Testing Moderating Role of Long Term Orientation between the Relationship

of Heuristics and Investment Decision

Imran khan (PhD Scholar at Islamia College University, Peshawar)
Email: imrankhan.pk87@gmail.com
Dr. Mustafa Afeef (Asst. Professor at Islamia College University, Peshawar)
Email: mustafaafeef@gmail.com

Abstract

In this paper, we attempt to investigate the effect of heuristics namely availability heuristic and
representativeness heuristic on irrational investment decision behavior in Pakistan stock
exchange (PSX). The novel contribution of the study is that, to the best of our knowledge it is the
first of its kind to analyze the moderating role of long term orientation (LTO) between the
relationship of heuristics and investment decision. In doing so, we employ multiple regression
analysis and hierarchical regression analysis as proposed by Baron and Kenny (1986) for
moderation analysis. The analysis is conducted on the data obtained through an adopted self
administered questionnaire among investors trading in PSX through Islamabad brokerage
houses. The results revealed that availability heuristic and representativeness heuristic have
significant and positive influence on irrational investment decision behavior. Furthermore, LTO
has no moderating effect on availability heuristic with investment decision, whereas a
moderating effect between representativeness heuristic and investment decision is observed. The
findings also play a pivotal role for stock market players and regulators to know about behavioral
factors and its effect on share prices.
Keywords: Availability heuristic, Representativeness heuristic, Long term orientation,
Investment decision, Moderation, Hierarchical multiple regression.

1. Introduction
The traditional economics and finance theories assumed that individual investors are
rational decision maker; because they take in account all available information in their
investment decision process. The classical theory of traditional finance “efficient market
hypothesis” (EMH) states that it is impossible for any investors to outperform the stock market;
because share prices reflect all the available information. According to EMH share prices in the
stock market are traded at fair value and it is impossible for the investors to purchased
undervalued stock or sale stock at higher value because of the market efficiency and the only
way to outperform is to do risky investments (Eugen Fama 1970). Investors and financial analyst
used various financial models for predicting stock prices. For example capital asset pricing
model (Sharp, Linter 1964), and arbitrage pricing theory (Ross, 1976). However, there are
evidences of poor investment decision making in various literature such as tendency of investors
to hold looser for too long and selling winner too early (Tversky & Kahneman, 1974; Odean,
1998) following the crowed and information cascade (Tan, Chiang, Mason & Nelling, 2008) and
under-diversification (Goetzmann & Kumar, 2008). The traditional financial theories are failed
to capture these behavioral anomalies in stock market. These facts draw the attention of
researchers and have put forward the questions: Are markets no more efficient? Or are the
investors are irrational, bouts by fear, emotions and greed, which leads to bad decisions?
Actually, the traditional financial theories do not consider the effect of human psychology on
their economic decision (Sanfey, et. al, 2003). Behavioral finance as the new field of finance
oppose the assumptions of perfect rationality and market efficiency and studied investment
decision as a continuous process with the implications of cognitive and emotional biases.
According to behavioral finance theories, investors behave irrationally in the stock exchange in
different situations while traditional finance theories and models assume that investors are
rational human beings (Babajide&Adetiloy, 2012). Kahnemanand Tversky (1980) contributed to
psychology literature, which serve as foundation and give raise to the new paradigm called
“Behavioral Finance”; which studeis “how people actually behave in a financial setting.
Specifically, it is the study of how psychology affects financial decisions, corporations, and the
financial markets”.They conclude that individual become risk seeking in loss situation, whereas
they are risk averse in the face of gains and oppose the expected utility theory of maximization.
Behavioral finance theories studied investor investment decision behavior in financial markets
and identifies various anomalies that influence investment performance of individual and
institutional investors (Barber &Odean, 2008;Kengatharan 2014; Brealey et al., 2006).In order to
better understand and explain these anomalies; behavioral scientist applied the knowledge of
psychology and sociology and developed various theories i.e. Heuristic, Loss Aversion, Herding
and Overconfidence etc. The present study explored the influence of Heuristic on investment
decision with the moderating role of long term orientation.
Heuristics refers to the strategy, methods or other mental shortcut which can be used by
individual to derive a solution in different complicated situations (Tversky & Kahneman,
1974;Ritter, 2003). Heuristics play an important role in making sense of real world in relatively
reliable manner while reducing mental load. However, the result derived from using heuristics
sometimes leads to systematic errors which results in inappropriate outcomes (Tversky &
Kahneman, 1974). These systematic errors are known as cognitive biases and characterized into
three main categories, namely availability heuristic, anchoring and adjustment, and
representative heuristic. These heuristics have been considered and used by various investors to
speed up decision making process as compared to rational decision making which required
thorough analysis of all available information (Shefrin, 2000). Behavioral scientist studied the
effect of heuristic on financial decision in financial markets i.e. (Barber &Odean, 2001; Waweru
et al. 2008), however the focus of their studies have generally on developed countries. According
to Khan et al. (2017) developing economies are differ from developed economies in many ways,
such as political situation, security, technology, media and information technology and financial
structure. Similarly, investors’ attitude, perception and belief in developing markets are different
from developed markets, which are reflected in their decision making (Khan et al. 2017).
Furthermore, behavioral scholar mostly focus on investigating a direct linkage between
heuristics and investment decision, whereas little studies have been conducted to determine
intervening effect through which this relationship and effect flow. The current study fill that gap
by analyzing moderating role of LTO on the relationship between Heuristics (availability
heuristic and representative heuristic) and investment decision in developing market like
Pakistan stock market.Furthermore, Kumar and Goyal (2015) also suggest studying behavioral
biases and its effect on stock market using primary data, as studies are limited to secondary data
and laboratory experience. Therefore, author used primary data collected through an adopted
questionnaire to study the effect of behavioral biases on investment decision. Another novel
contribution of the study is that, to best of our knowledge the present study is first of its kind to
include LTO as moderating variable between the relationship of heuristics and investment
decision. The following section explains representativeness heuristic, availability heuristic and
long term orientation.

