UNIVERSITY OF GUJRAT,

HAFIZ HAYAT CAMPUS

BS Final Research Project

ATTESTATION OF AUTHORSHIP

This Final project report is composed by:

1. Sania Ilyas. Roll No. 19011554-005

2. Nargis Rehman Roll No. 19011554-011

We hereby solemnly state that this Final Project Report entitled “The Impact of loss

aversion, greed, and fear on the individual investors’ investment decisions” is our work and

that, to the best of our knowledge and belief, it encompasses no material previously published or

written by another person. This final project report is not submitted already and shall not be

presented in the future for obtaining a degree from the same or another University or Institution.

Suppose it is found to be copied / plagiarized at the later stage of any student enrolled in the

same or any other university. In that case, we shall be liable to face legal action before Unfair

Mean Committee (UMC), as per UOG rules and regulations, and we understand that if we are

found guilty, our degree will be canceled.

Authors’ Signatures,

1. Signature _______________

2. Signature _______________

CERTIFICATE
 This research work is entitled “The Impact of loss aversion, greed and fear on the

individual investors’ investment decisions” is conducted by two members of Group 2.

1. Sania Ilyas Roll No. 19011554-005

2. Nargis Rehman Roll No. 19011554-011

And have been completed under my guidance and supervision. I am satisfied with the quality of

these students’ research work.

____________________

Signature

Supervisor Name: Dr. M Ehsan Mukhtar

Date: ______________________

ACKNOWLEDGEMENT
 All praises and thanks to the Almighty Allah, the Merciful, the only Creator of the

universe and the Source of all knowledge and wisdom, who blessed us with health, thoughts,

talented teachers, and helpful friends.

We feel highly privileged to express our gratitude to our sincere and honorable

supervisor Dr. M Ehsan Mukhtar Lecturer of Department (Hafiz Hayat campus) University of

Gujrat, for his keen interest, untiring guidance, creative criticism, and sympathetic attitude

throughout the study. Without his enthusiastic scholarly guidance, this manuscript would not

have seen the light day at best in its present form.

 
 ABSTRACT

This study has investigated the impact of loss aversion, greed, and fear on individual investors'

investment decisions in Pakistan. This study has considered loss aversion, greed, and fear as

independent variables and investment decisions as to the dependent variable. In addition, this

study has finalized the individual investors of the stock market and brokerage houses of twin

cities (Islamabad and Rawalpindi) of Pakistan to investigate the impact of the aforementioned

variables. The sample size of this study is 250 respondents. To prove the impact of variables, a

survey has been conducted through an adopted structured questionnaire regarding the literature,

in which the individual investors in the stock market and brokerage houses of twin cities

(Islamabad and Rawalpindi) of Pakistan have been requested to share their experiences by filling

the questionnaires. To identify the results of the data gathered from the respondents, statistical

instruments have been used. Some of them used in this study include descriptive statistics,

reliability, and regression analysis. Results derived from statistical tools with the help of SPSS

software have shown a significant positive relationship between the variables. The study's

findings are that loss aversion, greed, and fear substantially impact individual investors'

investment decisions.

Key words: Loss Aversion, Greed, Fear, Investment Decisions, Stock Exchange, and Brokerage

Houses etc.
 TABLE OF CONTENTS

CHAPTER 1: INTRODUCTION...........................................................................................8

1.1 Background of the Study.............................................................................................8

1.1.1 Pakistan Stock Exchange.....................................................................................8

1.1.2 Study Variables....................................................................................................9

1.1.2.1 Loss Aversion...................................................................................................9

1.1.2.2 Greed..............................................................................................................10

1.1.2.3 Fear.................................................................................................................11

1.2 Need of the Study......................................................................................................11

1.3 Problem Statement.....................................................................................................13

1.4 Research Questions...................................................................................................14

1.5 Objectives of the Study.............................................................................................14

1.6 Significance of the Study...........................................................................................14

1.7 Scope of the Study.....................................................................................................15

CHAPTER 2: LITERATUE REVIEW................................................................................17

Introduction..........................................................................................................................17

2.1 Loss Aversion............................................................................................................17

2.2 Greed.........................................................................................................................20

2.3 Fear............................................................................................................................23

2.4 Investment Decisions.................................................................................................26

2.5 Theoretical Framework.............................................................................................27

2.6 Hypothesis Statements...............................................................................................28

 2.7 Underpinning Theories..............................................................................................29

2.7.1 Prospect Theory.................................................................................................29

2.7.2 Stakeholder Theory............................................................................................30

CHAPTER 3: RESEARCH METHODOLOGY.................................................................32

3.1 Research Design........................................................................................................32

3.2 Population of the Study.............................................................................................32

3.3 Sampling Techniques................................................................................................33

3.4 Sample Size...............................................................................................................33

3.5 Research Instrument..................................................................................................34

3.6 Data Collection Method............................................................................................35

3.7 Data Analysis.............................................................................................................35

3.7.1 Reliability Analysis............................................................................................35

3.7.2 Regression Analysis...........................................................................................36

CHAPTER 4: RESULTS AND DISCUSSION....................................................................37

Introduction..........................................................................................................................37

4.1 Data Analysis.............................................................................................................37

4.1.1 Reliability...........................................................................................................37

4.1.2 Descriptive Statistics................................................................................................38

4.1.3 Regression Analysis.................................................................................................38

4.2 Data Findings.............................................................................................................41

