Impact of Behavioral Biases on Investors Financial Decision Making:

With a Moderator Rule of Cognitive Reflection Test

An Empirical Study in Pakistan Stock Exchanges
A research project for final semester by
Ahmad Naveed

11-NTU-1005

Hamid Raza

11-NTU-1031

Muhammad Waqqas

11-NTU-1067

BBA-8th

Supervisor:

Mr. Zia-ur-Rehman
PhD. Scholar (Finance) IIUI

National Textile University Faisalabad

Contents
Chapter 1
1. Introduction

Chapter 2
2. Literature Review

i. Overconfidence

ii. Illusion of Control

15

iii. Self-Attribution

21

iv. Optimism

24

v. Cognitive Reflection Test

28

Chapter 3
3. Theoretical Framework

32

4. Hypothesis

33

5. Methodology

33

6. Analysis

34

i.

Pearson Correlation

35

ii.

Regression Model

36

iii.

Moderator Interaction

38

7. Findings and Conclusion

40

Chapter 4
8. References

42

Abstract
The study aimed to investigate the impact of behavioral biases on investors financial
decision making and how Cognitive Reflection Test enhance the impact of biases.
Current research studies the behavioral biases including overconfidence, illusion of
control, self-attribution and optimism. The study includes the sample size of 107. The
study is significant for the business people, investors, policy makers, brokers, house
wives and student. Empirical data has been collected through administrating a
questionnaire. Correlation and Multiple Linear regression model techniques are used to
investigate whether investor decision making is affected by these biases. The study
concluded that overconfidence, illusion of control, self-attribution and optimism have
direct impact on investment decision and how CRT enhance the relationship of biases
and investors decision making. Those who attained high score in (CRT) are succeeded
to decrease the effect of these biases. This study will help the investors to overcome
these biases.

Key Words: Overconfidence, Illusion of Control, Self-Attribution, Optimism and CRT

Chapter 1
Introduction
People are biased at some point both purposefully and unexpectedly in their standard life choices.
Psychological science is a science in which we concentrate on the human action, nature and
behavior and how human goes amiss from wise choice. Behavioral finance relies on upon the
mental choice of the speculators.
Behavioral Finance is a rising train that speaks to an accumulation of option ways to deal with,
refine the established fund meaning of financial objectivity. Specifically, BF draws on the brain
science and psychological science writings to look at why singular choice settling on frequently
are different from reasonable decisions in efficient ways. Behavioral finance is another world
view in budgetary markets, which has as of late developed as a reaction to the issues confronted
by current monetary hypothesis. Comprehensively talking, it examines that some money related
wonders are better comprehended by method for models in which operators are not completely
wise (Saidi, 2007: 12). At the end of the day, behavioral account tries to utilize introducing so as
to cut edge money related hypothesis behavioral viewpoints in choice making procedure. It
manages people and gathering and utilizing routines for data.
Behavioral fund looks to cover and expect the results of precise money related business in mental
choice making (Rhnamaye rood poshti et al, 2008: 61) Furthermore, behavioral account
concentrates on use of mental and monetary standards to advance budgetary choice level. By and
large, deviation from the right and ideal choices in estimating Stock Exchange is one of the
fundamental and most vital issues and it regularly reminds poor returns for financial specialists.

In this way, Identifying elements that remind wrong choices and said deviations, can motivate
better choices. As per the significance of brain science and behavioral account in monetary
choices and estimating of stock trade, this study researched major behavioral tendency
(optimistic, illusion of control, self-attribution and over confidence) in Pakistan's stock trades.
Behavioral finance is to some degree a rising however quickly developing zone of account,
which study individuals' financial choice making conduct and the hypothesis of subjective brain
research joined with the understanding of the conventional fund and financial matters. The
essential assumption in behavioral fund is that, information structure merging with parts of the
business division individuals impacts the guess decisions of speculators and business sector
results. The thinking instruments don't work as PC rather; a man's brain every now and again
works information using channels or options. Standard finance expects that back areas
individuals, establishments, and even markets are observing or reasonable. Those people settle
on objective choices and build their riches. Any person who settles on unreasonable choices will
experience the ill effects of poor results.
Behavioral fund is combination of science and human conduct. It begins in 1990. As indicated by
behavioral account it is clarified that human side is additionally imperative. Behavioral finance
said in the event that you need to foresee costs then anticipate conduct of financial specialists too.
Predisposition is a reason which examines that why a conduct found in the business sector?
Behavioral tendency help to clarify any sort of marvels and irregularity that are difficult to
disclose as indicated by traditional money.
As indicated by standard fund a financial specialist is consider to be sound to settle on a choice

utilizing accessible assets. By objective choice making he needs to expand his results. Standard
finance considers that market is productive and mirrors all data auspicious.
Behavioral account is another parameter in which another idea of monetary markets because of
the issues of the cutting edge money related position. In detail some money related reflections
have been examined to comprehend method for models player by which speculators are not
completely wise. Behavioral finance concentrates on mental elements of a man having effect on
his choice making. As indicated by Taller, behavioral fund is a sort of scholarly back which
asserts that a few specialists in monetary are not completely levelheaded. It appears that a large
portion of guess choices in stock trade were not reasonable and were influenced by feelings and
behavioral tendency (Barbizon, 2000: 73).
As per traditional money person is a reasonable leader. They take all choices soundly on the
premise of distinctive models while settling on guess choices. Established account is all around
the EMH (proficient business guess) while Fama clarify about change that why a change happen
in the business and diverse sort of documentation done on the premise of business. He said there
are a considerable measure of tendency that are not reasonable by EMH.
The disappointment of financial analysts and thoughts which they swear in result, the inquiry is
introduced on different events. Are individuals truly wise? Then again would they say they are
liable to be driven by feelings like misgiving and ravenousness which could motivate terrible
choices? Bernstein (1998) says that the "proof uncovers rehashed examples of ridiculous,
irregularity, and inadequacy in the ways individuals touch base at choices and decisions when
confronted with vulnerability".

As indicated by (Shefrin, 2007) predisposition is nothing else yet the angle towards
disappointment. Predisposition is tendency to settle on choices while the leader is as of now
being subjected to a basic assurance. There are such a large number of sensitivities in human
brain science. This examination concentrate on optimism, illusion of control, self-attribution and
confidence. These tendency lay effect on people in a manner that they habitually deed on a
clearly senseless way, routinely dismiss ordinary thoughts of risk avoidance, and make
predictable breaches in their guesses and judgments. These predispositions have influence in
forming singular's decisions, budgetary choices in partnerships and money related markets.
Carelessness is a perceptional tendency that have an effect on human's conduct or on financial
specialist's choice making. Carelessness is essentially one's certainty level naturally judgment,
anticipating and capacities. Because of this predisposition a man overestimates its possibilities of
accomplishment and depends a lot all alone choice unquestionably or depend a lot on
unreasonable data for guess reason.
Arrogance is predisposition that influences the choice of individual and also corporate world.
Individuals have a preference to overestimating their capacities and abstain from taking the
assistance of others in choice making procedure. These individuals are absolutely depend on their
capacities. Accordingly they look less help and heading amid the choice making. As per Shefrin
"relates how well the individuals comprehend their own capacities and the points of confinement
of their insight" (Shefrin 2007).
In presumption, financial specialist exchanges all the more forcefully. The Past data lead
speculator to wind up pomposity and Result says that the assumptions tendency impact in the

financial specialists choice of Pakistan's Stock Exchanges.

