Exploring the Dynamics of Investors’ Decision Making in Pakistan Stock Market: A Study of Herding Behavior

Abstract

Stock markets are often considered as a yardstick for economic growth and development. Therefore, understanding investment behavior in stock markets is pivotal for better regulation and promoting growth and stability. Hence current study is aimed at understanding the influence of one of the most significant factors, i.e. herding behavior on the Pakistan stock market. Besides, it also investigates the impact of demographical differences among investors. The herd behavior or tendency to follow peers is a counterintuitive behavior to the traditional paradigm of rationality and efficiency. This can influence the whole decision-making process by making it irrational. Data from (n=210) investors trading at Lahore and Islamabad are gathered to test this proposed linkage. Structural equation modeling is used for establishing these associations. The results revealed that herding significantly influences the rational decision-making process of investors. For a better and contextualized understanding of these results, demographical characteristics are considered, which indicate that a non-business related occupation, higher income and lower age are associated with a higher tendency towards herding, and conclusively demography plays a significant role. These findings can be extremely useful for investors, policymakers, and investment professionals and can be utilized to make the decision-making process optimal. Investors need to account for the influence of their inclination to follow peers and their occupation, income, and age before making any decision. Theoretically, these findings are the pioneer in providing a comprehensive linkage of the behavioral aspect of the stock market functioning and to explore the whole decision making process instead of focusing on a dimension.