CHAPTER 5: CONCLUSION AND RECOMMENDATIONS........................................42

5.1 Discussion..................................................................................................................42

5.2 Research Implication.................................................................................................42

 5.2.1 Theoretical Implication......................................................................................42

5.2.2 Practical Implication..........................................................................................43

5.3 Limitations and Future Research...............................................................................43

5.4 Conclusion.................................................................................................................44

REFERENCES.......................................................................................................................46

APPENDIX A.........................................................................................................................49
 CHAPTER 1: INTRODUCTION

1.1 Background of the Study

Several biases affect the individual investors' investment decisions. Those biases include

overconfidence, greed, regret aversion, anchoring, fear, representative, herding, loss aversion,

etc. According to some researchers, a study can be carried out to determine their influence or

effect on individual investors' investment decisions in the Pakistan stock market. The stock

exchange plays a dynamic role in trading in every country. Numerous variables have been

studied in the past when it comes to Pakistan. Still, certain variables or biases can be learned and

influence the individual investors’ investment decisions. Among them are loss aversion, greed,

and fear. This study will find the influence of these three variables on the individual investors'

investment decisions.

1.1.1 Pakistan Stock Exchange

The Pakistan stock exchange was founded on September 18, 1947, and formally inaugurated on

March 10, 1949, as a guaranteed limited company under the name ‘Karachi stock exchange’. The

Lahore stock exchange was founded in October 1970 to satisfy the demands of the local stock

exchange. In October 1989, the Islamabad stock exchange designated target investors in the

country's northern parts. Because the three interchanges had different administrations, trading

positions, indicators and had no joint structure, the stock interchanges (privatize, demutualize,

and incorporate) under the Act, 2012 that the government of Pakistan promulgated. It eventually

led to the three companies merging their activities on January 11, 2016, under the new name

Pakistan Stock Exchange Limited (PSX). About 443 PSX-listed firms with a combined market

value of PKR 8,736 billion ($52 billion) were listed in January 2021. On September 8, 2021,

MSCI designated the PSX as the frontier market. A total of 1,886 international institutional
investors and 883 domestic institutional investors, as well as nearly 220,000 individual investors,

participated in the exchanges. In addition, there are over 400 PSX brokerage houses and 21 asset

management firms. The Karachi stock exchange, one of the PSX's constituent stock exchanges,

was named one of the top performing frontier equity markets between 2009 and 2015, with an

average annual return of 26%. PSX sold 40 percent of its strategic interests to a Chinese

organization for the US $ 85 million in December 2016. PSX's mission is to create a secure,

trustworthy, efficient, and consistent marketplace for investors to purchase and sell listed

company common stock and other securities. The exchange has been promoting financial growth

for more than 60 years, benefiting a wide range of participants, including individual and

institutional investors, the trading community, and publicly traded enterprises.

1.1.2 Study Variables

Several variables have been studied in the past, but certain variables or biases can be learned and

influence the individual investors' investment decisions. There are loss aversion, greed, and fear,

which are our research variables.

1.1.2.1 Loss Aversion

The inclination to avoid losses over gaining equal benefits is known as loss aversion. Loss

aversion was firstly introduced in 1979 by two psychologists, Daniel Kahneman and Amos

Tversky. Loss aversion is a behavioral finance phenomenon in which investors are more

concerned with avoiding losing money than with making money. Loss aversion is a characteristic

of investment behavior in which investors would rather avoid a loss than obtain a similar return.

According to psychologists, loss aversion is innate in all humans and is a result of appraisal and

the battle for survival.

 1.1.2.2 Greed

Greed is an insatiable need for more of anything, generally more than you require. Greed is an

essential economic motive. On the other hand, it has been linked to various economic activities.

Psychological greed is defined as a disordered desire for more than one deserves, for one's own

selfish benefit at the expense of others and society as a whole, rather than for the greater good.

Greed is measured as a self-reported inclination to be greedy. In accounting, greed is the greedy

desire for more wealth or power than one requires at the expense of others. Greed may (and will)

induce you to accept more risk in your portfolio than you are normally comfortable with, as

discussed by Breda and Berlamont, (2014).

1.1.2.3 Fear

Fear is the threat of danger, discomfort, or injury as it causes an unpleasant emotion. Fear is

defined by Wynes, (2020) as an expression of anticipation of a market opening those results in

lower prices during the trading session. In psychology, fear is a basic, common, and powerful

human emotion. Fear is an emotion that we certainly need in moderation, but it can hinder us

from doing the required items when it becomes excessive.

1.2 Need of the Study

There are several works on fear and greed, but not much in Pakistan. If there is some work

related to these variables' they are mainly from Karachi and Lahore stock exchange, so the focus

of this research data collection will be from the Pakistan stock exchange in twin cities

(Islamabad and Rawalpindi).

According to Chaudhary, (2013) loss aversion occurs when an investor is faced with the chance

of losing money, but also occurs when the investor is faced with the opportunity of making

money. Investors are loss averse, according to Kahneman; this 'loss aversion' means that people
are willing to take greater risks to avoid losing money than to make a profit. The prospect theory

is based on the idea that individuals do not always act logically. In times of uncertainty, a variety

of psychological variables influence investment decisions. Chaudhary, (2013).

So, the purpose of this study is to study these two emotions, i.e., fear and greed, and find out how

they impact the investors’ and their investment decisions. This study will significantly help

understand all three variables, i.e., loss aversion, greed, and fear, and how they impact investors'

investment decisions.

