How do Behavioral Factors Affect Stock Market Participation in Pakistan?

Abstract

This study investigates the impact of behavioral factors on the stock market participation in the Pakistan stock market using Prospect theory. It is a cross sectional study and used a structured questionnaire to collect data from 406 actual individual investors during Sep/2023 – Jan/2024. The data was analyzed and hypotheses were tested by using smart PLS 4.  A statistical result reveals that elements of Prospect theory have a significant influence on the stock market participation. The findings show that disposition, herding, cognitive dissonance and other heuristic biases have a significant impact on the investors’ decision to participate in the stock market. The study finding shows an important insight of the prospect factors i.e. most of the prospect factors show a positive relationship with the stock market participation due to the daily growth in the KSE-100 index during the study period. This study is one of the initial attempts on the Pakistan stock market, and the findings highlight how prospect factors influence investors’ decisions. On the basis of these findings, Authors suggest that Security & Exchange Commission should promote investment educations and introduce access of individuals’ investors to institutional advisory services for guarding their principal investment from possible negative effects which are likely to be existed in the stock market outside of the boundaries of stock market regulations.

Key words:     Prospect theory, Pakistan stock market, disposition effect, cognitive dissonance, herding, heuristic biases, KSE-100 index