1.1. Representativeness heuristic

Representativeness heuristic refers to degree to which people tends to interpret a
characteristic as a representative of the subject as a whole, irrespective of the fact that whether
the said characteristic relates to subject matter or otherwise (Khan et al. 2017). As per
DeBondt&Thaler (1995) representativeness is a cognitive heuristic that indicates the degree to
which an event resembles its parent population. Representativeness refers to the tendency of
individuals’ to form judgments about a social phenomenon on the basis of some stereotypes.
Individual investors in financial market are prone to two types of representativeness: one is base
rate neglect and second is sample size neglect. Base rate neglect means that investors while
judging the value of an asset for investment purpose consider irrelevant information (Ahmad et
al. 2017). They often overestimate the likelihood of irrelevant information or something that is
very rare or underestimates the likelihood of common attributes related to subject matter
(Chandra, 2016). The reason for base rate neglect and relying on these stereotypes is that
investors perceive and assume it an easy and alternative approach to investment evaluation. The
second type of representatives used by investors in stock market is “sample size neglect”, which
refers to the tendency of individuals to draw conclusion from too few samples regarding social
phenomenon (Barberis & Thaler, 2003). In financial market when investors focusing on buying
“hot” stockshaving great earning history instead of stocks having poor earning history, this behavior
indicates that representativeness heuristic is applied. This behavior is the reason of investor
overreaction in stock market (DeBondt& Thaler, 1995).