Developed countries like the U.S, Canada, New Zealand, and developing countries like China,

India, Bangladesh, and other Asian countries have done a lot of loss aversion, fear, and greed.

The impact of these variables on investors' decisions, their work is beneficial in studying the

investor behaviour, and behavioural biases impact investor decisions. In Pakistan, some of the

researchers worked on these variables. Still, excessive data is not available, and in Pakistan, there

is a need for research in the variable of this studyThe data from the markets in Pakistan will help

us and other people who will research these variables.

1.3 Problem Statement

According to traditional finance, investors are rational. Their decision concerning investment is

involved a careful understanding of information on the market. Some investors make irrational

decisions, and if they become familiar with the factors behind this sort of decision, then there is a

possibility that they can make rational decisions. Still, it is unattainable for every investor to

make investment decisions rationally because behavioral finance has shown that investors are apt

to behavioral bias. Several biases affect investors' decisions and this study will cover some of the

variables, i.e., loss aversion, greed, and fear, which influence investment decisions. Compared to

Pakistan, other countries like India, China, Bangladesh, and other Asian countries have done
more work in these variables. This study is carried out through the PSX market and will find the

influence of loss aversion, greed, and fear and their impact on investors' investment decisions.

1.4 Research Questions

The research questions of this study are following below:

R1. What is the impact of loss aversion on individual investors’ investment decisions?

R2. How greed impacts the investors’ investment decisions?

R3. How fear impact the investors’ investment decisions?

1.5 Objectives of the Study

The research objectives of this study are following below:

 To find the impact of loss aversion on individual investors’ investment decisions.

 To find the impact of greed on investors’ investment decisions.

 To find the impact of fear on investors’ investment decisions.

1.6 Significance of the Study

This research is very beneficial for the policymakers working in the Pakistan stock exchange,

brokerage houses, the agents, the shareholders, the share issues, the corporations, organizations,

the government that make policies for the financial markets, and the financial advisors. After

studying this research, those who can be able to advise the investors in their investment decisions

and protect them from making irrational decisions, the policymakers who can understand these

psychological factors will ensure that the market is running smoothly. These students are willing

to study these variables and conduct future research related to these variables or in these

variables' perspectives. After reviewing this research, these finance teachers can teach the

students more efficiently about these variables and their impact on investors' investment

decisions. This research will help researchers better understand investor behavior characteristics
from the Pakistan stock exchange of twin cities (Islamabad and Rawalpindi), such as loss

aversion, greed, and fear. The recommendations of this research are defined onwards in the

study.

1.7 Scope of the Study

The scope of this study is limited to a sample size of 250 respondents from the Pakistan twin

cities' population (Islamabad and Rawalpindi). This study analysis can cover the scenario

related to loss aversion, greed, and fear that lies in the hearts of the investors. Those investors

are either willing to invest all their life savings to make millions or are afraid to take a more

significant risk in fear of losing everything they have in the Islamabad stock exchange. As the

sample size of this study is not fixed, the various variables and factors were taken from the

questionnaire results from 250 investors in Islamabad stock exchange. This research will

determine the reason behind the actions of investors that are currently investing there. This

research will also find the trends of investments in the Islamabad stock exchange with the

research charts based on analysis of distributing questionnaires among the investors. Through

this research, those who do the study after this research will have the capability to read the

mindset of investors of residents of Islamabad and Rawalpindi and the investors’ residing in the

area of Attock Chakwal, Murree, WahCantt, Jehlum, Texila, etc. The scope of this research

project is to find such kinds of people who have greed and fear on investment and researchers

looking towards to get the answer that is why people invest their money on the stock market

while they have a problem of greed and fear of losing their money. After reviewing that, the

researchers will try to overcome this habit among people, and after that, they will not fear

investing money in the stock market. In this research, the scope is limited because of the limited

area. The study results can be generalized for the economies that resemble the economic
conditions of Pakistan. Individual investors' decision-making processes are significantly

influenced by the behavioral characteristics highlighted in this study. The findings of this study

can be utilized to push the frontiers of behavioral finance literature in terms of application,

theory, and methodology.

CHAPTER 2: LITERATUE REVIEW

Introduction

This chapter is about the literature review that the authors of this study looked at. It provides an

overview of the key research factors as well as a review of the literature. Firstly, the literature or

the authors' articles regarding the study variables had read cited below. Afterward, the theoretical

framework given in this chapter and the hypothesis statements related to the theoretical

framework are listed below. The theories used in this research or related to this study are

presented at the end of this chapter.

2.1 Loss Aversion

The Rwanda stock exchange was the setting for Mahina, Muturi, and Florence, (2017) research.

