The Role of loss aversion emotional bias in individual investors performance: Evidence from Pakistan Stock Exchange

Abstract

The aim of this paper is to investigate the influence of loss aversion emotional behavioral bias on individual investors' performance. The researcher further investigates the moderating impact of financial literacy on the relationship between loss aversion and investor performance. This research paper is conducted in the positivist paradigm. Furthermore, the deductive approach was used in this study as it is relying on the behavioral finance theoretical framework. For sample selection, individual investors in emerging market and a convenience sampling technique was used. A total of 379 structured questionnaires and cross-sectional designs are used for the collection of data from registered individual investors of PSX. The direction of the relationship between research variables and hypothesis testing is carried out by hierarchical regression analysis. Furthermore, for authentication of moderation variable structural equation modeling technique is also utilized in this study. Research findings apprise us that loss-averse individual investors are pessimistic in emerging markets as a clear negative association between loss-averse individual investors and their performance was highlighted in the results. Furthermore, financial literacy is enhancing the performance of these investors as results depict that it is positively moderating the relationship between loss-averse individual investors and their performance. The article serves as a guideline to all policymakers in emerging markets like the SECP who are trying to find conceivable solutions to loss aversion emotional behavioral bias. Furthermore, research extension can be carried out by addressing the following question: Why / How does individual investor loss aversion emotional bias has influenced individual investors' performance in emerging stock markets in the recent crisis i.e., COVID- 19 pandemic?