1.2. Availability Heuristic

Availability is a cognitive heuristics that refers to the tendency of individuals to rely on
easily available information and other relevance instances while making decision (Tversky
&Kahneman, 1973). Availability heuristic is often applied when decision maker based their
decision on current information rather than considers all historical and detail information which
often results in biased decision (Kliger&Kudryavtsev, 2010). In availability heuristic individuals
evaluate the probability of an event based on readily available data, the easiness with which
relevant cases come to mind (Brahmana, Hooy &Ahmad, 2012). As per Pompain (2011)
investors in stock market give more weight to an asset on the basis of easily available
information. Consequently, investors prefer local stocks over international stock in their
investment decision. Moreover, they also prefer information from their friends and relatives over
other alternative sources and procedures and consider it as reliable reference for investment
decision.
1.3. Long term Orientation
One of the salient aspects of national culture is how individual within the society perceive
time (Mosakowski and Earley 2000). Time orientation has a pervasive effect on various aspects
of life for each member of a society. Decision should be made by these members regarding how
to weight time; how to value the past, present, and future; and how to assign value to events
based on succession and duration (Spears et al., 2001). Academics have used mostly long term
orientation (Hofsted, 2001; Bond, 2002) culture dimension to evaluate time orientation for their
research purpose. Long term orientation is one of the nation culture dimension which influence
consumer decision making process (Bearden et al. 2006). It refers to the importance and value of
planning and emphasizes on thrift and perseverance for better future. We hypothesis that long
term oriented individuals moderate the relationship between heuristic and investment decision,
because these individuals consider detail analysis and other alternative methods while making
financial decisions.

2. Literature Review

2.1. Availability heuristic and Investment decision

Availability heuristic is cognitive bias that refers to tendency of investors to consider
knowledge and information that is easily available in evaluating investment opportunity, while
ignoring other alternative methods. This tendency of investors results in irrational behavior and
hence affects investment performance (Folkes, 1988). In stock market this behavior can be
observed when investors prefer local companies stock overinternational companies stock,
because they are familiar to local stock and information about them is readily available and can
be obtained easily (Waweru et al., 2008). As per Steen (2002) investors preferences are changing
based on available news and information about economy and company performance which leads
to a particular pattern in stock market and influence investment decision. Investment decisions
are also sometimes influence due to irrelevant information (Steen, 2002). These irrelevant
information have a negative effect on investment decision, because with readily available
information risk attitude of investors changes which in turn effect investment decision (Weber,
2010). Numerous studies revealed that investors feel easy and relax in decision making when they have
superior information. Availability heuristic have a significant influence on investors decision, because it
causes investors to wrongly perceive a stock with good earning as a less risky security and similarly a
stock with bad earning as a high risky security, which results in suboptimal investment decision
(Ganzach, 2000). Moreover, during recession and bearish trends in stock marker, investors make
their decision based on availability heuristic suffer more than the market (Marcus and Goodman,
1991).One of the reasons is that, these investors overreact when they hear news about financial
securities and layoff and results in irrational behavior (Worrell et al., 1991).
Analyzing a financial security in stock market, investor compare its risk and return with
the risk and return of a peer, and then react according to the information regarding performance
of securities (Brauer and Wiersema,2012).This information can change the portfolio selection of
investors towards liabilities insteadof assets that are valuable for investment decision (Wang et
al., 2014), because instead of including all relevant information in evaluating security, investors
consider only recent and readily information. Furthermore, competition among investors to
outperform in the market, compels them to respond hastily to available information (Bowers et
al., 2014) and contrary to act as rational economic agents, they rely on mental shortcuts such as
availability heuristic, that in turn results in to irrational decision and effect investment
performance. Hence, it is proposed that:

H1: Availability Heuristic has a significant effect on investment decision.