Self-serving bias, over-optimism bias, loss aversion, self-attribution bias, confirmatory bias,

investment, and the Rwanda stock exchange were the study's primary factors. Individual

investors’ were the target audience for their research. The study's sample size was determined

through random sampling, which yielded 374 respondents. The goal of their research was to see

how behavioural biases affected investment in the Rwanda stock exchange. According to

Mahina, Muturi, and Florence, (2017) confirmatory bias plays a positive and substantial impact

in the frequency of stock market trading. Investors should examine these aspects when making

investment decisions, according to the authors. They argued in their study that stock market

investors should be intelligent enough to recognise the nature of self-serving bias, which might
help them make the correct investment selections and behave rationally while doing so. (Mahina,

Muturi, & Florence, 2017)

KHAN, AZEEM, and SARWAR, (2017) focused their research on the investors of the Islamabad

and Lahore stock exchanges, as well as brokerage houses. The main variables of their study were

overconfidence, loss aversion, investment decision and risk perception. A total of 250

questionnaires were circulated, and 160 investors answered, 90 percent of whom were males and

10 percent of whom were women. KHAN, AZEEM, and SARWAR, (2017) used risk perception

as a moderator to examine the influence of behavioural biases such as overconfidence and loss

aversion on individual stock investors' decision-making. In behavioral finance theories; human

decision-making is influenced by both cognitive and affective dimensions. Because 70 percent of

investors were affected, loss aversion bias has a major impact, as does overconfidence bias.

Their research reveals that when investors are afraid of losing money, they invest less.

Overconfidence and loss aversion biases harm investors, according to the findings, which are

valuable for policymakers, financial advisers, stock investors, finance lecturers, and finance

students. KHAN, AZEEM, and SARWAR, (2017).

Nalurita, Leon, and Hady, (2020) examined their study in Indonesia stock exchange (IDX) in

Jakarta. Loss aversion, regret aversion, market factor, and investment choice were the primary

variables in their study. Individual investors were the target audience for their research. The

sample size of their study was 281 respondents. The outcomes of their study revealed that

cautious investing by IDX investors enhances loss aversion, regret aversion, and market factors

behaviour. Their study results found that the direct association between variable loss aversion,

regret aversion, and market conditions had a substantial impact on investment decision making.

Nalurita, Leon, and Hady, (2020).

2.2 Greed

Greed, according to Mussel and Hewig, (2019) is described as an overwhelming need for more,

emphasizing an insatiable condition associated with the pursuit of sought things. LO, REPIN,

and STEENBARGER, (2005) investigated the involvement of dynamic processes in financial

decision-making using a different sample of people and a new technique for evaluating

emotional reaction. A total of 80 people participated in the study, which were part of a five-week

online training program for day-traders sponsored by Linda Bradford Raschke, a well-known

professional futures trader. Investors are irrational in general, showing a number of predicted and

potentially disastrous biases. LO, REPIN, and STEENBARGER, (2005).

Chaudhary, (2013) investigated the influence of behavioral finance on investment decisions and

strategies. The main variables of the study were irrational emotions, over-confidence, and

cognitive dissonance. The study revealed that emotions like fear and greed often play a pivotal

role in investors' decisions, which is also a cause of irrational behavior. It was observed that

stock prices fluctuate every day without any change in economies' fundamentals. Chaudhary,

(2013).

Breda and Berlamont, (2014) studied the secret of fear and greed behind financial decision-

making. Three hundred sixteen respondents in the sample ranged from 18 to 70 years old. They

described greed as an excessive desire to get more worldly possessions. Every investor desire to

experience the dizzy exhilaration that comes with success. Their findings confirmed that as

people get older, they take fewer risks. However, younger individuals are more ready to take

financial risks than older ones, according to Breda and Berlamont, (2014) research. And

experienced individuals are more likely than inexperienced persons to take financial risks. When

investors watch others getting money, they grow greedy. They want to attain profit on the
growing market before it fades. When greed is the prevailing emotion in the stock market, stock

prices begin to rise. Massive buying, which is encouraged by greed, causes prices to rise.

Overconfidence, which stems from miscalculations of risks and irrational levels of desire, is one

of the defining factors in greed. Greed in financial markets manifests itself in more asset

purchases, higher prices, and increased trading activity. (Breda & Berlamont, 2014)

2.3 Fear

According to Breda and Berlamont, (2014) fear is the feeling that keeps us from doing

potentially dangerous things. Fear is an emotion that we certainly need in moderation, but it can

hinder us from doing the required items when it becomes excessive.

LEE and ANDRADE, (2011) looked at the influence of accidental fear on the choice to sell.

Negative emotions in general and dread in particular, impact risk perception. When faced with

vague and uncontrollable threats, people sense fear. As a result, people who are fearful take

cognitive and behavioral actions to minimize their anxiety and dread. Fearful persons pay extra

attention to information in order to reduce uncertainty. In a stock market simulation, scared

investors sell their shares earlier than non-fearful ones. The sole decision to be made is whether

to hold (uncertain outcome) or sell (certain product) a stock. (LEE & ANDRADE, 2011).

Chaudhary, (2013) investigated the influence of behavioral finance on investment decisions and

strategies. Fear, according to the study, has a significant effect in investors’ decisions and is also

a source of irrational behavior. Fear of regret may make investors either risk cautious or

motivate them to take a risk in investing. Breda and Berlamont, (2014) studied the secret of fear

and greed behind financial decisions. They described fear as an uneasy feeling towards

situational control. There were 316 respondents in the sample, who ranged from 18 to 70 years

old. Their findings confirm that as people get older, they take fewer risks. According to the
study, younger people are more willing to take financial risks than older people. The findings

reveal that experienced people are inclined to take more financial risks than inexperienced

people. Investors, according to Breda and Berlamont, (2014) are prone to repeat the same

mistakes over and over. Despite the fact that they lose money, securities are bought high out of

greed and sold low because of fear. Fearful people make risk-averse decisions and sell their

stocks earlier, whereas greedy people make risk-seeking decisions. Greed and fear can lead to

illogical behaviors such as purchasing high and selling low. (Breda & Berlamon, 2014)

Jausen and Nikiforov, (2016) discovered in their study that in a market with numerous greedy

and fearful investors, aggressive buying or selling can cause an overreaction. Afraid to go

through the corresponding losses, the individual investors will push the price down even further.

