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Theoretical and Applied Economics
No. 6 / 2014 (595)

Interrelationship of biases: effect investment decisions ultimately

University Institute of Management Sciences PMAS AAU, Rawalpindi, Pakistan

Abstract. The purpose of this study is to examine if investors of Islamabad Stock Exchange are indicating tendencies of irrational behavior when exposed to certain psychological dilemmas related to the financial world and what are interrelationships among these dilemmas, This study deals with three dilemmas i.e. self-attribution bias, overconfidence bias and overoptimism bias. The main purpose of the study is to empirically prove the relationship among the biases and their effect on the rational decision making of an investor. For this study quantitative method is used and a survey is conducted. For measuring the behavioral impact on decision making, Structural Equation Modeling is used on the collected empirical data to obtain the results. The findings of this study can be useful for individual investors, financial brokers, financial manager and other financial decision makers to improve their cognitive thinking process and make more rational decisions.

Keywords: behavioral finance, self-attribution bias, overconfidence, overoptimism, rational decision making.

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