2.2. Representativeness heuristics and Investment decision

Heuristics are rules of thumb or other mental shortcuts that investors applied in different
situation to reduce decision making process and draw conclusion quickly (Ricciardi & Simon,
2001). Tversky and Kahneman (1974) introduced the concept of representativeness in stock
market, in which investors’ value marketable securities based on some representative attributes.
According to Waweru et al. (2008) investors used past performance of stock as representative to
make investment decision (Pompain 2012). Because, investors believe that a stock with
consecutive better earning history will generate similar performance in future although past
performance is not a reliable representative of stock. Similarly, they also perceive that a stock
with poor earning history will continue to provide same poor earning in future and decide
irrationally. Hence, they opt to invest in stocks after increase in prices and expect the
continuation of this increasing trend and avoid stock investment when their prices are below their
fair value (Baker and Ricciardi,2014).
Representativeness heuristic is a cognitive bias (DeBondt & Thaler, 1995) which
influences investment decision and hence stock prices. Investor in stock market gives more
weight to noticeable information and attributes this information to company’s success or failure
while ignoring other relevant factors which leads to overreaction behavior (Antunovich and
Laster 1998).According to Kaestner (2006) in stock market investors’ investment decision is
affected by representativeness heuristic in two different ways. First when evaluating future
performance of a firm; investors view similar information as a pattern and give more weight to
current information about a firm and they overreact. Second investors might interpret a series of
similar information as a reversion to mean although the series is too short (Kaestner 2006).
Although majority of researchers study representativeness heuristic in order to better
explain and understand investors’ behavior in stock market, however they found mixed result.
Some studies indicate that this concept is not a primary determinant of investor behavior in stock
market (Grether, 1992; Charness, Karni & Levin, 2010). Whereas, other studies identifies that
representative heuristic affect investors’ investment decision process (Bloomfield & Hales, 2002;
Kaestner, 2006; Alwathainani, 2012). Furthermore, studies conducted on the effect of
representativeness on investment decision are limited to developed economies and there is a need
to study the effect of this concept in emerging market. This study is conducted in an emerging
market such as Pakistan stock market to analyze the effect of representative heuristic on
investment decision with moderating role of LTO.
On the basis of above literature the author proposed following hypothesis:

H2: Representativeness heuristic has a significant influence on investment decision.

2.3. Moderating role of Long Term orientation
In financial markets investors mostly focuses on short-termism, in which strategies are
developed based on short term decision making behavior of investors, where the expectation is to
maximize short term returns (Forum for the Future, 2011). Another aspect of short-termism is the
investment of funds in financial securities having short term interest. These aspects (short term
decision behavior and investment of funds with expectation of short term interest) have
numerous detrimental influences on financial markets, because short-termism investors ignore
systematic risk, wider effect on market volatility and irreversible negative outcomes of their
behavior (Tonello, 2006).
Whereas, on the other extreme, as proposed by Emerson & Little (2005), long term oriented
investment behavior considers all relevant financial performance in evaluating risk exposure
related to financial security or companies, which might affect future financial return. Thus, long
term investment behavior is a risk management strategy, because as investment horizon is
extended the risk of investment also increases (Valkanov, 2003). As per Lydenberg (2009) long
term investment behavior should considers the benefits of holding investment for long term,
incorporating all factors into investing and willingness to add value to investments. Lee, Kim and
Kim (2014) argue that investors preferring longer time horizons should invest and holds greater
proportion of risky assets in their portfolio; as the investment horizon is extended the risk is also
reduced. They also revealed that equity premium is sensitive to investment horizon, that is, with
shorter horizon the return from risky assets is not satisfactory as compared to return from riskless
assets. However, with longer investment horizon the return of risky assets increases as compared
to riskless assets. Thus, it can be concluded that when the investment time horizon is extended,
investors demands for higher return, because with long term the risk associated with investment
is greater (Valkanov, 2003). Hence it is proposed that investors with long term orientation
should consider all relevant information in their investment decisions. Furthermore, they also
conduct detail and thorough analysis of financial securities and avoid mental shortcuts such as
representativeness and availability heuristics in their investment decision. Therefore, we
hypotheses that long term orientation moderate the relationship between heuristics and
investment decision.

H3: Long term orientation moderates the relationship between heuristics and investment
decision.