Without the right amount of fear, we would reveal ourselves to unreasonable threats, and

without the right amount of greed, we would refrain from opportunities to secure the resources

we need to live. However, too much of either fear or greed is usually harmful. An individual

overwhelmed by fear will not pursue opportunities that will permit him to secure the resources

he needs Jausen and Nikiforov, (2016).

2.4 Theoretical Framework

The theoretical framework of this research is following below:

INDEPENDENT DEPENDENT
VARIABLES VARIABLE

Loss Aversion

Greed Investment Decisions

 Fear

This theoretical framework has three independent variables and one dependent variable. Loss

aversion, fear, and greed have been considered as independent variables. However, investment

decisions have been considered as the dependent variable. Loss aversion (independent variable)

has been adapted from Parker and Decotiis, (1983), fear (independent variable) has been adapted

from Howland, Lachman, Peterson, Cote, Kasten, and Jette, (1998), and greed (independent

variable) has been adapted from Seuntjens et al., (2014). At the same time, investment decisions

(dependent variable) have been adapted from Ahmed, (2013).

2.5 Hypothesis Statements

The hypothesis statements for this research are following below:

H1: Loss aversion impacts the investment decisions.

H2: Greed impacts the investment decisions.

H3: Fear impacts the investment decisions.

2.6 Underpinning Theories

Following are the underpinning theories which are related to this study.

2.6.1 Prospect Theory

Amos Tversky and Daniel Kahneman first proposed prospect theory in 1979, and later, it was

developed in 1992. The prospect hypothesis proposed that investors value gains and losses

differently, with perceived gains weighing more heavily than perceived losses. Kahneman and
Tversky, (1979) critiqued expected utility theory as a descriptive model of risky decision-making

and suggested prospect theory as an alternative model. Subjects (investors) are more inclined to

assess prospects or expected outcomes in terms of profits and losses compared to a reference

point rather than ultimate wealth states. Prospect theory is based on the assumption that

individuals do not always behave logically. When presented with uncertainty, people's judgments

are impacted by persistent biases triggered by psychological factors, according to this theory.

Preferences are treated as a function of 'choice weights,' which are thought not to always equate

to probability in prospect theory. Prospect theory suggests, in particular, that decision weights

overvalue small probabilities while undervaluing medium and high probabilities.

When investors are handed over with the chance of loss aversion, prospect theory shows that

they are more likely to make riskier actions to avoid losing money (though they may sometimes

refrain from investing altogether). They tend to reverse or significantly alter their previously

reported risk aversion. Finally, this blunder in investing may lead to significant losses in a

portfolio of investments, such as an individual's investment in a mutual fund group. Several

biases affect the investor's decision, but loss aversion bias is the one that affects the decision-

making behaviour. The marginal utility of a loss is strictly greater than the marginal utility of a

corresponding gain, according to the prospect theory. Prospect theory describes that individuals

are more risk-averse when faced with possible benefits than losses. Risk aversion leads to a

dispositional effect, in which investors sell winning equities too soon and keep losing stocks for

too long. Prospect theory research indicates that there is a negative association between

perceived risk and hazardous decisions.

 2.6.2 Stakeholder Theory

Shareholders and financial investors are one of several groups that a business or organization

must serve, according to stakeholder theory. Employees, consumers, suppliers, local

communities, environmental groups, governmental groups, and others are all considered

stakeholders under stakeholder theory. According to stakeholder theory, organizations and

companies should aim to do the right thing by all of these stakeholders, and that by doing so;

they will achieve real long-term success.

The term ‘stakeholder' was first used in an internal document at the Stanford Research Institute

in 1963, and it is still in use today. A 'plethora' of stakeholder definitions and ideologies emerged

as a result. In 1971, Hein Kroos and Klaus Schwab produced a German pamphlet titled 'Modern

enterprise management in Mechanical Engineering,' claiming that in order to achieve long-term

growth and prosperity, management of a modern firm must serve not only shareholders but all

stakeholders. In the 1980s, Edward Freeman popularized the word stakeholder and a more

comprehensive stakeholder theory, defining a stakeholder as "any group or individual who may

impact or is affected by the attainment of the organization's aim."

The goal of this study is to figure out how loss aversion, greed and fear of individual investors’

affect the stock market's result. On Wall Street, there is an old adage that the market is driven by

only two emotions: greed and fear. The majority of investors desire to make as much money as

possible in bull markets. They strive to acquire as much stock as they can in order to sell it all at

once at the opportune time. According to stakeholder theory, all the investors, governmental

groups, suppliers, etc., are a part of the stock market as they also have their stakes. Whenever the

investor buys shares in greed, the supplier and producer of the product get benefit from it along

with the company.

Herd behavior is the term economists use to describe what happens when investors purchase or

sell because everyone else is doing it. The market, just as it may be overcome by greed, can also

be overcome by fear. When equities experience big losses over a long period of time, investors

may become frightened of more losses and begin to sell. It has the self-fulfilling consequence of

causing prices to drop even further. The stakeholder theory shows that every kind of stakeholder

weathers its employee or any group, is in development by the greed and fear in the stock market.

