This document discusses a study on the impact of behavioral biases on investment decisions and the moderating role of financial literacy. It provides background on behavioral finance theories like prospect theory which suggest that individuals weigh gains more than losses. The literature review discusses previous research finding that overconfidence, loss aversion, availability, optimism, and regret aversion influence investment decisions. However, these factors were not examined together previously in Pakistan with financial literacy as a moderator. The research aims to examine the impact of these behavioral biases and the moderating role of financial literacy on individual investor decisions in the Pakistan stock exchange.

1. Impact of behavioral biases on investment decisions; moderating
role of financial literacy
INTRODUCTION
1.1 Overview: The main objective of this chapter is to provide a clear picture of the
subject of this research. The background of this research was cleaned by the study
of the problem statement , research purpose, related research questions and
relevant hypothesis, the importance and significance of study described here.
1.2 Introduction,
In rational decision making, determines the main result of the decision before
investing and opens every accessible door to make investment decisions. After a
comprehensive evaluation, investors believe that their choice depends on the
emotions, mental factors and other factors related to human emotions. The new
decision-making attitude is against the theory of traditional finance, ensuring the
change in human behavior before collecting information to improve individual
learning (Seoul and Marine 2007, Analysis 2010)
Prices unchanged stock exchange shows that the investor is not regular. Such
conditions can be removed by behavioral finance. How human concepts and
emotions affect financial behavior. The practice limits the financial investors and
the rational decision makers of their activities in the past. People must find the
right way of their personal funds. A lot of things that can be stored, and sometimes

2. it is necessary to collect information for every purchase. Non-governmental people
are unrelated groups, but are interested in interest, experience and financial matters
from different people (Gunson and Wales).
The technology to manage their funds is still important. Money is an important part
of our lives. (Vermont and Patriot, 1972)
Recently, studies found significant negative contact between pretend concern and
investment behavior, but in the case of sudden settlement (Wayne Ant, 2011)
financial outlook, the perspective of conceptual beliefs and the values of individual
finances, such as saving them is necessary for money (June 2010) analysis of
gender differences in investment behavior in previous studies, and said that
behavior of men and women is dependent on financial risk because they want to
invest in the risk of male investment. This area of research is called behavior
finance, but we call it the implementation of financial behavior. The economy of
behavior combines two components that are psychological and economic meetings,
logical or non-logical decisions about people's savings and money (Glavich1999)
Traditionally, efforts to improve financial outcomes are aimed at increasing the
financial decisions of the people. In order to see financial results in life, the areas
of society were set up for the result of socialization.
A theme, which is often considered in the field of organizational and industrial
psychology, has an impact on human behavior. Anyway, starting the University
Career without being responsible for their own finance (BUDDY & AL., 2008)
It was also said that young people have basic financial skills, such as organizing
their funds, savings plans and long-term needs (practice and Patel, 2014).

3. Past information, for instance, plays an important role, continuous return to choose
the method of behaviorally validated was known as another factor that is affecting
the decisions of investors (Cadiala , Row, XA and Ravindran, 2004)
Various efforts have been made by researchers who need to buy investors
.andandand and Shantikimar (2003) tried to answer questions: Weather is
unfortunately small investors regardless of what? It is not clear that the positive
analyst investor produces illegal purchases in the initial trade.
investment decisions are important for anyone who wants to invest in stocks,
especially when investing in high risk stocks. Profit is not safe. If you choose to
have a specific impact on investing their money, there are many factors that affect
the individual in making investment decisions after the implementation of the
elements of analysis, and shows that among these factors individuals have a
distinctive variety. Tabassum and Pardhasaradhi (2012).
Respondents take into consideration, among other things, the storage of objective
factors that affect savings and information about investment decisions. Defendants
look for annual savings and income where the level of income determines the
amount of savings, and now investors have complete information about the stock
market. Market transfer affects behavior in the stock market. Suman and Warren
(2012)
Alleyne and Broome (2010) studied investment decisions that are looking for
future investment plans and the principle of hunger. They also say that the
principle of schematic behavior is best in the indicators of investment goals. The
outcome continued to identify the situation and to find clear and clear barriers and
opportunities for making investment decisions.
Factors involved in investment behavior affect the intensity. This study used
factors of over confidence, availability, loss aversions , optimism, regret aversions

