Emotional Biases Impact on Investment Behavior: A Comparative Study of Individual and Institutional Investors in an Asian Emerging Economy

Abstract

This study compares the impact of emotional biases on institutional and individual investors' behavior proxies; decision-making, performance and trading frequency on the PSX (Pakistan Stock Exchange). This research is conducted in the positivist paradigm, encompassing the deductive study approach. An adapted questionnaire was utilized for data collection, encompassing individual and institutional investors as the unit of analysis. Furthermore, this study used hierarchical regression and structural equation modeling techniques while relying on SPSS and AMOS for analysis of the direction and strength of the relationship. Emotional biases significantly impact individual investors' performance and trading frequency but not their decision-making. Whereas, institutional investors' trading frequency is also significantly induced by emotional biases but institutional investors' performance and decision-making are mostly unaffected by these biases. Emotional biases correlate positively with trading frequency and negatively with decision-making and performance for both individual and institutional investors. This research paper addresses a theoretical gap by being the first to explore the connections between emotional biases, investor decisions, performance, and trading frequency. Additionally, the study may aid the Securities and Exchange Commission of Pakistan (SECP) and policymakers in other emerging economies in developing strategies to mitigate the negative impact of emotional behavioral biases on investors. This study also offers a framework for all stakeholders to understand how emotional behavioral biases influence trading frequency and investment management activities.