Abstract: finance simple assumes we are normal (Meir Statman).


The aim of this study to investigate the impact of market and herding factors on investors decision-making at the Pakistan Stock Exchange(PSX). Behavioral finance is interested and relatively new phenomena for study in Pakistan. This study is based on existing theories of behavior finance. The data of this study will be collected via questionnaire from investors of Pakistan Stock Exchange(PSX). The result will be analysis through SSPS tool. The expected result of this study will be show that both market and herding factor is impact on investors decision-making as per previous studies in this relevant field and expectedly market variable (past trends, over or under-reactions, price changes, market information and customer preference) is highly impacted than herding.

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Behavioral finance is new field of finance in which studies the effect of social, cognitive and psychological factors on the decision making of investors while there are individual or institutional. There are two school of thought about investors behavior in financial market; one is traditional and other is behavioral finance. Traditional finance is based on Efficient market hypothesis(EMH) theory states it is impossible to “beat the market” because stock market efficiency causes existing share prices to always incorporate and reflect all relevant information. In other thought, investors decision-making based on their investor psychological. Behavioral finance is the study of the influence of psychology on the behavior of financial practitioners and the subsequent effect on markets (Sewell, 2007).  Behavioral finance has been growing over the past few decades because investors rarely behave according to the assumptions made in traditional financial and economic theory. Behavioral finance holds out the prospect of a better understanding of financial market behavior and scope for investors to make better investment decisions based on an understanding of the potential pitfalls (Byrne and Utkus, 2008).

Traditional finance assumes that we are rational, while behavioral finance simple assumes we are normal (Meir Statman). Behavioral finance is a study of investor market behavior that derives from psychological principles of decision making, to explain why people buy or sell the stocks. It is related to behavioral cognitive psychology, which studies human decision-making and financial market economics (Gupta et al., 2014). The collaboration between finance and other social sciences that has become known as behavioral finance has led to a profound deepening of our knowledge of financial markets (Shiller, 2003).

Herding is psychological behavior in which individual or institutional investors follow the actions of other for making decision. Herding behavior is derived from animal’s movement who move together at the same time in same direction. A similarly investors follow the herd when investors follow other to buying or selling of stocks and investment decision. A form of herd behavior results when information cascades develop in markets characterized by the high cost of information collection. The herding factor include four different types of behavioral variables buying and selling, choice of trading stocks, volume of trading stock and speed of herding (Waruingi, 2008).

Market factors are external factors who effect the investors decision-making. According to (Waweru et al, 2008) market factor consists of following variables; price changes, market information, past trends of stocks, consumer preference, over or under-reaction and fundamentals of underlaying stocks.

Empirical Literature Review:

The different researchers conduct a different studies in different regions of world to investigate the impact of behavioral factors on investors decision-making. Most of the studies found similar result that market and herding factors effect investors decision-making but the impact level of both factors market and herding is different in different regions. (Anum & Ameer, 2017) study the impact of behavioral factors on investor’s decision-making at the Pakistan Stock Exchange. They identified the herding factor highly impacted than market factor over investor’s decision making. The mostly Pakistani investor’s in stock market follow the actions of others for decision making. (Shabgou & Mousavi, 2016) survey the influence of behavioral factors on investment decision-making in Tabriz Stock Exchange. They found that investor’s decision-making effect with market and herding factors.

(Vijaya, 2016) examine the presence a relationship of behavioral factor on investment-decision of retail equity investor of India. The result of this study revealed that all factor is strong relationship with investment decision-making. (Tadesse, 2015) Identifying the factor influence the individual investor behavior in Ethiopian private commercial banks. They found that market and herding factor is moderately impact on investor decision-making in Ethiopian private commercial banks.

(Kengatharan & Kengatharan, 2014) is exploring the behavioral factors influence individual investor’s decision-making at the Colombo Stock Exchange. The market and herding influence moderately on investor’s decision-making but one factor of herding (choice of stock) is low impact in CSE. (Ghalandari & Ghahremanpour, 2013) is investigate the effect of market and herding on investment decision as factor influencing investment performance in Iran. The decision of investor is influencing both variables but market variable (Market information, past trends, consumer price and over-reaction) is highly influence on investor decision.

(Ngoc, 2013) investigate the influence of behavioral factors on decisions of individual investors at the Ho Chi Minh Stock Exchange. They found that all factors influencing on individual investment decision making. The individual investors of Ho Chi Minh consider market information, past trends, price changes for decision-making rather than follow than action of other investors(Herding). (Shikuku, 2014) is determine the effect of behavioral factors on individual investors choice in Nairobi Stock Exchange Kenya. The finding of study indicates that investor’s decision-making effect with herding factors (choice of stock, decision of volume and decision of buying and selling) and market information, past trends and under or over reaction of price changes

(Luong & Ha, 2011) study the influence of behavioral factors on investors decision-making at the Ho Chi Minh Stock Exchange. The result shows that all behavioral factors influence on investment decision-making but the level of impact of herding factor is moderate and market factor is highly influenced on individual investor behavior. (Ojwang, 2015) is establishing behavioral factors that influence investment decision-making by investors trading in Kibuye market, Kisumu Town. The finding showed that investment decision-making of trader is significantly effect with market information. The herding behavior is low impact on decision making.

Problem Statement:

In this paper, discuss the market and herding factor impact on the investors decision-making at the Pakistan Stock Exchange(PSX). Subsequently, there is the following problem statements:

·         To what extent does impact of market factor on the investors decision-making at the PSX?

·         To what extent does impact of herding factor on the investors decision-making at the PSX?

·         To which impact level does both factors influence on investors decision-making at the PSX?

Theoretical Framework:

Market Factor
Past trends, Over or under-reactions, Price changes, Market information and customer preference

Herding Factor Buying and Selling, Choice of Trading stocks, Volume of trading stock and Speed of herding

Investors Decision-Making


















Research Methodology:

It is descriptive form of study. The data source is primary and collected through questionnaire. The population of this study will be investors of Pakistan Stock Exchange(PSX) and sample will be selected through random sampling method. Cronbach’s alpha coefficient is used to determine reliability of questionnaires. The different statistical tools used to analysis the data and SPSS software also used.


The proposed research is based on behavioral finance which is new and broad area; in which investigate the impact of psychological factors on investors decision making. Pakistan Stock Exchange(PSX) is an emerging market established in 2016 after merger of all three-stock exchanges of Pakistan. Pakistan Stock Exchange(PSX) is not much developed so the information is not easily available for evaluation of investment. The proposed research will help to understand how investors decision-making effect with behavioral finance factors (Market and Herding). The proposed study also identifies the impact level of market and herding factors on investors decision-making. The investors decisions help to set market trends which the effect economy.

The result of this study is expected to be similar as per previous studies in this field both factors effect the investors decision-making at the Pakistan Stock Exchange(PSX). The research may conclude that market variable is highly impact on investors decision-making than herding variable. The investors of Pakistan stock exchange make their decision on available market information and past trends. The investors react at any news speculate in market and make their decision on available information. The different statistical tools will be using to get the answers of raised questions in problem statement. After using tools, the result of this study conclude that market and herding variable is impact on investors decision-making.


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