4. and financial literacy as moderator. It is undererstood that all these factors
influence the investment decision making process
Factors through research that affect the decision making process during investing
in Pakistan Stock Exchange. The decision to buy shares depends on the assets of
the investor. Accept references from investors and their friends' relatives and use
accounting information, but most decisions depend on themselves and no one is
affected. People do not have the ability to make investment decisions (Iqbal and
Usmani, 2012)

5. 1.2 Current scenario in Pakistan stock Exchange
There are many ideas about investing in the stock market, some investors have
invested money to prove the company, some investors are not profitable and invest
in investment to Full control to buy something (Chen, Four, Shi'a, 2013). In many
stocks, investments require higher investment status at the top, and decision-
making requires huge investment. Many researchers argue that the financial
behavior study is a good idea for the feelings of well-being that influence
investment and the performance of decision-making processes (Vivelo, Manoku,
Aiana, 2008).
Pakistan Stock Exchange is generally less than other stock exchanges in the world
because Pakistan is a developing country in the world, despite the fact that the
stock exchange works well in Pakistan. In January 2016, Karachi Stock Exchange,
Islamabad Stock Exchange, Lahore Stock Exchange and three markets were active.
The Karachi Fair was the worst crisis during 2008-2009, while the Karachi
down100 index had more than 10,000 points.
In this period of time, the Lahore Stock Exchange also faced crises due to political
instability, with the stock exchange index down 25 by 3,000 points. At this time
the Pakistani economy faced rising inflation The economic growth was somewhat
little in the economic and political situation was so bad and very important is that
Pakistan is fighting the war against terrorism which mainly contributes to the
collapse of the economy
Several studies have been conducted on investment behavior in Pakistan. There are
many factors that have been examined in these studies. Azzam and Kumar (2011)
examined the variables that affect investor behavior. The results showed that
foreign direct investment, share-sharing and GDP development are clearly linked

6. and have a significant impact on the prices of companies listed on the Pakistan
Stock Exchange.
Research into behavioral bias influences the behavior of individual investors on the
stock market in Pakistan. He also found that financial literacy as a moderator has a
major influence on the behavior of investors of Pakistani investors. (Lodhi, 2014)
Another study by Akbar, Salman and Mahmoud (2016) was on the subject and this
factor influences the behavior of investors when making investment decisions on
the Islamabad Stock Exchange. They discovered that investor decisions are
influenced by the views of family and friends and the suggestions from
stockbrokers.
Aziz and Khan (2016) studied behavioral biases that were implemented on PSE
investors and also found that many variables had a significant impact on investor
behavior in investment decisions. This study uses organizations, individuals and
market factors to examine their commitment to investment decisions in Pakistan.
According to the researchers' view, people are more surrounded by behavioral
biases in the collective system because of the imitating behavior of the individual,
the social, or the secrets, or the views of the family that influence decision-making.
In Pakistan there are many factors that influence investor behavior in decisions.
For the researcher the best information in the area of interest, the investigator on
the organizational, individual and market determinants of investment performance
in securities, bulk or targeted studies in other countries are limited in the region,
for example Pakistan, so possibly limited

7. Problem statement
Stock exchange is main element of every country where we can judge the
economy of that country. This is important trading system that help in the
economic growth. If there is high investment, then this is considered better for
economy. Investment decision behavior was changed from individual to individual
and impact decisions and life of individual investor and stock exchange market.
Behavior biases play an important role in making the decision about investment.
Optimism as an independent variable was no studied with dept. the regret aversion,
availability overconfidence and loss aversion are not studied with moderator as
financial literacy in depth. it is exceptionally critical to see that which factors
impact on investment decision. For better understanding the market and upgrade
the market knowledge, it is very important to adapt more and more about the
relationship between variables and investor’s decisions.