Hallucination of control is a predisposition recognized by conduct fund which has sway on
exchanging conduct of a financial specialist straightforwardly or in a roundabout way in the share
trading system, i.e. under response and overcompensation of stocks. From the above expressed
articulation, according to the establishment design of Behavioral Finance EMH structure is more
prone to be influenced by financial specialist's choice, individuals (speculators) are ordinary
(Meir Statman). So the suppositions of EMH bust over yonder, i.e. business have normal
operators, implies that the business sector effectiveness hand-off upon the specialists' exchanging
conduct. In this study we might want to figure out some proof by which we can demonstrate that
market productivity is likewise effected by exchanging conduct and exchanging conduct is
impact by mental predisposition i.e., hallucination of control.
Illusion of control is essential a truth of "Arrogance" in which the financial specialist get to be
pompous about his capacities to control the occasions. In spite of the fact that in actuality he
can't, which best fits on a maxim likely "pride precedes the fall" (Mackay, n.d).
Illusion of control win in Pakistan culture because of that it's make the business wastefulness the
primary explanation for that the peculiarities exist in Pakistan economy (Sidra Ajmal, Maria
Mufti, Dr. Zulafqar Ali Shah). Fantasy of control is the limit of individuals to overestimate their
capacities about business sector.
Carelessness and Illusion of control assume an imperative part in the choice procedure of
financial specialists. In arrogance the financial specialists overestimate their capacity, they
surmise that they have preferable data over they really do "An excess of individuals exaggerate

what they are not and underestimate what they are". Financial specialists exaggerate their own
particular capacities and make the over the top exchanging securities exchange.
Self-attribution predisposition is a long-standing idea in brain research and touches to people's
general tendency to ascribe triumphs to individual aptitudes and disappointments to calculate
outside their ability to control. Self-attribution tendency make Individuals trust that their victory
is a direct result of their common capacities and ability set and they are distant from everyone
else in charge of their prosperity and their disappointment is not their deficiency. (Hastorf et al.,
1970) demonstrated that people give credit of the great results on prevalent abilities they think
they have, while accuse diverse reasons for their disappointments. In a comparable study,
(Gervais and Odean, 2001) mulled over that. At the point when a financial specialist gets positive
results he/she attributes this accomplishment to their own capacities and along these lines
overestimates their capacities and this overestimation motivates another tendency called
carelessness.
For the aforesaid reasons, it is imperative for customer scientists to build their comprehension of
self-attribution tendency in the setting of buyer money related choice making. To date, in any
case, the presence of self-attribution tendency amongst singular financial specialists is just
accepted and not specifically observationally tried. For instance, it is assumed that self-attribution
predisposition causes effective financial specialists to become progressively arrogant about their
guess abilities and subsequently build their exchanging volume after some time (Daniel,
Hirshleifer, and Subrahmanyam 1998; Gervais and Odean 2001; Statman, Thorley, and Vorkink
2006). Whether singular financial specialists really have a self-attribution tendency, be that as it
may, is not measured. As an eminent special case, Dorn and Huberman (2005) solicit a specimen

from individual financial specialists whether they judge their past guess victories to be for the
most part because of their own abilities, however they don't test whether these speculators in
reality credit great comes back to their aptitudes and terrible comes back to different variables,
which shapes a key segment of self-attribution tendency (Miller and Ross 1975). The present
examination builds up direct experimental proof for self-attribution predisposition in buyer
money related choice making utilizing a one of a kind mix of review information and coordinated
exchanging records of an example of Dutch rebate business customers.
Idealism is the overestimation of positive results and underestimation of negative results
(Shefrin, 2007). Individuals are overoptimistic when they trust that they won't be presented to
future occasions and things won't go outside their ability to control and individuals likewise
surmise that high likelihood positive occasion will happen to them and negative occasions will
transpire (Weinstein, 1980). In further warning he declared that individuals have propensity to
trust that it is more outlandish that they will experience the ill effects of an undesired
circumstance than the others. He mulled over that hopefulness predisposition is in numerous
areas and age bunches. People are overoptimistic before an occasion e.g. individuals before begin
of their occasions were expecting more fun and satisfaction yet amid that same occasions they
express less pleasure. People are overoptimistic when gotten some information about to suspect
their estimation of their future encounters. Positive thinking is likewise present in business
environment. Business visionaries are to a great degree hopeful in regards to their future results
when contrast with financial specialists. The good faith predisposition especially influences he
money related choice making, the fundamental driver of obligation issues today are because of
confidence of monetary administrators (Meinert, 1991). He gave most accenting on the writing

recognizing behavioral choice making ascribes that are liable to have efficient consequences for
monetary business sector conduct.

Problem Statement
To determine the impact of behavioral biases on investors financial decision making in Pakistan
stock exchanges. And analyze the impact of cognitive reflection test on behavior of investors and
their financial investment decisions.

Objectives

To identify the impact of overconfidence on financial decision making of investors

To examine the effect of illusion of control on investors financial decisions

To analyze the influence of Self-attribution on the investors financial decision making

process

To investigate the influence of Optimism bias on individuals financial decision making

To analyze the influence of cognitive reflection test on the relationship of these biases and
investors financial decision making

Significance and contribution of study:

The significance of the study is to contribute in literature as well as to explain the influence of
behavioral biases on the investor financial decision making. The study also included the effect of

cognitive reflection on investors behavior and their relationship of biases and financial decision
making. The outcomes of study would be helpful for the business investors, policy makers,
financial advisor, and students. The individual investor can take help from the findings of this
study and can come to know which bias interrupted their decision making, by overcoming these
biases they can make good investment decisions. The contribution of this study in the existing
literature is that there was no study where all these biases including overconfidence, illusion of
control, self-attribution and optimism have been discussed with the effect of cognitive reflection
test together. This study covers the knowledge gap of the previous studies.

Chapter 2
Literature Review
Overconfidence
Distinctive hypothetical models demonstrates that careless financial specialists will exchange
more because of their high certainty level above then normal than those speculators who take
choices wisely on the premise of rationale. A few truths of arrogance are miscallibration
(mis-course of action) dream of control, hopefulness that are should have been be considered. By
considering these realities it is reasoned that those speculators who feel that they are above
normal in term of venture aptitudes or past execution of exchanging they exchange more.
As indicated by conversional monetary hypothesis, a speculator are consider an objective
individual keeping in mind the end goal to distinguish and the utilized important data and be
effective to settle on best choice. In conventional monetary hypothesis are utilized to comprehend
the diverse issue, for example, why do a speculator treaded, how would they do their undertaking
and why do return change so quickly yet crosswise over stocks for reason other than danger.
Standard account says that market is productive however there is some hazy area exit in business
sector because of that in viable business is not effective.
Carelessness predisposition is inability to perceive the limits of one's learning (Russo and
Schoemaker, 1992). The components, for example, self-responsibility to the undertaking and
self-presentation of capability are the reasons for pomposity in a financial specialist. At the point
when people neglect to understand the uncertainty of their capacities completely, assumptions

has a tendency to expand (Kahneman and Tversky, 1979). Mental specialists have discovered
how carelessness predisposition influences the conduct of people. The choices identified with
unverifiable occasions are the ones which have component of arrogance.
Inflation tendency shows up as over the top positive thinking and superior to anything normal
impact. Carelessness tendency can be extremely hurtful on money related choices; In a taking
after examination (Odean, 1998) demonstrated that the financial specialists with assumptions
will over-esteem their insight, along these lines they will contribute effectively. In any case,
contributing effectively does not ensure great results. (Hairdresser and Odean, 2001) considered
in their study that the financial specialists who exchange as often as possible acquire substantially
less benefit then those speculators who exchange regularly, in this manner assumptions tendency
is unsafe for those kind of financial specialists.
Razek (2011) characterize assumptions as an overestimation of the probabilities for an
arrangement of occasions. The creator contends that the idea is operationally reflected by looking
at whether the particular likelihood allocated is more noteworthy than the bit that is right for all
appraisals administered out to the given likelihood. Agrawal (2012) prominent that assumptions
reasons individuals to overestimate their insight, underestimate dangers and overestimate their
capacity to control occasions. The creator guaranteed that carelessness begins in peoples
one-sided assessment of proof. Numerous analysts discover proof for the vicinity of the
arrogance predisposition in diverse money related choices. Studies have demonstrated that
declaration returns are lower for careless bidders when contrasted with levelheaded bidders.
The most generally perceived result of arrogance is that it actuates higher exchanging volume.

