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Stock market efficiency: Behavioral or traditional paradigm?Evidence from Karachi Stock Exchange (KSE) and investors community of Pakistan

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  • Shahzad, Syed jawad hussain
  • Ali, Paeman
  • Saleem, Fawad
  • Ali, Sajid
  • Akram, Sehrish

Abstract

Traditional finance explains the investment process on rational and logical grounds based on the assumption of rationality of average investor. This paper attempts to understand why traditional finance models fail to capture stock market movements and how behavioral finance explains that failure in the context of Pakistan’s financial market. Beginning with the basics of behavioral finance, the discussion unfolds to explain any association that investor’s decision making process has with the behavioral biases like overconfidence, regret, pyramid and risk. Primary data based on questionnaire and interviews of investors trading at Karachi Stock Exchange of Pakistan was used. The study concluded that behavioral traits have significant association with investment decision. The study will also open up the doors to further analyze the deviated scenarios which cause the market to create the loss spiral for one group and unbounded gain for the other.

Suggested Citation

  • Shahzad, Syed jawad hussain & Ali, Paeman & Saleem, Fawad & Ali, Sajid & Akram, Sehrish, 2013. "Stock market efficiency: Behavioral or traditional paradigm?Evidence from Karachi Stock Exchange (KSE) and investors community of Pakistan," MPRA Paper 45095, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:45095
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    File URL: https://mpra.ub.uni-muenchen.de/45095/1/MPRA_paper_45095.pdf
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    References listed on IDEAS

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    1. Bruno Biais & Denis Hilton & Karine Mazurier & Sébastien Pouget, 2000. "Psychological Traits and Trading Strategies," CSEF Working Papers 39, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy.
    2. Milton Friedman & L. J. Savage, 1948. "The Utility Analysis of Choices Involving Risk," Journal of Political Economy, University of Chicago Press, vol. 56(4), pages 279-279.
    3. Shefrin, Hersh & Statman, Meir, 2000. "Behavioral Portfolio Theory," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 35(2), pages 127-151, June.
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    Cited by:

    1. Khaira Rizfia Fachrudin & Khaira Amalia Fachrudin, 2016. "The Influence Of Education And Experience Toward Investment Decision With Moderated By Financial Literacy," Polish Journal of Management Studies, Czestochowa Technical University, Department of Management, vol. 14(2), pages 51-60, December.

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    More about this item

    Keywords

    Behavioral finance; Regret; Pyramid; Overconfidence;
    All these keywords.

    JEL classification:

    • G02 - Financial Economics - - General - - - Behavioral Finance: Underlying Principles
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)

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