8. Research objectives
Factors that affect the individual investor’s decisions
Following are the research sub- objectives:
1. To find out the impact of over confidence on investor’s decision.
2. To find out the impact of loss aversions on investor’s decision.
3. To to find out the impact of availability on investor’s decision.
4. To examine the impact of optimism on investor’s decision.
5. To examine the impact of regret aversions on investor’s decision.
6. To examine the impact of financial literacy as moderator on investor’s
decisions.
1.1 research questions
1. Does overconfidence have an impact on the decision of investor?
2. Does loss aversions have an impact on the decision of investor.
3. Does availability have an impact on the decisions of investor?
4. Does optimism have an impact on the decision of investor?
5. Does regret aversions have an impact on the decisions of investor.
6. Does financial literacy as moderator have an impact on the decision of
investor.
1.2 significance of the study
For each researcher, it is necessary to monitor the behavior and work of individual
investors, as investors are constantly on the stock exchange in various ways, such
as buying and selling. It is therefore necessary to evaluate and prejudge prejudices.

9. What factors affect investment decisions. This research is an assessment of the
factors that influence the decision of the investor, and this research will be an
important part of research and modern and experienced jobs. This research will
help all students of commerce, finance and business to carry out further research in
this area.
This research will also be useful in investment and reinvestment. It is measured as
the best base and open for all purposes.
This research revolves around behavioral finance, factors that influence the
decision-making process. The best possible system has been developed to assess
behavioral biases affecting Pakistan's growth or stock market. It gives the
fundamental impact on investment decisions on the Pakistan Stock Exchange
.
Research Gap
This place of study was a geographical location because this research was
conducted in Lahore and analyzed the various variables and confirmed its impact
on the decisions of investors in the Pakistani stock exchange. Private investors
have changed investment decisions to individual investors. over confidence was
not learned more confidently as a permanent variable with financial literacy as
moderator variable.
Loss aversion, availability, optimism and regret aversion were not checked at a
time as an independent variable before in dept. financial literacy was not checked
as moderator variable before in dept. for better understanding the market and
knowledge, It is necessary to know the relationship between the independent

10. variable and the independent variable and investor decisions. Second, all these
variables were examined in the theoretical framework together for the purpose of
verifying the impact on the investor's decision.

11. Literature review
Introduction:
This chapter describe about the literature of dependent variable, independent
variables and moderator variable and also tell us about the development hypothesis
in this research. Investment decision is dependent variable. Over confidence,
availability, loss aversion, optimism and regret aversion is independent variable.
Financial literacy is used in this study as moderator variable. The basic purpose
of literature review is to tells about the how to earlier studies find out the influence
of behavioral biases on investment decisions.
Why study this topic:
This study helped by the previous research that point out the factors that influence
the investor’s decision. This topic imagine that behavioral biases may have the
serious impact on individual investor’ decisions in Pakistan stock exchange.
Previous researcher researched have find to develop the for evaluating the impact
of behavioral biases includes over confidence, availability, loss aversions,
optimism and regret aversion on investment decisions. This research examines the
effect of behavioral biases on investment decisions.
The earlier research was conducted on small level and researcher also used
restricted source for measuring the factors. This study also examines the influence
of behavioral biases on investment decisions.

12. 2.3 theories of behavioral finance
This theory described that how the decisions making process and other factors
affect the individual investor and the prices of stock .it also tells us that individual
behavior changed from individual to group behavior but in this study financial
behavior is broadly accepted.
Olsen, (1998) described that this theory is used to know about the future accurate
resulted related to market. This is very tiny explanation of behavioral biases related
to market. Financial behavior is basically behaviorally economics Beslkey, Gary,
Gilovich and Thomas (1999). There are two type of behavioral economics one is
called psychology and second one is economics. These two type tell us about how
and why investor take decisions that are illegal when he want to save money or
invest funds.
Individual take their decisions about investment are depend on their importance.
Before making the decision about how to invest their funds, we should know about
the investor behavior who have the skills , knowledge and experience about the
stock market. This is very useful for making the investment decisions before invest
their funds. Individual investor experience tell us about the situation of stock
market that what happened according to profit and loss in stock market and what
would be expectation about profit and loss in future.
Strahilevitz, Oden and Barbar(2011) All the investors are mentally prepared to
continue invest their funds in market regarding bad and good experience.
Mohamad& perry(2015) better understanding about behavioral finance is helpful
to making the decisions regarding to invest their funds in future.
After the coherent market, investors collect the information and hold the chances
for future investment’s returns and reveal on present worth. Every investors in