Careless speculators, on the grounds that possibly they overestimate the accuracy of the data they
have, or on the grounds that they think they have above normal venture aptitudes, exchange more
than wise financial specialists. For De Bondt and Thaler (1995) carelessness is the key behavioral
component expected to comprehend the overtrading riddle. Odean (1998b) contends that the
abnormal state of exchanging volume is the most imperative impact of carelessness. Statman et
al. (2006) presents experimental confirmation for the US market and contends that exchanging
volume is especially higher after significant yields, as venture achievement builds the level of
arrogance. Hair stylist and Odean (2000) researches the execution of 60,000 markdown financier
speculators. The creators split the example into quintiles of portfolio turnover. Results
demonstrate that those exchanging the most have lower normal month to month return. The
confirmation reported by the creators recommends that the dealers were frequently directed by
deception of arrogant financial specialists.
As per Agrawal (2012), pomposity influences the conduct of business sector merchants as well as
speculators in the essential business sector. In a late study, Hsu & Shiu (2010) analyzed the guess
returns of speculators in prejudicial barters occurring in the Taiwan securities exchange and
found that regular applicants fail to meet expectations occasional applicants. Inflation motivated
forceful offering and higher installment for securing the sold shares. Continuous bidders likewise
turn out to be sub-par as far as stock choice execution. This infers their overestimation without
bounds income of the starting open offer (IPO) firms, or underestimation of the danger of interest
in these organizations, or both. As per Subrahmanyan (2007), pomposity about private signs
causes eruption and subsequently wonders like the book/business sector impact and long-run
inversions, though self-attribution (ascribing accomplishment to capability and disappointments

to misfortune) keeps up carelessness and permits costs to keep on overcompensating, making

force.
Two unique measurements of pomposity may have this effect on the exchange conduct of
individual financial specialists. Speculators may be presumptuous as in they think little of the
unpredictability of money related resources and as an outcome exchange more. Those speculators
demonstrate a miscallibration tendency. This methodology is exhibited in Daniel et al. (1998)
who models assumptions as the level of underestimation of the change of data signs.
Then again, speculators might likewise be presumptuous in regards to their venture aptitudes,
especially financial specialists with high past execution. The instinct behind this contention is
that the gathering of fruitful business sector guesss makes financial specialists progressively
presumptuous and thus makes them exchange more. Because of a self-attribution tendency,
financial specialists think they are above normal (superior to anything normal predisposition)
with respect to their guess abilities. This finding is reliable with the guess that a higher level of
carelessness motivates higher exchanging volume on the off chance that we acknowledge that
high past returns are decidedly connected with assumptions. This superior to anything normal
exchanging impact has been archived exactly by Glaser and Weber (2007) who give confirmation
of a higher exchanging affinity by careless financial specialists when they recognize pompous
speculators as the individuals who think they are above normal as far as venture aptitudes or past
execution. This finding is predictable with other late studies (see Deaves et al. 2009, Graham et
al. 2009). In the same line of exploration, Barber and Odean (2001) cases that arrogance is much
higher among men than among ladies and that clarifies why men exchange more than ladies.

Next to this exchanging impact, assumptions has likewise been connected with exorbitant danger
taking. Experimental work by Dorn and Huberman (2005) and Nosic and Weber (2010) appears
to demonstrate that pompous speculators are more inclined to assume hazard for which there is
no obvious return advantage.
A few researchers hold that "inspiration" is a main consideration of pomposity. Individuals
exaggerate their capacity with a specific end goal to keep self-regard and lessen tension and
accordingly indicate arrogance. In the hypothesis of behavioral financial matters and behavioral
fund, the accompanying researchers once considered reasons for speculators' arrogance, including
Kahnemanand Tversky (1973), Fischhoff, Slovic and Lichtenstein (1978) and in addition Fiske
and Taylor (1991) and so forth.
Carelessness might likewise influence the effect of data on people's exchanging conduct. Forbes
and Kara (2010) contends that individual speculators' self-assurance intervenes how venture
money related learning impacts financial specialists' exchanging adequacy, and Abreu and
Mendes (2012) find that the more pompous and non-presumptuous speculators put resources into
data the more they exchange, yet the exchanging conduct is delicate to the wellsprings of data
utilized. Careless financial specialists exchange less habitually when they gather data by means
of loved ones, and non-presumptuous speculators exchange all the more often when they utilize
particular wellsprings of data. Be that as it may, Kirchler's (2010) test results demonstrate the
inverse conclusion: the industrious underperformance of powerless educated financial specialists
is not because of arrogance.
Arrogance is a predisposition which mirrors the perspective in which an individual overestimates

his/her capacities or expertise to perform a specific undertaking. In their investigation of

Overconfidence tendency (Barber and Odean, 2001) found that it impacts the balanced choice
making of financial specialists and will lead the speculator to exchange more hazardous security.
(Gervais and Odean, 2001) concentrated on that both pomposity and over good faith are identity
qualities which impact the choice making of an individual and that the arrogance strengthens the
over confidence.
Kahneman and Tversky (1973, 1979) for the most part clarified framing reasons of pomposity
from the point of view of perception of data preparing. They observed that amid settling on
judgment and choices, individuals would have a tendency to give the unmistakable data high
weight. Therapists Lichtenstein, S. furthermore, B. Fischhoff (1977, 19780 considered people
would underrate event plausibility of the occasions they couldn't currently or envision so that
they may overlook conceivable dangers and result in carelessness and overcompensation. Master,
Ross and Lepper (1979) found in their audits that individuals would give little weight to the data
distinctive structure their thoughts or purposely disregard it. In the suppositions of Fiske and
Taylor (1991), the length of individuals trust, they would not consider whether the data is totally
right. The motivation behind why individuals trust realness or non-legitimacy of these occasions
originates from individual arrogance mindset. Griffin and Tversky (1992) found individuals as
often as possible considered amazing data or esteemed it, yet did not stress whether the data was
compelling or right.
Assumptions and over positive thinking are a touch comparable in nature, yet they are not the
same. An overoptimistic individual may not be pompous about his/her capacities but rather yet
idealistic about the event of a coveted constructive result of their activities, while a presumptuous

individual is certain about his/her capacity, or the result of the occasion. So a presumptuous
individual is liable to be overoptimistic also on the grounds that he/she overestimate their
capacities and they feel that they have settled on the best choice which will create them greatest
positive results, therefore they get to be overoptimistic about the result too. So an arrogant
individual is exceptionally prone to be overoptimistic while an overoptimistic individual might
possibly be presumptuous (Baumeiste et al., 1989).
In behavioral fund consider individuals are ordinary. Behavioral finance is a rising field that
shows an accumulation of exchange drew closer to expand the established account meaning of
financial reasonability. Behavioral finance depicted on the brain science, attribution and
intellectual writing's to investigate why a financial specialist choice making often shift from wise
option in customary ways. In wise choice making process a speculator need to boost their wishes,
before taking a particular choice a financial specialist will regularly apply a progression of
systematic strides to discriminating survey material reality, goal and fair-minded to potential
result. Tverskey and kahneman recommended the prospect hypothesis that to clarify a financial
specialist choice making conduct under uncertain thought. The prospect hypothesis permitting
that there are numerous mental components of speculator's that cause their existent choice
making procedure to shift from wiseness, the contention of limited discernment will proceed by
Sinon (1957). As indicated by Robbins (2002) reasonable chief when all is said in done settle on
a choice on the base of under certain rationale and methodical choice procedure.

