MODERATING ROLE OF DEMOGRAPHICS ON IMPACT OF OVERCONFIDENCE BIAS ON INVESTMENT DECISION: EVIDENCE FROM PAKISTAN STOCK EXCHANGE

Abstract

This study analyzed the effects of overconfidence bias on individual investment decisions within the Pakistan Stock Exchange moderated by demographics. Overconfidence bias is one of the biggest cognitive biases known to affect investors, which causes investors to overestimate how much they know, and how much control they have over their decisions, thus making suboptimal and often risky investment decisions. Based on the data collected from Pakistan Stock Exchange 200 investors who currently trading in Islamabad Stock Exchange, the study finds that overconfidence has a large bearing on traders’ behavior. Age also moderates 
the overconfidence such that the older investors would exhibit less of it in their line of decision making. Another study has found that educational background also exerts positive moderation on the overconfidence-investment decision, since more educated investors will be more confident, and thus may trade more often or more risking. In regard to the second hypothesis, the analysis reveals that gender has little moderating effect on overconfidence and investment decisions. These findings add to own knowledge of how several demographic factors influence investment decision amongst individual investor in emerging market. Based on this study, suggestions can be given to our financial advisors and policy makers to improve delivery of financially educating population and advisories to prevent adverse consequences of overconfidence bias and to enhance rationality of the populace when investing.