BEHAVIORAL BIASES AND STOCK MARKET VOLATILITY: EVIDENCE FROM INDIVIDUAL INVESTORS IN THE PAKISTAN STOCK EXCHANGE

Abstract

This study examined the impact of behavioral biases on stock market volatility in the Pakistan Stock Exchange (PSX), focusing on the investment behavior of individual investors. Grounded in behavioral finance and Prospect Theory, the study investigated how overconfidence, herd behavior, loss aversion, anchoring, and representativeness biases influence market volatility. A quantitative, cross-sectional research design was adopted, and data were collected from 356 individual investors through a structured questionnaire using a five-point Likert scale. The data were analyzed using statistical techniques to test the hypothesized relationships among variables. The findings revealed that all behavioral biases have a significant positive impact on stock market volatility. Among them, herd behavior and loss aversion were identified as the most influential factors driving market fluctuations. The results indicate that irrational investor behavior, driven by psychological and emotional factors, plays a crucial role in increasing volatility in the PSX. The study concludes that behavioral factors are essential in explaining market dynamics in emerging economies where financial literacy is relatively low and market inefficiencies are prevalent. This research contributes to behavioral finance literature by providing empirical evidence from Pakistan and highlights the importance of investor psychology in financial market stability. It also offers practical implications for investors, regulators, and policymakers to improve financial decision-making and reduce market instability.

Behavioral Biases; Stock Market Volatility; Pakistan Stock Exchange; Herd Behavior; Overconfidence Bias; Loss Aversion; Anchoring; Representativeness Bias; Behavioral Finance; Individual Investors