In behavioral economics, loss aversion is a phenomenon in which people consider an actual or

projected loss to be more psychologically or emotionally painful than an equivalent gain. The

anguish of losing $100, for example, is typically significantly higher than the elation of

discovering the same amount. The stakeholder theory of the stock market demonstrates that, just

as greed reigns supreme during a bull market, fear reigns supreme during a down market. To

limit their losses, investors sell equities fast and replace them with safer assets such as money

market securities, stable value funds, and principal-protected funds, which are all low-risk but

low-return investments. Whether it's a stockbroker or an individual investor, everyone tries to tell

themselves that their investment won't be lost until fully realized, or you can say they are sold at

a lower price compared to buy price.

CHAPTER 3: RESEARCH METHODOLOGY

The methodology used to assess the association between loss aversion, greed, and fear

(independent variables) and investment decisions (dependent variable) is expressed in this

chapter. This chapter covers the research methodologies, such as the study's population, sample
size, and sampling technique, etc. This chapter also covers technique for gathering and analyzing

data using quantitative or qualitative approaches, such as research design, research instrument,

population and sample size, data collection, data analysis, and so on.

3.1 Research Design

As elaborated by Sekaran and Bougie, (2013) research design is the plan for data collection,

measurement, and analysis based on the study's research questions. Starting from the research

methodologies, which are of three types as discussed by Sekaran and Bougie, (2013). These are

qualitative, quantitative, and mixed research methods. This study uses primary data after going

through the definition of research design and many sorts of research methodologies. As a result,

the quantitative research method is used in this study. In the quantitative research method, the

nature of the investigation has the following types. These are quasi, experimental, causal, and

descriptive research designs. The nature of this study belongs to causal research design, as this

study explains the cause-and-effect relationship between the variables. Causal research design, as

highlighted by Sekaran and Bougie, (2013) is the scientific method of study relies heavily on

causal investigations. Such research examines if one variable influences the behavior of another.

In a causal investigation, the researcher is looking for the elements that are causing the problem.

3.2 Population of the Study

The population, according to Sekaran and Bougie, (2013) is the total group of individuals,

events, or items of interest that the researcher desires to explore. The researcher tries to draw

conclusions about a group of individuals, an event, or a particular object of interest (based on

sample statistics). In this study, the researchers have chosen individual investors of twin cities

(Islamabad and Rawalpindi) of Pakistan as the population of this study. These individuals have
been asked to complete the questionnaire in order to obtain the necessary information. The

population size chosen has been the 250 individual investors of Pakistan's twin cities (Islamabad

and Rawalpindi).

3.3 Sampling Techniques

According to Sekaran and Bougie, (2013) the process of picking a sufficient number of the

correct elements from the population such that a study of the sample and comprehension of its

properties or characteristics allows us to generalize such properties or characteristics to the

population components is known as sampling technique. According to Sekaran and Bougie,

(2013) there are two primary sampling approaches in statistics and these are random and non-

random sampling techniques. This study is using a non-random sampling technique. The

following are the several sorts of non-random sampling methods; these are purposive, quota,

snowball, and convenience sampling techniques. This study follows the purposive sampling

technique. As predicted by Sekaran and Bougie, (2013) the purposive sampling is a non-

probability sampling approach in which the needed information is acquired on a reasonable basis

from individuals or specified targets or groups of people. Majority of the researchers who have

already researched this literature have used the questionnaire technique to gather the data.

Therefore, the major procedure used to collect the data within this research has been a structured

questionnaire distributed amongst the individual investors of Pakistan.

3.4 Sample Size

According to Sekaran and Bougie, (2013) the sample is analyzed as a subset of the population. It

is made up of members who have been chosen from among them. In other words, the sample

contains some, but not all, aspects of the population. The sample size was determined based on

the recommendations of top scholars such as Sekaran and Bougie, (2013) who claimed that the
sample size is the actual number of participants chosen as a sample to represent the population

characteristics. Hair. et al., (2005) suggested that if you are to use advanced multivariate models

like structured equations modeling, the minimum sample size should be 250. In that case, 250

questionnaires were distributed amongst the individual investors’ and all were reliable for the

data analysis. A sample of 250 respondents (individual investors’) working in the Pakistan Stock

Exchange (PSX) and the brokerage houses have been taken to represent the entire population.

3.5 Research Instrument

The data gathering instrument in this study was a survey questionnaire. The structured

questionnaire items have been adopted from various researchers who conducted their study

previously. The table below shows the study's variables and the things and their source.

Variable No. of Items Source

Loss Aversion 5 (Parker and Decotiis, 1983)

Greed 5 (Seuntjens et al., 2014)

Fear 3 (Howland, Lachman, Peterson, Cote, Kasten and

Jette, 1998)

Investment Decisions 8 (Ahmed, 2013)

The respondents' data was collected using an accepted questionnaire as a research tool

(individual investors’). This study employed a structured questionnaire as a research tool to

gather data from the respondents and analyze data to evaluate the link between loss aversion,

greed, fear, and investment decisions in Pakistan, similar to the bulk of research studies
completed on this literature issue. The structured questionnaire utilized in this study was built on

five liquid scales for capturing responses (strongly disagree, disagree, neutral, agree, and

strongly agree).