Illusion of Control
The dream of control is the tendency for individuals to overestimate their capacity to control

occasions, for case to feel that they control results that they evidently have no impact over. At the
end of the day, the fantasy of control is overestimating the part of aptitude with respect to
fortunes in the determination of results. Likewise, the Illusion of control impact portrays the
propensity for individuals to carry on as though they may have some control over occasions or
results when actually they have none. Alongside the confidence tendency, the deception of
control is one of the positive illusions.
As per Shefrin (2007) clarify that the carelessness is concern to how well Investors understand
their own particular capacities and limit of their insight. In Pakistan economy Investors conduct
is not diverse. In Pakistan financial specialists dependably concentrate just towards the arrival
and overlook the turnover the business sector. This pomposity may motivate unreasonable
decisional making by the financial specialists and will endure a misfortune (Beenish andNaeem
Ullah Feb 2013). Tunisian speculators appear to be careless. Besides, age and wage are not
identified with self-assurance in Tunis. Presumptuous men have a tendency to exchange more
than ladies (salma zaine,Ezzeddine). Hair stylist, Gervais & Odean (2001) contended that men
are more arrogant than ladies and that carelessness diminishes with experience and kirchler and
maciejovsky in 2002 study that Overconfidence increment with their speculator's ventures
experience. High market returns make financial specialists presumptuous and therefore,
speculators exchange all the more regularly. Truth be told, exchanging exercises effected by past
business returns. There is critical positive connection in the middle of volume and instability
(Salma Zaiane and Ezzeddine Abaoub 2009).
The impact was named by therapist Ellen Langer (1975) and has been imitated in a wide range of
connections: research facility investigations, watched conduct in natural diversions of chance, for

example, lotteries, and self-reports of true conduct. Thompson (1999) gives a complete
clarification of why fantasy of control happens. She contends that individuals utilize a control
heuristic to judge their level of impact over a result. All the more accurately individuals utilize a
straightforward tenet to achieve an appraisal of one's control over accomplishing a result with
two components: one's aim to accomplish the result and the apparent association between one's
activity and the craved result. On the off chance that one intends a result and sees an association,
then view of individual control is high. Like most heuristics this straightforward govern regularly
motivates precise judgments however can likewise motivate overestimations of control in light of
the fact that purposefulness and association can happen in circumstances in which a man has no
control.
Shefrin (2000) in an examination "Predispositions permit the distinction of business sector costs
from its crucial values."According to established money related hypothesis, a financial specialist
is viewed as capable and insightful individual to better utilization of data and can possibly take
best choice. Customary money related hypothesis utilization to figure out the reasons of a
speculator to exchange, taking hazard and settle on choices over the business sector.
The prescient part of the dream of control motivate stretches out to the more broad idea of
pomposity. In the behavioral account writing (e.g., Kyle and Wang, 1997; Odean, 1999), a
careless financial specialist has generally been characterized as one who overestimates the
accuracy of his data signals. Overconfidence is destined to show in situations with variables
connected with expertise and execution and some critical components of shot.
As of late, research in the field of behavioral fund likewise a few highlights on expert business

sector guess. As per Shefrin (2001), business sectors can't ever be unequivocally proficient, for
the reason that financial specialists don't settle on choice and act reasonably in the business. The
monetary business proficiency relies on the financial specialist's exchanging conduct. The
shortcomings in the EMH that behavioral fund has brought under examination are called
'predispositions. 'Something willful about tendency is basic comprehension. On the other hand,
the preferences utilized by behavioral finance are not something that can be unlearned. These
tendency are referred to by behavioral financial experts and have profoundly established
characteristics of human instinct (Zimmermann, n.d).
Late studies demonstrate the capacity to tentatively control dream of control. Numerous guesses
of why people keep on betting or go out on a limb concentrate on qualities of the speculator as
the essential variable in charge of danger taking. Future after subjects had played the amusement
for various trials; wrong standards identified with this "deception of control" were presented in a
different benchmark design crosswise over subjects, later took after by exact principles. Results
demonstrate that the control heuristic may exist for subjects, yet that it can be brought under test
control through the utilization of experimenter conveyed directions.
An examination demonstrates that figment of control have an effect on people execution in
money related instruments. The creators contended that assignment and environment of a market
that are confronted by dealers are conductive to advancement of figment of control and that
affinity of a person to figment of control will conversely interlink or interfaced with the
merchants execution.
For instance, speculators playing the opening machines pull the handles with the expectation of

getting a triumphant blend. At the point when this activity is trailed by the craved result, an
association is set up (activity result) and players raise their levels of fantasy of control. The
same may likewise apply to guess returns.
Other than this heuristic different elements add to the hallucination of control. Individual
contribution is fundamental for the figment of control on the grounds that generally the
association can't be set up. Achievement arranged undertakings build fantasy (in light of the fact
that they lead individuals to overestimate the association), disappointment encounters and the
emphasis on losing have the inverse impact.
Those distinctive types of carelessness are interconnected. Case in point, individuals have a
tendency to be arrogant about both their capacities and their insight. Individuals who are
presumptuous about their capacities overestimate their impact over results.
Individuals who are arrogant about their insight have a tendency to think they know more than
they really do. Specifically, individuals who are careless about their insight have a tendency to
build up unnecessarily limit certainty interims. Such individuals wind up being amazed at their
slip-ups more frequently than they had expected. However these distinctive indications of
assumptions don't gauge the same thing and examination appears to demonstrate that they don't
motivate the same blunders in the money related conduct of individual financial specialists.
Langer (1975) characterizes the dream of control as "an anticipation of an individual
achievement likelihood improperly higher than the target likelihood would warrant." Langer
finds that decision, undertaking commonality, rivalry, and dynamic contribution all lead to
swelled certainty convictions. For instance, Langer found that individuals why should allowed

select their own particular numbers in a lottery diversion (speculatively) requested a higher cost
for their ticket than did individuals who were doled out arbitrary numbers. Since this introductory
study, numerous different scientists have found that individuals regularly see more control than
they really have, make causal associations where none exist, and report shockingly high expected
prescient capacity of chance occasions.
Speculators may be having a mixture of behavioral tendency, which lead them to commit
psychological errors. Every single person hold heuristic improvements that are the reason they
settle on unsurprising and non-ideal choices at whatever point they are confronted with
vulnerability. We consider a surely understood behavioral tendency that impact human choice
making "Deception of control predisposition". One result of heuristic rearrangements
"self-misdirection" happens when individuals imagine that they can control a few occasions yet
truly they can't (Trivers, 1991). Another trait of deception of control tendency is when financial
specialists point out past accomplishment to their aptitudes and past inability to misfortune.
Scientists have exhibited hallucination as an illumination for consistent high rates of ownership
passage, in spite of the way that recurrence of possession disappointment is a lot of high
(Camerer & Lovallo, 1999).
Presson and Benassi (1996) perform a meta-examination of 53 trials on the fantasy of control and
make a refinement between deceptive control and fanciful forecast. They discover much more
noteworthy impact sizes in investigations "that deliberate members' view of their capacity to
foresee results, instead of members' capacity to control results." truth be told, the creators point
out (p. 496): "Strangely, few tests have really measured deceptive control as in members judge

the degree to which they straightforwardly influence results."

As indicated by Pompian (2012), fantasy of control tendency is which individuals have a
tendency to trust that they can control or impact results when, truth be told, they can't. A survey
by the creator showed that decisions, assignment recognition, rivalry and dynamic inclusion can
all blow up certainty and produce such illusions. This may lead speculators to either exchange
more than is reasonable or insufficiently expand portfolios, for example, in view of commonality
because of, for occurrence, having worked in the organization. Subrahmanyan (2005)
additionally displays proof that individual financial specialists lean toward stocks with high
brand acknowledgment, supporting the nature theory.
All things considered, there is a feeling that a few individuals do have some tendency for direct
control, for instance, numerous poops players care who moves the craps at the table, and some
unequivocally want to move the shakers themselves.
Two late trial studies explore pomposity in venture conduct and utilize more straightforward
estimation of assumptions. Dittrich, Gth & Maciejovsky (2001) permit members to pick a guess
portfolio, and characterize pomposity as the reliably higher assessment one could call one own
decision over the ideal portfolio, and in addition hazard loath and danger looking for portfolios.
They find that assumptions increments with errand unpredictability and declines with instability.
Biais, Hilton, Mazurier & Pouget (2002) unequivocally measure one's attitude toward
assumptions by controlling mental tests, and find that pompous dealers do have a tendency to
overestimate the accuracy of their signs and acquire generally low benefits in the going with
exploratory exchanging session.

In any case, none of the studies said expressly address the dream of control, and as far as anyone
is concerned this wonder has not been tried in a guess test in which choices are actualized with
genuine cash. There are various reasons why an individual may be presumptuous (e.g., a general
tendency, or a conviction particular to a specific circumstance), and we are intrigued rather in the
impact of direct investment in the process motivateing a monetary result on the relating danger
states of mind and portfolio decision. Our configuration obliges both the control and expectation
parts of the hallucination of control.