3. Research Methods

3.1. Population and Sample

The present study investigates the impact of heuristics particularly representativeness
heuristic and availability heuristic on investors’ investment decision with the moderating role of
LTO. Populations of the study are investors trading at Pakistan stock exchange via Islamabad
brokerage houses. A total of 150 questionnaires was distributed among the participants, in which
107 are received filled, which make the response rate equal to 72 percent. The questionnaire was
distributed among participant using sample random sampling; however care is taken to make
sure that respondents have at least one year of investment experience.
3.2. Data Instruments’
The data was collected with the help of an adopted questionnaire. Questionnaire is
comprised of two sections; first section is composed of questions related to demographic
characteristics of respondents such as, gender, age, investment experience, monthly income and
investment amount. The second section is composed of questions related to representativeness
heuristic, availability heuristics, LTO, and investment decision.

Availability heuristic comprised of 5 items which is adopted from Rasheed et al. (2018).
They further adopted these items from Kudryavtsev et al. (2013), and Waweru et al. (2008).
Similarly, items for the scale of representativeness heuristic comprised of six items and also
adopted from Rasheed et al. (2018), which they adopted from Sarwar et al. (2014) and Waweru et
al. (2008). Long term orientation is Hofstede (2001) culture dimension and used as a moderating
variable in current study. Yoo et al. (2011) developed “Hofstede’s five dimensions of cultural
values at the individual level”, from which the author adopted 4 items related to LTO.
Investment decision scale consists of 5 items which is adopted from Scott and Bruce (1995).
They developed measure for decision making, from which we adopted the irrational decision
behavior (Rasheed et al. 2018), as the primary purpose of our study is to analyze the irrational
behavior of investors in context of Pakistan stock market.

All the items were measure using 5-point Likert scales. The “agreement” likert scale
type was applied, where investors were asked to answer the questions based on their level of
agreement from 1 to 5 ponits. The 5 points in the scale are respectively from 1 to 5: strongly
disagree, disagree, somewhat agree, agree, and strongly agree.

3.3. Research Methodology

In order to investigate the effect of availability and representativeness heuristic on investment
decision the Multiple Regression Model was applied via ordinary least square (OLS) method
using SPSS 20. Furthermore, to identify the moderating effect of LTO on the relationship
between Heuristics and investment decision Baron and Kenny (1986) method was applied.
3.4 Theoretical Framework

LTO

Availability Heuristic

Investment Decision

Representativeness
Heuristic

4. Findings
4.1 Demographic Distribution
The author distributed a total of 150 questionnaires among investors at Islamabad brokerage
houses, in which 107 investors responds to the questionnaire, so the response rate is 72 percent.
The descriptive statistics of demographic variable shows that male investors are 85 percent and
female investors are 15 percent participated in responding to survey questionnaire. This
indicates that female participants as investor are very few in Islamabad brokerage houses as
compared to the male counterpart. The age distributions of respondents composed of 25 percent
are below 30 years, 45 percent of respondents are between 31-40 years and above 40 years are 30
percent.

As per investment experience which is considered one of the important demographic

characteristic and posses a significant influence on investment decision (Prosad et al. 2015).
According to statistics most of the respondents have more than 3 years of experience. In which
investors with experience of 1-2 years are 11.2 percent; 43 percent have 3-5 years of experience
and 45.8 investors possess more than 5 years of experience. The qualification level of the
respondents is as 21.5 percent are post graduate, 65.4 percent are graduate; 12.1 percent
respondents possess secondary high school certificate and 0.9 percent are with the education of
high school certificate. Another important variable is income level, in which 24.3 percent
investors have monthly income of Rs0- Rs40000; investors with income level of 41000 to
100000 are 39.3 percent and remaining 26.5 percent of respondents have monthly income of
more than 10000. The level investment amounts of participants are as; below Rs 50000 are 8.4
percent, 21.5 percent of investors invested Rs50000 to 1 Lac, percent of respondents of 1 Lac-5
Lac are 31.8 percent and 37.4 percent of respondents invested above 5 Lac rupees in Pakistan
stock market. (See table 1).

