Role of Locus of Control in the Relationship between Behavioral Biases and Investment Decision

Abstract

The current study focuses on three heuristics commonly used in decision making; anchoring bias and representative bias with investor’s numeracy capability. This research explains the relationship between biases of investors in investment decision making of Pakistan Stock Exchange. The research also identifies the moderating role of locus of control between behavioral biases and decision making. Data was taken from 400 investors of Pakistan Stock Exchange. The results of the study revealed that representative bias and anchoring bias has a positive impact on investment decisions of the investors. However, the results also revealed that individual’s numeric capabilities do not affect his/her investment decision. Locus of control is used as a moderator in the study. Results show that presence of internal locus of control enhances the impact of biases on their investment decisions. Nonetheless, locus of control does not moderate the relationship between individual’s numeric capabilities and investment decisions. This study is helpful for both individual investors and the regulator in understanding the role of biases in the investment decision making.