Self-Attribution
At the point when individuals relate their prosperity with their own capacities and abilities and
hold outside strengths or misfortune for their disappointments is self-attribution predisposition
(Shefrin, 2007: p. 101). (Gervais and Odean, 2001) contended that individuals judge their
aptitudes not through self-examination but rather by evaluating their achievements and
disappointments. Individuals basically assume a lot of acknowledgment for their own
accomplishments, they additionally found that self-attribution predisposition influences the
impression of individuals with respect to their capacities and occupies them from gaining from
past victories.
Self-Attribution Bias uncovers that individuals decode achievement and disappointment in an
unexpected way: Individuals have a tendency to credit accomplishment to their own capacities.
Interestingly disappointment is frequently ascribed to outer elements which they can't impact
(Miller & Ross, 1975). In this way, individuals normally don't gain from their mix-ups on the
grounds that they really are not mindful of those mix-ups or don't recollect that them. Lau and

Russell (1980) study Self-Attribution Bias for competitors and their chiefs. They find that
competitors and their directors credit 80% of the triumphs they could call their own group to
interior components. Inside elements are connected to the accomplishment and abilities they
could call their own group.
Then again, misfortunes are clarified by interior components in just 53% of cases. Rather, outer
reasons, for example, officials' choices or the climate, are regularly rebuked for thrashings.
Moreover, Lau and Russell study the clarifications given by columnists in daily papers. On
account of a triumph, writers property achievement 70% of the time to inside elements. Yet,
columnists characteristic just 57% of thrashings to inside variables. Consequently, writers clarify
achievement more frequently by inward components than disappointment, too, yet the
Self-Attribution Bias of columnists is weaker than that of competitors or chiefs.
Pompian (2012) clarified predisposition as the propensity of people to credit their victories to
intrinsic viewpoints, for example, ability or premonition, while all the more regularly faulting
disappointments for outside impacts, for example, misfortune. Thusly, self-attribution
speculators can, after a time of fruitful contributing, trust that their prosperity is because of their
discernment as financial specialists as opposed to components out of their control. This can
motivate taking a lot of danger because of certainty. Self-attribution tendency is a long-standing
idea in brain science research and alludes to people's general propensity to ascribe victories to
individual aptitudes and disappointments to calculates outside their ability to control (see e.g.,
Feather and Simon, 1971; Miller and Ross, 1975).Recently, self-attribution predisposition is
likewise picking up exploration consideration in the field of family unit fund. In such manner,
this tendency is thought to underlie and fortify individual speculator assumptions (Barberand

Odean, 2002; Dorn and Huberman, 2005).

Singh (2012) watched that more often than not individual is represented not by the good
judgment but rather by its feelings. As indicated by Qawi (2010), the human hereditary makes us
to act quicker than reasonably, because of the natural reaction time inside of our brains in testing
circumstances.
Choi and Dong (2008) study Self-Attribution Bias in budgetary markets. They understand that
institutional financial specialists ascribe accomplishment to their own capacities while
disappointment is regularly clarified by outside components. Choi and Dong archive that in the
event of progress, financial specialists get to be arrogant. Carelessness motivates putting
resources into commercial enterprises which are not in the circle of ability of those speculators.
Doukas and Petmezas (2007) additionally discover a relationship between Self-Attribution Bias
and Overconfidence for institutional financial specialists. Carelessness motivates over the top
exchanging, which is in charge of poor guess results (Doukas & Petmezas, 2007).
Pompian (2012) clarifies that a feeling may be considered as a mental state that emerges
suddenly instead of through cognizant exertion. Feelings need to do with how individuals feel as
opposed to what and how they think. Passionate predispositions stem from motivation or instinct
and may be considered to come about because of thinking affected by emotions. Then again, in
light of the fact that enthusiastic predispositions stem from motivation or instinct particularly
individual, they are less effortlessly amended. Feelings are identified with emotions,
observations, or convictions about components, items or relations between these things and they
can be an element of reality or of the creative energy. Feelings may be undesirable to those

tendency them; they may wish to control the feelings however regularly can't. Along these lines,
it might just be conceivable to perceive an enthusiastic predisposition and adjust to it.
Self-attribution predisposition influences the capacity of a man to gauge his/her capacities
furthermore influences the gaining from past exhibitions of that individual to gauge his/her
capacities furthermore influences the gaining from past exhibitions of that individual. (Gervais
and Odean, 2001) chipped away at the impacts of past exhibitions of the financial specialists on
their conduct, and found that achievement reinforces the carelessness. At the point when a
financial specialist is fruitful, he/she acknowledge this accomplishment for their own particular
capacities and aptitudes and firms their convictions in regards to their capacity excessively,
therefore they get to be careless. It was observed that People experiencing self-attribution
tendency turn out to be more pompous after a win and it influences the origination about own
abilities as it prevents the assessment of past execution, this motivates carelessness (Seppl,
2009).
At the point when gone up against with instability financial specialists have a tendency to be
expanding one-sided self-attribution, which eventually affect arrogance in them (Yosef and
Kumar, 2012). It was found that people turn out to be more presumptuous as opposed to going
for self-appraisal when influenced without anyone else attribution tendency (Cova et al., 2001).
(Tversky, 1995) concentrated on that assumptions produces from Phenomena like
self-improvement, locus of control and recklessness of consistency rightness, all these are the
bases of pomposity in a person. Speculators are presumptuous about the occasions which they
trust will produce constructive results and will exemplify them (Weinstein and Klein, 2002);

(Weinstein, 1980). So self-improvement triggers arrogance in speculators.

Optimism
Optimism is an individual contrast variable mirroring the degree to which individuals hold
summed up great anticipations for their future. More elevated amounts of positive thinking have
been connected tentatively to better subjective prosperity in times of misfortune or trouble
(Carver, Scheier, & Segerstrom, 2010)2. Individuals who are more hopeful work harder, hope to
resign more seasoned (subsequently hope to live more and more content with his/her
occupation), and are more prone to remarry, and they put more in individual stocks and spare
more (Puri & Robinson, 2007). In any case, McKenna (1993) contended that there was clear
confirmation for the fantasy of control, yet there was no proof for (unlikely) idealism as a
consequence of his exploration. As per De Meza and Southey (1996), if confidence emerges from
the deception of control, it is far-fetched that priors will be legitimately fused.
As indicated by Manglik (2006), examination on behavioral predispositions, for example,
idealism, in money related choice making started to assemble energy in financial matters just in
the seventies. Researchers started to recognize an example of peculiarities in the monetary
markets, for example, size impact and energy impact. At first, behavioral finance hypothesis was
considered as deficient and 'no hypothesis', while balanced decision is considered normatively
unrivaled by customary financial experts (Manglik, 2006). Just as of late has money related
conduct and its effect on monetary hypothesis turn into an acknowledged truth, and different
measurements of behavioral hypothesis been investigated. Behavioral issues are demonstrated to
influence the money related business. For instance, Shefrin and Statman (1985) find that mental

bookkeeping, misgiving, and discretion are the behavioral predispositions that motivate the
behavior to offer victors too soon and ride failures too long in budgetary markets. Hair stylist and
Odean (2001) find men bring down their profits more than ladies in light of the fact that they are
presumptuous and exchange too much.
In money related financial matters, idealistic people are characterized as the individuals who
tendency or overestimate the likelihood of good results and belittle the likelihood of contrary
results, hence motivateing more hazard taking conduct in monetary choice making (Kahneman
and Lovallo, 1993; Heaton, 2002).
One of the best reported of every mental blunder is the tendency to be over-hopeful. Exorbitant
hopefulness happens when individuals overestimate the return of ideal results and belittle the
recurrence of unfavorable results (Shefrin, 2007). Case in point, people underrate the possibility
of getting separated, being in a fender bender of anguish from a noteworthy disease, while they
hope to live more than others, overestimate their achievement in the work drive and trust that
their youngsters are particularly skilled (Sharot, 2011). Good faith is vital for budgetary
intermediation; it can influence corporate monetary and bookkeeping choices; it can swell
security costs in the vicinity of short-deal limitations; and it can motivate over-and under
response in stock returns. Puri and Robinson (2007) presume that more idealistic individuals
work harder, hope to resign later, put more in individual stocks, and spare all the more, on the
other hand, amazing self-assured people show budgetary propensities and conduct that are for the
most part not thought to be reasonable.
Hopeful predisposition in choice making is among the heartiest discoveries in exploration on

