activity 20.39% Risk Taking 23.81% Stable Returns 28.80% Enjoyment from Risky Trade 8.49% Keep Invested 47.06% Increased Investment 17.55% Price Increase Expectation 22.20% Investment Behavior Stock Picking 21.96% Familiarity Bias 38.89% Involvement 17.84% Specific Skills 32.41% Self-Control 28.15% Overconfidence 50.42% Index Recovery 13.19% Risk Attitude 17.80% Optimism 13.96% E-mail corresponding author: bushraghufran@gmail.com
  • 14. 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. E-mail corresponding author: bushraghufran@gmail.com
  • 15. We also calculated the Global Weighted Indices of the determinants of investor behavior. Results are summarized below, GWI of the Investment Behavior Dimensions Index Recovery Increased Investment Price Increase Expectation Stay Invested Optimism Enjoyment from Risky Trade Risk Taking Stable Returns Familiarity Bias Risk Attutude Trade Activity Quick Money Involvement Market Knowledge Stock Picking Sel-Control Specific Skills Overconfidence 0.018416628 0.024492525 0.030989385 0.065697285 0.1396 0.01511982 0.042388171 0.051261062 0.069223845 0.178 0.036363852 0.14201856 0.1784 0.088120845 0.110661184 0.141875811 0.163371026 0.5042 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% 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% Optimism E-mail corresponding author: bushraghufran@gmail.com
  • 16. 18B3 9.3 12.2 16.3 11.8 14.6 100% 25.6 17.5 11.4 28.5 6.9 5.7 4.5 100% 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% 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 Risk Preferences/Attitude 9.3 18B4 Involvement 26.4 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 E-mail corresponding author: bushraghufran@gmail.com
  • 17. 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 E-mail corresponding author: bushraghufran@gmail.com
  • 18. 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 E-mail corresponding author: bushraghufran@gmail.com
  • 19. 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 MatriculationIntermediate 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 E-mail corresponding author: bushraghufran@gmail.com
  • 20. 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 selfemployed 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 PrimaryMiddle 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 E-mail corresponding author: bushraghufran@gmail.com
  • 21. 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 Short term profit seeking Involvement .499 t value p value 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 E-mail corresponding author: bushraghufran@gmail.com
  • 22. 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. Active Trade Volume 39.88% Patterns, Charts, Trends 16.60% Daily Price Fluctuation 29.58% Past Price Information 13.94% Financial Ratios 50.33% Government Regulations 11.56% Company Information 28.51% Management Quality 9.60% Technical Analysis 38.34% Decision Making Style Fundamental Analysis 32.72% Herd Behavior 37.30% Media Stories 19.65% Rumours 30.08% Recommendations 12.97% Market Sentiments 28.94% 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 E-mail corresponding author: bushraghufran@gmail.com
  • 23. 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, E-mail corresponding author: bushraghufran@gmail.com
  • 24. GWI of the Dimensions of Investment Decision Professional Advice 0.028606349 Media Stories 0.056855706 Rumours 0.08705329 Herd Behavior 0.107946798 Market Psychology Return on Equity Debt to Equity Ratio Management Quality Government Regulation 0.289375309 0.017767907 0.024136939 0.031425269 0.037836541 Price to Earning Ratio 0.051380644 Dividemd Payout Ratio 0.071414813 Company Information 0.093287825 Fundamental Analysis 0.327249938 Past price Information 0.053426029 Patterns, Trends, Charts 0.063648311 Daily price Fluctuation 0.113419316 Active Trade Volume 0.152881097 Technical analysis 0.383374753 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% 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% Fundamental Analysis E-mail corresponding author: bushraghufran@gmail.com
  • 25. 19B5 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% 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 Market Psychology/ Sentiments 17.1 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 E-mail corresponding author: bushraghufran@gmail.com
  • 26. 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 selfemployed 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 E-mail corresponding author: bushraghufran@gmail.com
  • 27. 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 Involvement .085 .023 .214 Risk.Attitude .092 .039 .136 2.383 .018 Optimism .039 .030 .074 1.303 .194 Overconfidence .195 .032 .356 6.062 .000 E-mail corresponding author: bushraghufran@gmail.com 12.153 .000 3.749 .000
  • 28. R square .273 245 Adjusted R square .261 F value 22.499 Durbin-Watson 1.601 Degrees of freedom Significant at 5% level. 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 Involvement .110 033 Risk Attitude .082 Optimism Overconfidence R square .090 10.138 .000 .212 3.324 .001 .056 .093 1.453 .147 .030 .044 .044 .695 .488 .078 .047 .110 1.680 .094 Adjusted R square .074 F value 5.906 Durbin-Watson 1.799 Degrees of freedom 245 Significant at 5% level. 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 Explanatory variables Unstandardized Coefficients SE of Coeff. Beta t value value Intercept 1.857 .492 Involvement .012 .045 Risk Attitude .181 .077 E-mail corresponding author: bushraghufran@gmail.com p 3.772 .000 .017 .275 .783 .142 2.360 .019