3.6 Data Collection Method

The questionnaire was designed with great attention and made as basic as possible to guarantee

that the procedure of replying is simple enough to obtain trustworthy replies from the

participants in the data collection. The factors of ambiguity and suspension were immediately

eliminated with such a simplified questionnaire. The information was gathered from the Pakistan

individual investors’ using a standardized questionnaire that was individually given. The

gathered questionnaires are synced suitably to help in the study's plausible results and

conclusions.

3.7 Data Analysis

After the data was collected, it was evaluated using a variety of tests to complete the analytic

method. Various statistical methods such as reliability and regression have been used to prepare

data for analysis after it has been collected. The magnitude and direction of the link between the

independent and dependent variables were determined using these statistical methods and SPSS

software. These statistical tools have demonstrated the significant relationship between loss

aversion, greed, fear, and investment decisions on Pakistan individual investors.

3.7.1 Reliability Analysis

The items that make up the scales may be evaluated using reliability analysis, which is a

statistical tool that exposes the properties of measuring scales. The reliability analysis tool

generates a number of regularly used scale reliability indicators as well as information on scale
item correlations. Intraclass correlation coefficients can be used to create inter-rater reliability

estimates.

3.7.2 Regression Analysis

Regression analysis is a sophisticated statistical tool that allows you to investigate the connection

between two or more variables. Regression analysis is a reliable tool for evaluating which factors

have an impact on a particular issue. Regression analysis allows us to pinpoint which aspects are

most important, which ones may be overlooked, and how these factors interact.

CHAPTER 4: RESULTS AND DISCUSSION

Introduction

In this chapter, data has been collected from the individual investors of the stock market and

brokerage houses of Pakistan's twin cities (Islamabad and Rawalpindi). Based on the collected

data, reliability, descriptive statistics, and regression analysis have been applied to analyze the

data.

4.1 Data Analysis

Software Used

To conduct the data analysis, SPSS Statistics has been used.

41

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43

4.1.1 Reliability

The reliability of the structured questionnaire has been tested through Cronbach's alpha to

investigate the level it is being consistent with what it is supposed to be measuring. The
questionnaire is more reliable if it has lesser variations upon repeated interval measurements.

How dependable the questionnaire is, how consistent its questions are, and how related it is to

measuring the instruments' reliability. Below is the result of Cronbach's alpha reliability test of a

structured questionnaire used within this research.

Reliability Statistics (Collective)

Cronbach’s Alpha No. of Items

.706 21

The closer the coefficient of reliability is to 1, the higher the internal consistency reliability will

be. The value of Chronbach's alpha shown by reliability statistics is 0.706, which is 70.6%

(>50%), and it is acceptable in this study. This value of Cronbach's alpha has indicated the

maximum level of reliability and consistency possessed with the questionnaire used primarily the

research conducted within the study. The value of Chronbach's alpha is 0.706, which is close to

1, demonstrating the reliability of the questionnaire used and the respondents' reliable responses.

The responses received through the study instrument are internally consistent. Thus, the tool is

dedicated to using descriptive and inferential statistics.

 4.1.2 Descriptive Statistics

Descriptive Statistics

Std.
N Minimum Maximum Mean
Deviation

LA 250 1.20 5.00 3.3624 .71205

Fear 250 1.00 5.00 3.1693 .81279

Greed 250 1.60 5.00 3.3656 .69763

ID 250 1.25 5.00 3.5245 .64000

Valid N 250

(listwise)

The table above shows the descriptive statistics, including the mean values and standard

deviation of all variables. The mean values of loss aversion, fear, greed, and investment

decisions, are 3.3624, 3.1693, 3.3656, and 3.5245, respectively. No mean value is closer to +ve

or -ve extreme. Whereas, it shows in the table above that the mean value for investment

decisions has been the highest.

4.1.3 Regression Analysis

Regression indicates the relationship between dependent (investment decisions) and independent

(loss aversion, fear, and greed) variables and the extent of the connection between them. In

addition, regression highlights the fitness of the theoretical framework model used in the

research study to develop hypothesis. Below is the regression analysis results, which is another

term used for the analysis of the data. This is a significant step in calculating the type of the

relationship between the variables, whether they are dependent or independent variables, the
relationship between variables exists or not, and finding the relationship is significant. When

derived from this whole process, such results can give the most relevant and reliable data.

Coefficients

Unstandardized Standardized

Model Coefficients Coefficients t Sig.

B Std. Error Beta

(Constant) 1.276 .205 6.237 .000

LA .284 .049 .316 5.757 .000

1
Fear .098 .047 .114 2.085 .047

Greed .300 .056 .327 5.321 .000

a. Dependent Variable: Investment Decisions

The above table shows dimensions that have a positive influence on investment decisions. In the

model, the significance value of t-stats should be more than or equal to 1.96, and the probability

of t-stats should be less than or equal to 0.05. The significance value of loss aversion, fear, and

greed are less than 0.05 showing the positive or significant relationship between them. To find

the nature of the relationship of variables, whether there are statistically significant or not, it will

be defined through beta, and beta tells the definition of regression and shows the dependence of

dependent variable (investment decisions) on independent variables (loss aversion, fear, and

greed). Loss aversion (b=0.284) is significant (p=0.000), and the coefficient is positive, which

indicates that loss aversion is related to investment decisions which suggest that with the change

in one unit in loss aversion, the investment decisions changes by 0.284 (or 28.4%) in the same

direction. Fear (b=0.098) is significant (p=0.47), and the coefficient is positive, which indicates
that the fear is related to investment decisions which demonstrates that with the change in one

unit of fear, the investment decisions change by 0.098 (or 9.8%) in the same direction. Finally,

greed (b=0.300) is significant (p=0.00), and the coefficient is positive, which indicates that the

greed is related to investment decisions which suggest that with the change in one unit of greed,

the investment decisions changes by 0.300 (or 30%) in the same direction.