social observations and comprehensions in the course of the most recent two decades
(Helweg-Larsen & Shepperd, 2001). Different information recommend that individuals have a
tendency to be unreasonably idealistic about the future (Weinstein, 1980). Studies concerning car
crashes (Robertson, 1977), wrongdoing (Weinstein, 1977), and ailment (Harris & Guten, 1979)
find that numerous individuals trust their danger is not as much as normal, yet a couple think
their danger is more prominent than normal. At the point when individuals are solicited to
anticipate the result from social and political occasions, their expectations have a tendency to
correspond with their tendency (McGuire, 1960). Notwithstanding for simply risk occasions, for
example, a supposition of heads or tails, individuals at times presentation idealistic
predispositions (Langer & Roth, 1975).
Idealism is key for survival, despite the fact that there are occurrences in which confidence
neglects to pass on favorable position and occasions in which even it may pass on an
inconvenience (Carver et al., 2010). The purposes behind the last case may be because of
incorrect self-assurance practices, in spite of self-hobby. The resultant impact is the worry in this
exploration, instead of the examination of the reasons.
A person who is hopefully one-sided judges his or her own particular danger as not exactly the
danger of others. Such blunders in judgment of anticipating that others should be casualties of
setback yet not themselves, and intuition themselves as insusceptible are marked as unreasonable
good faith by
Weinstein (1980) taking into account his studies. Weistein (1980) led two studies that examined
the tendency of individuals to be unreasonably idealistic about future life occasions.

People who fill in as business experts or take part in the capital market reliably make wrong
evaluations of probabilities, and especially, people regularly overestimate the likelihood of good
results in budgetary choice making (Camerer & Lovallo, 1999; Rosen R. J., 2003; Lee, Shleifer,
& Thaler, 1991). Hackbarth (2007) found that idealistic administrators overestimate corporate
assets development rate and think little of the assets hazard. They lean toward value to
obligation to finance new undertakings. Most business people in the test directed by Camerer and
Lovallo (1999) think the aggregate benefit earned by all participants will be pessimistic, yet their
own particular benefit will be sure. At the point when social state of mind is high, there is higher
volume of union and acquisitions (Nofsinger & Kim, 2003). Lowry and Schwert (2002) find that
more firms open up to the world in the wake of watching high IPO returns for different firms.
Easterwood and Nutt (1999) find that budgetary investigators underreact to negative data,
however go overboard to positive data.
From over analysts' writing it can be gathered calm effortlessly that carelessness, dream of
control self-attribution and confidence drives speculators to overstate and overestimate their
insight and afterward they such choices that are problematic as well as motivates serious
expenses furthermore it demonstrates that how self-attribution gets to be main driver for
assumptions tendency, and arrogance gets to be fundamental reason for positive thinking along
these lines one predisposition motivating another tendency. The writing survey additionally
recognizes the exploration hole that the original reason is available among the predispositions
and this is the principle motivation behind the study.
In this paper, we characterize assumptions, figment of control self-attribution and idealism as the
overestimation of the positive result in a future occasion. In particular, in our study this is a

positive change of a speculator's future budgetary circumstance. Utilizing family study

information empowers us to utilize a limitless example from this present reality as opposed to an
examination.

Cognitive Reflection Test

This study is gone for utilizing CRT inquiries to test whether the behavioral tendency are
identified with intellectual capacities among distinctive Malaysian races. Frederick (2005) in
acquainting the three things CRT with measure subjective capacity found that they are discerning
of the sort of decisions people make. What's more, when exploring the time tendency association
with CRT it was found that people with high subjective capacity are more patient than the people
with low intellectual capacity. This study straightforwardly examines the distinctions in the
collaboration in the middle of race and sex in Malaysia. The Malaysian populace is a blend of
Malay, Chinese and Indians and this public has a blend of four noteworthy religious affiliations.
Frederick (2005) introduced proof that the precision of the view of danger is identified with an
identity trademark touched to as 'subjective reflection'. Psychological reflection is the capacity to
oppose the first drive or instinct. It is the propensity to reflect and consider an issue as opposed to
taking after beginning angles. Low subjective reflection is connected with an tendency to respect
motivate motivations by settling on brisk choices with little thought and consideration.
Individuals who are high in subjective reflection have a tendency to be great at assessing unsafe
venture circumstances, and have a tendency to be willing to go out on a limb.
Also, a few behavioral tendency are researched all the while, for example, conservatism and
hazard and time tendency. In researching the relationship between intellectual capacities and

behavioral predispositions Oechssler et al. (2009) found that CRT is connected with conjunction
paradox, conservatism, subjects' timing and danger tendency. Conjunction false notion or what is
currently known as "Linda issue" is the predisposition where the likelihood of the collaboration
of two or more occasions or their conjunction is thought to surpass the likelihood of the single
general occasion. Tversky and Kahn (1983) were the pioneers in building up a strategy for testing
such a predisposition. They found that 85% of the members fall into the conjunction deception.
So also Oechssler et al. (2009) discovered a noteworthy distinction between diverse intellectual
gatherings as far as conjunction deception. Then again conservatism alludes to truth that
individual have a tendency to think little of high probabilities and overestimate low ones
(Hilbert, 2012).
Nofsinger and Varma (2007) referred to proof that proposes a connection between intellectual
reflection and relative insusceptibility from behavioral tendency. They additionally did a review,
which observed that expert money related consultants (individual budgetary organizers) were
above normal as far as subjective reflection. Frederick had introduced confirmation that proposes
a connection between hyperbolic reducing (i.e. overemphasis on the present) and low intellectual
reflection. Nofsinger and Varma gave confirmation to bolster that perception. Individuals with
low intellectual reflection neglect to see the premium rate certain in a decision between two
distinct wholes of cash at diverse purposes of time (the present and a future date).
The balanced of this study is gotten from Albaity, Rahman and Islam (2014), Albaity and
Rahman (2012a) and Albaity and Rahman (2012b) who study a few behavioral characteristics of
the Malaysian public and the relationship in the middle of CRT and demographic variables. Their
discoveries express that distinctions existed in the middle of race and sexual orientations.

Halpern et al. (2011) and Reily (2012) considered the sexual orientation contrast stereotyping and
found that the existed however was belittled.
Individual money related counsels ought to have the capacity to see the understood premium
rates keeping in mind the end goal to give a word of wisdom to their customers. All the more for
the most part, customers with low psychological reflection are more needing direction since their
capacity to comprehend options and to pick between them would have a tendency to be
moderately low.
CRT mirrors two sorts of subjective procedure over the span of choice making: one sort indicates
alert execution with minimal aware consultation, and the other one shows slower execution and
more intelligent (Frederick, 2005). We all can have these two sorts of procedure, while the point
to get right answers is whether we can overcome the rash mistaken answers. Tying down impact,
delegate tendency, accessibility predisposition, encircling impact, crowding impact and lament
and other mental tendency mulled over by behavioral account, every one of them show up amid
the procedure of guess choice making (Shefrin, 2000). In this way, utilize an intellectual capacity
test that attention on choice making to gauge predispositions throughout choice making would be
an ideal choice.
"Cognitive Reflection Test" (CRT) as a straightforward measure of one kind of subjective
capacity. I will demonstrate that CRT scores are prescient of the sorts of decisions that
component noticeably in tests of choice making guess, as expected utility hypothesis and
prospect hypothesis. Without a doubt, the connection is once in a while so solid that the tendency
themselves successfully work as articulations of intellectual capacity an exact certainty asking for

a hypothetical clarification.