4.2. Reliability of Scales

To assess internal consistency of multi dimensional items of construct we calculate coefficient alpha, by
conducting Cronbach’s Alpha analysis. The minimum acceptable level of Cronbach’s Alpha is 0.7,
which is dependent on the number of items in a construct (Nunnally, 1978). However, if items of
construct are less than 10, then Cronabch’s Alpha value could be sensitive. If it is the case, then mean
inter-item correlation is better to calculate. Briggs & Cheek (1986) recommend a range of 0.2 to 0.4, as
acceptable for mean inter-item correlation. According the statistic presents in table II, the Cronbach’s
Alpha value is less than 0.7, however mean inter-item correlation for all the construct are in optimal range
(Briggs & Cheek, 1986).

Table II Reliability Analysis

No of
Scales items Cronbach's Alpha Inter-item Correlation

Availability Heuristic 5 .455 .204

Representativeness Heuristic 6 .696 .287

Long Term Orientation 4 .603 .274

Investment Decision 5 .572 .213

4.3. Regression Analysis

In order to measure the effect of availability heuristic and representativeness heuristic on
investment decision, we performed Multiple Regression Model using ordinary least square
(OLS) method. The R Square value is .335, which indicates that 33.5 percent of variation in
investment decision is due to availability heuristic and representativeness heuristic. The
remaining 66.5 percent of variation in investment decision is not explained by our model, which
needs further research to be explored. The F statistic is (F = 26.231), which indicates model
goodness of fit and it is significant at p<0.01, this shows that the model is good fitted.
The regression coefficient obtained through OLS indicates the effect of independent variables
(availability heuristic and representativeness heuristic) on dependent variable (investment
decision). The beta value for availability heuristic is (B= .395), which is significant at p<0.001.
Hence, hypothesis 1 is supported, which indicates that availability heuristic has a positive and
significant influence on irrational decision making behavior of investors. This result is
consistent with majority of previous researches. Such as Khan (2015) also conducted a study on
availability and loss aversion heuristic on investment decision and found a significant influence
of availability bias on investment decision. Similarly, Massa, Insead and Simonov (2005) also
found that availability bias effect rational decision making behavior of investors and results in
irrational behavior in stock market.
Representativeness heuristic is also significant at p<0.05 with a beta value of (B= .240). This
provide evidence in support of hypothesis 2, which states that representativeness heuristic has
direct and significant influence on irrational decision making behavior of investors trading
through Islamabad brokerage houses in PSX. The finding is consistent with the results of Chen et
al. (2007) and Yaowen et al. (2015). They found that representativeness heuristic leads to
irrational behavior in effect market efficiency (Hadi, 2017). Because, investors suffering from
representativeness heuristic unable to make optimal investment decision and indulge in trading
mistakes, which in turn effect market efficiency. (See table III).

Table III Coefficientsa

Model Unstandardized Standardized t Sig.
Coefficients Coefficients
B Std. Error Beta
(Constant) 5.286 1.739 3.040 .003
Availability Heuristic .395 .094 .384 4.204 .000
1
Representativeness
.240 .077 .286 3.128 .002
Heuristic

F 26.231 sig. .000

R Square .335
Adjusted R Square .323
a. Dependent Variable: Investment _Decision
4.4. Moderation Analysis of Long term Orientation
In order to measure the effect of moderating variable (LTO) on the relationship between
heuristics (Availability heuristic and Representativeness heuristic) we applied moderating
analysis rules developed by Baron and Kenny (1986). For this purpose we generated two new
interaction variables, one is the product of Availability and LTO (AB x LTO) and the second
interaction variable is the product of Representativeness heuristic and LTO (RB x LTO). To run
the analysis stepwise hierarchical multiple regression analysis was conducted.