  • 29. Optimism .036 .059 .036 .606 .545 Overconfidence .077 .064 .367 5.916 .000 R square .187 freedom 245 Adjusted R square .173 F value 13.851 Durbin-Watson 1.506 Degrees of Significant at 5% level. 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 Explanatory variables Unstandardized Coefficients SE of Coeff. Beta t value p 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 Significant at 5% level. 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 E-mail corresponding author: bushraghufran@gmail.com
  • 30. 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 E-mail corresponding author: bushraghufran@gmail.com
  • 31. 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. E-mail corresponding author: bushraghufran@gmail.com
  • 32. 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 E-mail corresponding author: bushraghufran@gmail.com
  • 33. 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. REFERENCES 1. Anderson, P. W., K. J. Arrow, et al. (1988). "The Economy as a Complex Evolving System." Reading: Addison-Wesley. 2. Arthur, W. B., (1994). "Inductive reasoning and Bounded Rationality." The American Economic Review 84(2): 406-411. 3. Arthur, W. B. (1995). "Complexity in Economic and Financial Markets." Complexity 1(1): 20-25 4. Arthur, W. B., S. N. Durlauf, et al. (1997). “The Economy as an evolving complex system II”, Reading: Addison-Wesley. 5. Asch, S. (1956). “Studies of independence and conformity: A minority of one against a unanimous Majority” Psychological Monographs 70. 6. Barber, B. M. and T. Odea, (1999). “Online investors: Do the slow die first?” University of California Davis Working Paper. 7. Barber, B. M. and T. Odean, (2000). “Trading is Hazardous to your Wealth: The Common Stock Investment Performance of Individual Investors”, The Journal of Finance 55(2): 773-806. E-mail corresponding author: bushraghufran@gmail.com
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  • 36. 58. Tetlock, P. C. (2007). "Giving content to investor sentiment: The role of media in the stock market." The Journal of Finance 62(3): 1139-1168. 59. Thaler, R. H. (1980). "Toward a positive theory of consumer choice." Journal of Economic Behavior & Organization 1(1): 39-60. 60. Thaler, R. H. (1999). "Mental accounting matters." Journal of Behavioral Decision Making 12(3): 183-206. 61. Thomas K. (1970). “The Structure of Scientific Revolutions.” Financial Analysts Journal 23(6): 31-45. 62. Topol, R. (1991). “Bubbles and volatility of stock prices: Effect of mimetic contagion.” The Economic Journal 101(407):786-800. 63. Tversky, A. and D. Kahneman, (1971). “Belief in the Law of Small Numbers,” Psychological Bulletin 76: 105-110. 64. Tversky, A. and D. Kahneman, (1974). “Judgment under Uncertainty: Heuristics and Biases,” Science 185, 1124-1131. 65. Tversky, A. and D. Kahneman (1981). "The framing of decisions and the psychology of choice." Science 211(4481): 453-458 66. Tversky, A. and D. Kahneman (1991). "Loss aversion in riskless choice: A reference-dependent model." Quarterly Journal of Economics 106(4): 1039-1061. Appendix-A Survey on Investment Behavior Personal Information 1. Sex: � Male 3. Marital status? � Female �Single 4. Do you have children? �Yes If yes please specify 2. What is your age? (In years) � Married � 30 - 50 � Divorced �50+ �Widowed �No � No. of children >20 years:__ 5. What is your occupation? � < 30 � Student � No. of children <20 years:__ � Retired � Self-employed � Un-employed � Salaried Individual (specify job title/designation) __________________ 6. What is your level of education? �Primary - Middle E-mail corresponding author: bushraghufran@gmail.com � Matriculation - Intermediate � Bachelor – Masters
  • 37. � 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 ___ 12. I was ___ years old when I started investing in stocks �Others ___ 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 � � � � � � � � � � � � � � � � � � � � � 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 � � � � � � 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. next 12 months E-mail corresponding author: bushraghufran@gmail.com �
  • 38. 18B3. The prices of stocks will increase in next 12 months � � � � � � � 18B4. If the KSE index drops by 3% tomorrow, I would suggest � � � � � � � 18C. Involvement 1 2 3 4 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 � � � � � � � that it will recover most of its losses in a few days 5 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 19C1. Rumour driven market � � � � � � � 19C2. News stories in the media � � � � � � � 19C3. Recommendation/advice of professional investor/broker � � � � � � � E-mail corresponding author: bushraghufran@gmail.com 7
  • 39. 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. 2. Proper recommendations or advice from family/friends 3. The market has, in general, performed well 4. Own Prudence 5. 24. Proper recommendations or advice from broker/analyst/banker Sheer Good luck 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 E-mail corresponding author: bushraghufran@gmail.com � � � � � �
  • 40. 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 _____________________________________ E-mail corresponding author: bushraghufran@gmail.com