Chapter 3
Theoretical Framework

Key Words:
OVC: Overconfidence
IOC: Illusion of Control
SAT: Self-Attribution
OPM: Optimism
INVD: Investor Investment Decision Making
CRT: Cognitive Reflection Test

Developing Hypothesis:
Hp1: There is an impact of overconfidence on investors financial decision making.
Hp2: There is an influence of illusion of control on investors financial decision making.
Hp3: There is an effect of self-attribution bias on investment decision making.
Hp4: Optimism has effect on investors financial decision making.
Hp5: CRT effect the relationship of overconfidence and investors financial decision making.
Hp6: CRT effect the relationship of illusion of control and investors financial decision making.
Hp7: CRT effect the relationship of self-attribution and investors financial decision making.
Hp8: CRT effect the relationship of optimism and investors financial decision making.

Methodology:
The aim of the study is to identify the effect of behavioral biases (overconfidence bias, illusion of
control, self-attribution bias, and optimism bias) on investors decision making. In the study
primary data was used and collected through questionnaire from sample size of 120 respondents
including teachers and students of finance and psychology disciplines and business men. 120
questionnaires were distributed, out of which 107 were received back, the rest are uncollected.
SPSS software was used for analysis and 107 observation were analyzed.

Questionnaire consists of two sections 1st for demographic variable and 2nd of question related
to behavioral factors. Questionnaire consists of 25 questions, 10 question for measuring of
investment decision and 4 question to measure overconfidence and 4 for optimism relatively.
Illusion of control and self-attribution are measured by 2, 2 questions relatively. CRT is
measured by using standard declared questions. Sample size in the study included 50 business
men, 32 employees, 14 students and remaining are related to other professions. From 107
respondents there are 68 male and 39 female, in which 88 respondents were married and 19 were
single. Out of 107 respondents, 15 belong to the age group below 28, the 40 respondents have
age group of 29-48 and remaining belongs to the age above 48. Educational level of 7
respondents is doctorate, 32 from Masters, 45 Bachelors while remaining has education level of
below graduation. Investment experience of 9 respondents is less than 1 year, 57 respondents
have 1-4 years experience and reaming have above 4 years. There are odfgdfgdfnly 27
respondents who invest by self in stocks remaining respondents invests through broker. Out of
107 respondents 41 trades in Karachi stock exchange, 58 in Lahore Exchange and remaining
trades in Islamabad stock exchange.
Descriptive Statistics
N

Minimum

Maximum

Mean

Std. Deviation

Investment Decision

107

1.90

4.30

3.4383

.41678

Overconfidence

107

1.75

5.00

3.7313

.57739

Illusion of control

107

1.50

5.00

3.5748

.79445

Self-attribution

107

1.00

5.00

3.7009

.83231

Optimism

107

2.00

4.25

3.3949

.47711

CRT

107

3.33

5.00

4.1558

.30135

Valid N (list wise)

107

Table 2. Reliability Analysis

Sr.

Variables

No. of Items

Cronbachs Alpha

Investment Decision

.659

Overconfidence

.535

Illusion of control

.628

Self-attribution

.611

Optimism

.716

Cronbach alpha is used to measure the reliability and validity of data. The results of Table 2
showed that all variable Cronbach alpha was greater than 0.5. Overconfidence bias has 0.535,
illusion of control has 0.628, self-attribution has 0.611, optimism has 0.716 and Investment
Decision has 0.659.

Pearson Correlation
Table 3. Correlations
INVD

OVC

IOC

SAT

OPM

Pearson Correlation
Sig. (2-tailed)
N
Pearson Correlation
Sig. (2-tailed)
N
Pearson Correlation
Sig. (2-tailed)
N
Pearson Correlation
Sig. (2-tailed)
N
Pearson Correlation
Sig. (2-tailed)
N

INVD
1

OVC

IOC

SAT

OPM

107
.573**
.000
107
.360**
.000
107
.443**
.000
107
.507**
.000
107

1
107
.551**
.000
107
.504**
.000
107
.459**
.000
107

1
107
.419**
.000
107
.341**
.000
107

1
107
.484**
.000
107

1
107

**. Correlation is significant at the 0.01 level (2-tailed).

The results of table 3 showed that overconfidence, illusion of control, self-attribution and
optimism have positive and significant relationship with investor decision making at (P < 0.01)
level with points (0.573**), (0.360**), (0.443**) and (0.507**) respectively. Its mean that all
behavioral biases have positive and significant relationship with the investors decision making.

Liner Regression Model

Table 4. Model Summary
Model

R Square

Adjusted R
Std. Error of the
Square
Estimate
1
.413
.389
.32566
.642a
a. Predictors: (Constant), OPM, IOC, SAT, OVC

The results of Table 4 show that 64.2% change in the dependent variable is due to independent
variable. The variation in the investors decision making 64.2% is predicted due to behavioral
biases (Overconfidence, illusion of control, self-attribution and optimism). 35.8% change in the
dependent variable is due to other variables which are not included the study. It is close to 1 so
we can say that model is valid for prediction. The model is fit for the prediction of the investors
decision making.

Table 5. ANOVAb
Model
1

Regression

Sum of
Squares
7.596

Df

Mean Square F

Sig.

1.899

.000a

17.905

Residual
10.817
102
Total
18.413
106
a. Predictors: (Constant), OPM, IOC, SAT, OVC
b. Dependent Variable: INVD

.106

The 5th table of analysis of variance it shows that model is fit because the P-value is less than
(P <0.01). It means that all independent variables have impact on dependent variable.

Table 6. Coefficientsa
Model

Unstandardized
Coefficients
B
Std. Error
1
(Constant)
1.366
.255
OVC
.280
.072
IOC
.003
.049
SAT
.057
.047
OPM
.237
.079
a. Dependent Variable: INVD

Standardized T
Coefficients
Beta
5.359
.388
3.872
.006
.069
.113
1.197
.271
2.994

Sig.

.000
.000
.946
.234
.003

Findings of table 6 shows that all independent variables play significant role in the change of
investors decision making. is the rate of change in investor decision due to the change of
0.280, 0.003, 0.057 and 0.237 in independent variable. On the basis of given data over
confidence and optimism have more influence on the investor decisions and has positive relation.
The results showed that illusion of control and self-attribution have no effect on investors
decisions because P-value greater than . So 2nd and 3rd hypothesis are rejected. Overconfidence
and optimism have impact on investor decision because their P-value less than value so 1st and
4th hypothesis are accepted.

Interaction of Cognitive Reflection Test

Table 7. Model Summary
Model
1

R Square

Adjusted R Std. Error of the

Square
Estimate
.431
.31441

.479
.692a
a. Predictors: (Constant), OPM_CRT_Interaction, OVC_centerd,
CRT_centerd, SAT_CRT_Interaction, OPM_centered, SAT_centered,
OVC_CRT_Interaction, IOC_centered, IOC_CRT_Interaction

The results of Table 7 show that 69.2% change in the dependent variable is due to interaction of
cognitive reflection test with independent variable. The variation in the investors decision
making 69.2% is predicted due to Moderator interaction with behavioral biases. 30.8% change in
the dependent variable is due to other variables which are not included the study. It is close to 1
so we can say that model is valid for prediction. The model shows that high CRT score effects
relationship biases and decision making. So model is fit for the prediction of the investors
decision making.

Table 8. ANOVAb
Model

Sum of
df
Mean Square
F
Sig.
Squares
1
Regression
8.824
9
.980
9.918
.000a
Residual
9.589
97
.099
Total
18.413
106
a. Predictors: (Constant), OPM_CRT_Interaction, OVC_centerd, CRT_centerd,
SAT_CRT_Interaction, OPM_centered, SAT_centered, OVC_CRT_Interaction,
IOC_centered, IOC_CRT_Interaction
b. Dependent Variable: INVD

The 8th table of analysis of variance it shows that model is fit because the P-value is less than
(P <0.01). It means that moderator interaction with independent variables have impact on
dependent variable.