4.4.1. Moderation of LTO with Availability Heuristic

The hierarchical multiple regression analysis was used for conducting moderation analysis from
which two models was generated. In the first step two variable, one is dependent variable i.e.
investment decision and another is independent variable i.e. availability heuristic interred in the
model. The statistics in model 1, indicates a significant variance in investment decision is caused
by availability heuristic, R2 = .358, F(2,104) = 29.040, p< .001. To avoid the problem of
multicollinearity of interaction term, which is the product of availability heuristic and LTO, the
interaction term was interred in BLOCK 2 of multiple regression model (Aiken & West, 1991).
The interaction term between availability heuristic and LTO are insignificant and does not
explain any variation in investment decision, ∆R2= .001, F(1,103) = .134, p>.005. Furthermore,
the coefficient value is also insignificant at (β = .009, p = .715), this negate the moderating effect
of LTO on the relationship between availability heuristic and investors investment decision.
Hence, hypothesis 3 is rejected and concluded that there is no significant moderating influence of
LTO on the relationship between availability heuristic and investment decision within the
context of PSX.
 Table IV Moderation of LTO with Availability Heuristic
Model Summary
Change Statistics
Adjusted R
R Square Sig. F
Model R Square Square Change F Change df1 df2 Change
1 0.358 0.346 0.358 29.04 2 104 0
2 0.359 0.341 0.001 0.134 1 103 0.715

Coefficientsa

Unstandardized Standardized
Coefficients Coefficients
Std.
Model B Error Beta T Sig.
1 (Constant)
5.737 1.573 3.647 0
Availability Heuristic
0.377 0.092 0.366 4.116 0
LTO 0.38 0.102 0.332 3.725 0
2 (Constant)
7.54 5.176 1.457 0.148
Availability Heuristic
0.256 0.343 0.249 0.748 0.456
LTO 0.25 0.371 0.218 0.674 0.502
AB x LTO 0.009 0.023 0.2 0.366 0.715
a. Dependent Variable: Investment Decision

4.4.2. Moderation of LTO with Representativeness Heuristic

For the purpose to investigate the moderating role of LTO on the relationship between
representativeness heuristic and investment the same hierarchical multiple regression analysis is
conducted. The statistic revealed that representativeness heuristic significantly explain 32.3
variation in investment decision, R2= .323, F(2,104) = 24.770, p<.001. To avoid the problem of
multicollinaearity of interaction term, the variables were centered and an interaction term between
representativeness heuristic and investment was created (Aiken & West, 1991).
Next, this interaction term (Representativeness x LTO) was entered in the regression model in BLOCL 2.
The regression output revealed that interaction term accounted a significant percentage of variance in
investment decision, ∆R2= .054, F(1, 103)= 8.834., p< .05. Furthermore, the beta value of interaction
term is also significant (β=0.060, p<0.05). This indicates that long term orientation has a significant
moderating effect on the relationship between representativeness heuristic and investment decision.
Hence, hypothesis 4 does not be rejected and it is supported. Analyzing the interaction plot obtained
through SPSS Process, indicates and increasing influence that is, as long term orientation increase and
representativeness heuristic increases the irrational investment decision behavior also increasing. This
means that as representativeness heuristic increases, investors focus on long term orientation is also
increases with regards to investment decision.

Table V Moderation of LTO with Representativeness Heuristic

Model Summary
Change Statistics
Sig.
R F
Adjusted Square Chan
Model R Square R Square Change F Change df1 df2 ge
1 0.323 0.31 0.323 24.77 2 104 0
2 0.376 0.358 0.054 8.834 1 103 0.004

Coefficientsa

Unstandardized Standardized
Coefficients Coefficients
Std.
Model B Error Beta t Sig.
1 (Constant)
5.904 1.71 3.452 0.001
Representativeness Heuristic
0.251 0.077 0.299 3.251 0.002
LTO 0.414 0.105 0.361 3.925 0
2 (Constant)
24.483 6.465 3.787 0
Representativeness Heuristic
-0.616 0.301 -0.733 -2.046 0.043
LTO -0.9 0.453 -0.784 -1.984 0.05
RB x LTO 0.06 0.02 1.887 2.972 0.004
 a. Dependent Variable: Investment Decision