13. market want to high returns from their investment from high level of risk and vice
versa. Behavioral finance is leading factor for regarding their investment, this play
an important role in making the investment decisions process.
Prospect theory:
Prospect theory is part of behavioral finance. This theory means how investors
decides about their investment in that environment where is high risk of tolerance
and uncertainty. Prospect theory was established by Kahneman, Daniel, Tversky,
and Amos (1979). This theory also called uncertain behavior theory because this
theory tells about the investors that how the make the decisions in uncertain
situations. It also explained that how investors gave the importance to their
decisions that they take in ambiguous environment.
Prospect theory is depending on psychological models such as those who are
involved in decisions making process related to investment. This theory is
designed to describe about the general pattern of choices. This theory also tells
about the different ways of decisions making process. This theory is descriptive
and empirical in nature. There is two part of prospects theory in decisions making
process. one is called framing and other one is evaluations.
“Theory that suggest that individuals place more emphasizes on gains rather
than losses andas a result will try to make decisions that contribute to gains”

14. Framing effects
First part or phase of prospect theory is framing or editing. Framing involves in
different operations that provide wide area of choices The effects of framing
indicate how a choice or option is made
Effected by the order or manner in which they are presented to the decision maker.
This is a crucial concept for a number of reasons. In many cases, the decision
maker does not know the relevant options available to them. It must establish and
extract what options are available or have been made for them prior to selection. In
a sense, this activity to identify and build options is the essence of creative

15. decision-making. The selection available may be affected by relatively minor
heroin in construction options. Most logical decision makers say that apparently
innocent changes, such as options, should not be the main impact on investment
decisions.
Two key points should be emphasized. First of all, the frame can be purely barrier.
Once people feel that they have failed, they often agree that their decisions must be
free from solving this problem. Domain is not necessarily a motivation, but it can
only be a completely serious event. In other words, this is a physical psychological
feature
Secondly, with the intervention approach to minimize or prevent the effects of an
intervention approach, the choice should be selected from different frames, as well
as helping determine the most accurate and permanent priorities.
Value functions:
Once the options are made then the decisions maker select the option from them
for decisions making process. This phase of prospect theory contains two part one
is called value function and other one is weighting function. this phases has three
main features. First off all it is not in term to attain the profit or loss and no
obsolete the property for welfare. This is quite different from the idea of expected
utility, which it assumes that assets are in place of predictions of their own interest
and choice. The potential theory is compatible with focus on the change from
reference points. In accountability theory, the price is an act of change that is in
the positive or negative direction rather than absolute luxury, as the principle of
expected personal utility. This emphasis on change focuses on the point of view,
which is referred to in the concept theory as a reference point.

16. Weighting function:
The second component 0f evaluation in the prospect theory is weighting function.
In the second part of the evaluation stage of prospect theory, each result is given in
decisions weight . This weight is not directly related to traditional concepts. After
deciding, the decision-makers handle the cost of each result by weight gaining their
decision, as it will benefit from taking advantage of their own prospects. However,
weighting function of decisions in accountability theory is different from the
theory of personal utility because decision weight logical accountability
possibilities do not obey any of the rules.
Investment decisions:
Overconfidence investor invests their funds in more risky projects because they are
more confident about their knowledge, skills and capabilities. Due to their
investment decisions which they took in over confidence create hurdles for their
stock in market because stock price changes due to their decisions. The over
confidence investors are more risk taker because they trust their information and
they think that they will earn more profit from their investment. They think that
they can take every decisions in betterment of their funds they also earn more
return from stock market which make them more happy(Odean,1998).