Model

(Constant)
OVC_centerd
IOC_centered
SAT_centered
OPM_centered
CRT_centerd
OVC_CRT_Interaction
IOC_CRT_Interaction
SAT_CRT_Interaction
OPM_CRT_Interaction
a. Dependent Variable: INVD

Table 9. Coefficientsa
Unstandardized
Standardized
Coefficients
Coefficients
B
Std. Error
Beta
3.451
.031
.269
.076
.372
.028
.050
.053
.046
.048
.091
.233
.078
.266
.012
.110
.009
.011
.246
.005
-.021
.171
-.014
-.007
.168
-.004
.756
.261
.265

109.569
3.544
.547
.959
3.002
.109
.043
-.125
-.043
2.900

Sig.

.000
.001
.585
.340
.003
.914
.966
.900
.966
.005

Analysis of table 9 shows that CRT play significant role in the change of investors decision
making. is the rate of change in investor decision due to the change of 0.11, -0.021, -0.007 and
0.756 in independent variable. On the basis of given data CRT has more influence on the
relationship of optimism and investor decisions having positive relation. The results showed that
CRT has no effect on the relationship of overconfidence, illusion of control and self-attribution
with investors decisions because P-value greater than (0.01). So 5th, 6th and 7tn hypothesis are
rejected. And 8th hypothesis is accepted due to influence on the relationship.

Findings:
The result of the Pearson correlation showed that there is a positive and significant relationship
between behavioral biases and investor decision making. Overconfidence and optimism have
more affected the investors decision making as compared to the illusion of control and
self-attribution. The finding of this study showed that there is a significant relation and impact of
overconfidence and optimism on investor decision making and there is a significant relation of
illusion of control and self-attribution but having no impact on investor decision making
according to regression model. The finding of the study showed that hypothesis 1st and 4th are
accepted, overconfidence and optimism have impact on investors financial decision making. All
behavioral biases have significant relationship with investors financial decisions. The finding of
CRT shows that the effect of CRT with optimism is significant and having impact on relationship
of optimism and investor decision making. The impact of CRT on Illusion of control, over
confidence and self-attribution is insignificant so moderator has no influence in the relationship
with investor decision making. 8th hypothesis is accepted and 5th 6th and 7th are rejected.

Conclusion:
The study aimed to investigate the impact of behavioral biases on investors financial decision
making. The study concluded that overconfidence bias and optimism have impact on investors
financial decisions. And illusion of control and self-attribution have no effect on it according to
given data. The previous literature support the findings of the study like studies Park and Konana

et.al (2007) and Kosnik (2007) investigated that overconfidence influenced investors decision
making and optimism also effect investors decisions examined by Seppala (2009), and Poluch
(2011).
It has been observed that Pakistani people mostly dont give their own opinion; they neither
utilize the available resources nor the all information. The rigidity of believes found in Pakistans
people, they make their decisions following others views instead of their own. The results of
CRT shows that who scores high number are less effected by the behavioral biases. Most of the
people are unable to give the right answers of CRT. That might have due to giving the answers
unintentionally or by nor understanding the question clearly.

References:
Iqbal, T. R. H. (2015). Impact of Overconfidence, Illusion of control, Self-Control and Optimism
Bias on Investors Decision Making; Evidence from. Research Journal of Finance and
Accounting, 6(11), 110-115.
Athur, A. D. (2014). Effect of behavioural biases on investment decisions of individual investors
in Kenya (Doctoral dissertation, University Of Nairobi).
Rostami, M., & Dehaghani, Z. A. (2015). Impact of behavioral biases (overconfidence,
ambiguity-aversion and loss-aversion) on investment making decision in Tehran Stock
Exchange. Journal of Scientific Research and Development 2, 2015
Khurshid, M. R. (2012). Overconfidence and perceived market efficiency. Journal of
Contemporary Research in Business, Institute of Interdisciplinary Business Research
Park, J., Konana, P., Gu, B., Kumar, A., & Raghunathan, R. (2010). Confirmation bias,
overconfidence,

and

investment

performance:

Evidence

from

stock

message

boards. McCombs Research Paper Series No. IROM-07-10.

Wang, M. (2015, March). Literature Review of Decision Behavior Biases of Enterprise
ManagersCase study of overconfidence. In 2015 International Conference on Education
Technology and Economic Management. Atlantis Press.
Bashir, T., Javed, A., Ali, U., Meer, U. I., & Naseem, M. M. (2013). Empirical Testing of
Heuristics Interrupting the Investors Rational Decision Making.European Scientific

Journal, 9(28).
Charness,

G.,

&

Gneezy,

U.

(2010).

Portfolio

choice

and

risk

attitudes:

An

experiment. Economic Inquiry, 48(1), 133-146.

KAFAYAT,

A.

(2014).

Interrelationship

of

biases:

effect

investment

decisions

ultimately. Theoretical and Applied Economics, 18(6 (595)), 85-110

Nguyen, T., & Schuessler, A. (2012). Investment decisions and socio-demographic
characteristicsempirical evidence from Germany. International Journal of Economics
and Finance, 4(9), p1.
Hoffmann, A. O., & Post, T. (2014). Self-attribution bias in consumer financial
decision-making: How investment returns affect individuals belief in skill.Journal of
Behavioral and Experimental Economics, 52, 23-28.
Hoffmann, A. O., & Post, T. (2014). Self-attribution bias in consumer financial
decision-making: How investment returns affect individuals belief in skill.Journal of
Behavioral and Experimental Economics, 52, 23-28.
Barber, B. M., & Odean, T. (2002). Online investors: do the slow die first?.Review of Financial
Studies, 15(2), 455-488.
Chira, I., Adams, M., & Thornton, B. (2011). Behavioral bias within the decision making
process. Journal of Business & Economics Research (JBER), 6(8).
Oran, J., & Perek, S. (2013). An empirical test of optimism bias in capital budgeting

decisions. Journal of Modern Accounting and Auditing, 9(2), 287-296.

Ayton, P., Muradoglu, G., & Balasuriya, J. (2010). Optimism and Portfolio Choice (No.
123456789/9830). Paris Dauphine University.
Malin, M. Psychological biases and decision making in finance - Pitfalls to avoid. MBA White
Paper Griffith Business School, Griffith University
Abreu, M. (2014). Individual Investors Behavioral Biases, Excerto da Lio de Sntese das
Provas de Agregao. Lisboa School of Economics & Management, Teaching Economics
Working Papers
Qadri, S. U., & Shabbir, M. (2014). An Empirical Study of Overconfidence and Illusion of
Control Biases, Impact on Investors Decision Making: An Evidence from ISE. European
Journal of Business and Management, 6(14), 38-44.
R. Subash, and Dr. K. Ba, Role of Behavioral Finance in Portfolio Investment Decisions:
Evidence from India Faculty of Social Sciences Charles University Prague 2011/2012
Mooreland II, J. J. (2011). The Irrational Investors Risk Profile (Doctoral dissertation,
UNIVERSITY OF MINNESOTA).
Ajmal, S., Mufti, M., & Shah, Z. A. (2012). Impact of Illusion of Control on Perceived
Efficiency in Pakistani Financial Markets. Abasyn University Journal of Social
Sciences, 5(2).
Fellner, G. (2004). Illusion of control as a source of poor diversification: An experimental

approach. Max Planck Inst. for Research into Economic Systems, Strategic Interaction
Group.
Budescu, D. V., & Bruderman, M. (1995). The relationship between the illusion of control and
the desirability bias. Journal of Behavioral Decision Making, 8(2), 109-125.
Frederick, S. (2005). Cognitive reflection and decision making. Journal of Economic
perspectives, 25-42.
Shi, X., & An, N. (2012). Cognitive Ability and Psychological Biases: Perspective from Chinese
stock individual investors.
Albaity, M., Rahman, M., & Isa, C. R. (2015). Individual differences in ethno-gender as a
function of cognitive style and behavioral biases. International Journal of Information
Processing & Management, 6(2).
Orlov, A., & Roufagalas, J. (2012). Performance Determinants in Undergraduate Economics
Classes: The Effect of Cognitive Reflection.International Review of Economics
Education, 11(2), 28-45.
Redhead, K. (2011). A Behavioral View of How People Make Financial Decisions Economic,
finance and accounting, Applied Research Working Paper Series