DO EMOTIONS PLAY ANY ROLE TO CONTROL THE BEHAVIORAL BIASES OF INVESTORS?

Abstract

Behavioral finance states that investor's investment decisions are influenced by psychological factors like mood, emotion and cognitive biases. Emotions can get in the way of making prudent financial decisions. It is human nature that they react differently when they are in a different state of emotion. Under such dynamics, this study investigated whether emotions can help to reduce behavioral biases of investors by focusing on overconfidence and illusion of control and by measuring moderating role of emotions on the relationship of overconfidence, illusion of control and investment decisions. Data was collected from 200 investors who directly invest at Islamabad stock exchange. After analyzing the data collected from these investors it is observed that two biases overconfidence and illusion of control have positive and significant impact on investment decisions. Emotions have significant and positive relationship with investment decisions. While checking the moderating role of emotions the study reveals that emotions significantly and positively moderate the relationship of overconfidence bias and investment decisions. The emotions insignificantly moderate the relationship of illusion of control and investment decisions. This study provide the clear understanding of prospects that how investors deviate from rationality while buying and selling of stocks and make biased decisions being influenced by emotions.