THE IMPACT OF BEHAVIOURAL BIASES ON TRADE RETURN, MODERATING ROLE OF FINANCIAL LITERACY AND LOCUS OF CONTROL.

Abstract

The present study aims to examine the effect of behavioral biases like herding bias, mental accounting bias, overconfidence bias, loss aversion bias, anchoring bias and representativeness bias on the investment trade return of the investors with moderating role of financial literacy and locus of control. For testing the hypotheses, finding answers to the research questions and achieving research objectives the methodology of study consists of positivist philosophical stance, quantitative and deductive approach. The population of the study includes the stock market participants of KPK. The sample size consists of 600 respondents using Gpower. But the whole 600 questionnaires were not received back in good standing, only 353 respondents has been analyzed. The sampling techniques were stratified random sampling, the data was primary, collected through questionnaires (adopted) from investors. The analysis techniques for model fitness were factor loading and cross-loading, for assessing the construct validity and reliability Average Variance Extracted (AVE) and for composite reliability, the Cronbach’s Alpha, for discriminant validity. The Fornell-Larcker Criterion and Heterotrait-Monotrait Ratio (HTMT) and for multicollinearity statistics Variance inflated factor (VIF). The descriptive statistics were used to answer the first research question, assess in achieving objective one and testing the first hypothesis. The structural model was used to answer the remaining research questions, achieving the rest of the objectives except the first one and testing the hypotheses. Findings of the research reveals that all investors incorporate all independent variables except herding behavior in their investment decision. Further there is a strong impact of mental accounting, overconfidence, loss aversion, anchoring and representativeness on the investment returns of investors and the financial literacy and locus of control moderate the association among variables. However, financial literacy doesn’t impact between herding and trade return and locus of control negatively impacting between anchoring and trade return, loss aversion and trade return, and mental accounting and trade return. Based on result, it can be recommended that investors should increase financial literacy and locus of control as it would make their investment decision more accurate. Further, the government should devise proper measures for boosting financial literacy of investors for smooth and positive operation of the stock market to accelerate economic growth.