Figure 1 Representative with Investment by LTO

25

20
Investment Decision

15
Low
10
Moderate
5 High

0
Low Mod High
Representativeness Heuristic

5. Conclusion and Discussion

The aim of our study is to investigate the effect of availability heuristic and representativeness
heuristic on investment decision with the moderating role of LTO. To achieve this objective an
adopted questionnaire was distributed among investors trading at PSX through Islamabad
brokerage houses. In order to measure the moderation effect of LTO, the study employ
moderation rules set by Baron and Kenny (1986) using hierarchical multiple regression analysis.
The results of multiple regression analysis revealed that heuristics namely availability and
representativeness heuristics have a direct and significant influence on irrational investment
decision behavior. This affirms that investment decision behaviors in Pakistan are also
influenced by various psychological factors. The result also revealed that investment decision
behavior of investors in Pakistan are influenced and driven by most recent and readily available
information. Furthermore, these investors also rely upon the information received from close
friends and family as reliable source and consider it in their investment decision without any
verification. Therefore, study of this kind can provide better insight into investors’ investment
decision behavior in Pakistan. The findings of our study is consistent with the results of Khan
(2015), Chen et al. (2007), Yaowen et al. (2015) and Massa et al. (2005). Sultan et al. (2013)
conducted a research on the validity of EMH in Pakistan and Kuwait. Their finding concludes
that both stock markets are not efficient and investors rely on previous prices and past trend for
investment decision. As we have witnessed, that investors trading in PSX are influence by
various behavioral biases and heuristics in making investment decision. These investors in the
haste of quick return emphasize on short term and take action based on new information. These
tendencies results in irrational behavior and market volatility.
Moreover, the result of moderation analysis shows that LTO has no significant influence on the
relationship between availability heuristic and investment decision. Whereas, LTO have a
significant effect on the relationship between representativeness heuristic and investment
decision. This indicates that as representativeness heuristic increases, investors’ focus on long
term orientation is also increase with regards to investment decision behavior in Pakistan.
This study supports the view of the behavioral finance that investors trading in PSX via
Islamabad brokerage houses are affected by behavioral factors. The impact of behavioral factors
on the trading and investment decision of investors is in varying degree from very high impact to
little or no impact. Market information and the fundamentals of the underlying stocks had the
highest impact on investment decision-making. The findings of this study are helpful for stock
market players (individual and institutional investors) in determining investment opportunity and
portfolio management. The findings also play a pivotal role for stock market regulators to know
about behavioral factors and its effect on share prices. The stock market regulators by
implementing the findings of this study can improve the efficiency of stock market and can avoid
unrealistic share price fluctuations.
This study examine the affect of heuristics particularly availability and representativeness
heuristic on investment decision with moderating role of LTO in PSX. However, the study also
has the limitation of small sample size; therefore future research should be conducted on a larger
sample size. Future research should also be conducted to explore the moderating role of LTO in
other behavioral biases such as disposition effect, herding and overconfidence behavior.
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 Table I: Demographic Distribution
Characteristic Frequency Percent
Gender
Male 91 85
Female 16 15

Age
Below 30 years 27 25.2
31-40 years 48 44.9
41-50 years 23 21.5
Above 50 years 9 8.4

Investment Experience
1-2 years 12 11.2
3-5 years 46 43
above 5 years 49 45.8

Education
Matriculation 1 0.9
Intermediate 13 12.1
Graduate 70 65.4
Post Graduate 23 21.5

Monthly Income (PKR)

0- 40,000 26 24.3
41,000 – 100,000 42 39.3
100,000 - 150,000 25 23.4
above 150,000 14 13.1

Investment Amount (PKR)

below 50,000 9 8.4
50,000 - 1 Lac 23 21.5
1 Lac - 5 Lac 34 31.8
above 5 Lac 40 37.4