International Journal of Research and Innovation in Social Science (IJRISS) | Volume III, Issue VIII, August 2019 | ISSN 2454–6186

The Impact of Overconfidence Bias on Investment Decisions: Mediating Role of Risk Tolerance

Dr. Muhammad Shaukat Malik¹, Dr. Muhammad Imran Hanif², Muhammad Zohaib Azhar^3
1Professor and Director, Institute of Banking and Finance, Bahauddin Zakariya University, Multan- Pakistan
²Assistant Professor, Institute of Banking and Finance, Bahauddin Zakariya University, Multan- Pakistan
³MS Scholar, Institute of Banking and Finance, Bahauddin Zakariya University, Multan- Pakistan

Abstract:
Purpose: Investor’s psychology plays an important role in decision making process and actually it is the motive behind this study. The research has been conducted to check the impact of overconfidence bias on investment decisions and how risk tolerance mediates their relationship.
Design/Methodology/Approach: A survey questionnaire was adopted and validated through pilot data (α = .911). Convenience sampling was used to select the investors from Islamabad and Lahore stock exchanges. Overall 400 questionnaires were distributed, out of which 283 returns with 70% response rate. A simple regression analysis was done to predict the relationship between the concerned variables using SPSS 23.00.
Findings: The finding of the study indicates that overconfidence biashas a positive relation with investment decisions. Further it is also found that risk tolerance mediates their relationship.
Originality/Value: The behavior of investor deviates from making logical or rational decisions and get influenced by overconfidence bias. This bias influences the investor’s rationality in decision making.
Limitations/Future Research Directions: Limited sample size, the use of less advanced analytical tool, less generalizability and overconfidence biasare certain limitations of current study. For future studies, it is suggested to conduct the longitudinal research along advanced analytical techniques to achieve more rigorous and robust findings.

Key Words: Overconfidence Bias, Risk Tolerance, Investment Decisions, Financial Market of Pakistan

I. INTRODUCTION

The aim of this study to add more literature to research conducted by Kumar & Goyal, (2015) and checks the impact of investor’s overconfidence bias on investment decisions and how the risk tolerance mediates their relationship in Pakistan stock exchange.