Model Summary

Adjusted R Std. Error of the

Model R R Square Square Estimate

1 .580a .336 .328 .52449

a. Predictors: (Constant), Loss Aversion, Greed, Fear

The Adjusted R-square value represents variance percent in the dependent variable that is

accounted for by variations in the predicting variables (loss aversion, greed, and fear). The R

Square value in the model is the coefficient of determination or explanatory power. It indicates

that all the independent variables (loss aversion, greed, and fear) explain the changes dependent

variable (investment decisions) by 0.336, which is 33.6%. However, 66.4% changes independent

variable, investment decisions are explained through other factors like risk aversion, regret

aversion, etc., which are not illustrated or described in this study. The R-square value in the

model shows that loss aversion, greed, and fear accounted for a 32.8% variance in the investment

decision.
 ANOVA

Sum of
Model Df Mean Square F Sig.
Squares

Regression 34.318 3 11.439 41.584 .000a

1 Residual 67.673 246 .275

Total 101.991 249

a. Predictors: (Constant), Loss Aversion, Greed, Fear

b. Dependent Variable: Investment Decisions

The table above shows the model fitness or combined significance of variables. In F-stats, the F

value should be more than or equal to 4, and the probability of F-stats should be less than or

equal to 0.05. The F-value in the model is greater than 4 (41.584), and the significant value is

less than 0.05 (0.000), representing the model's fitness. If the considerable value is more than

0.05, the model could not fit the data. The table above shows that the probability of F-stats

obtained in results is significant (p=0.000), the model is fit. In other words, all the independent

variables (loss aversion, greed, and fear) are relevant to the dependent variable, investment

decisions.

4.2 Data Findings

The data findings of this research are following below:

Hypothesis Statement Accepted / Rejected

H1 Loss aversion impacts the investment decisions. Accepted

H2 Greed impacts the investment decisions. Accepted

 H3 Fear impacts the investment decisions. Accepted

CHAPTER 5: CONCLUSION AND RECOMMENDATIONS

5.1 Discussion

This research study has aimed to investigate the relationship between loss aversion, fear, greed

(independent variables), and investment decisions (dependent variable), as individual investors’

have been chosen for data collection and investigation of the relationship between variables

mentioned above. An adoptive structured questionnaire has been used to gather responses from

the respondents that are individual investors in twin cities (Islamabad and Rawalpindi) of

Pakistan. However, a scale has been set, which ranges 5 percent of the significance level to test

the acceptance and rejection of hypotheses of this study. As significance level of loss aversion,

fear, and greed for investment decisions has been checked. H1, H2, and H3 have been accepted

and proved significant based on the significance level. Therefore, it has been established have a

positive relationship between loss aversion, greed, and fear (independent variables) and

investment decisions (dependent variable).

5.2 Research Implication

This research implication on theoretical and practical is following below:

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46
 5.2.1 Theoretical Implication

The behavioural factor identified in this study had a significant effect on the decision-making

process of individual investors'. This study will prove beneficial for the policymakers towards

understanding the relationship between independent variables (loss aversion, greed, and fear) and

dependent variable (investment decisions). In addition, policymakers and other think tanks will

continue this research study as a foundation to further explore the impacts of loss aversion,

greed, and fear on the individual investors' investment decisions in Pakistan. It is also helpful for

those who make policies for the financial markets, and the financial advisors who, after studying

this research, can be able to advise the investors in their investment decisions and protect them

from making irrational decisions, the policymakers who can understand these psychological

factors will be able to ensure that the market is running smoothly, the students who are willing to

study these variables and conduct the future research related or these variable perspectives, the

finance teachers who after studying this research can teach the students more efficiently about

these variables and their impact on investors' investment decisions.

Meanwhile, finance students of Pakistan will have sufficient evidence through this research

study concerning the significant role that loss aversion, greed, and fear impact individual

investors' investment decisions in Pakistan. Finance students will be able to enhance their

knowledge and understanding of the relationship between the variables of this study.

5.2.2 Practical Implication

This study will prove practical in helping policymakers who are working in Pakistan Stock

Exchange (PSX), stakeholders associated with Pakistan Stock Exchange (PSX), brokerage

houses, individual investors’, the agents, the shareholders, the share issuers, the corporation, the

organization, and the government, as this study will assist in developing their knowledge and
awareness about the role that loss aversion, greed and fear impact the investment decisions of

individual investors’ in Pakistan.

5.3 Limitations and Future Research

The limitation has consistently been recognized as a barrier that a researcher must face while

performing a research study. There have been numerous limitations experienced while

conducting this study. Some significant limitations were limited sample size, limited time frame,

or this research covering only two twin cities (Islamabad and Rawalpindi) of Pakistan. Although

the sample survey conducted in this study was based on a limited sample selected from a

particular area that genuinely represented the total population, it is also considered the limitation

of this study. On the other hand, in the Covid-19 uncertain situation, most of the factors

negatively affect financial decision-making, except for overconfidence, which shows a positive

effect. Though the limitation was a time constraint, limiting factors and Covid-19 is a stressful

environment, and people do not prefer to participate in interviews. However, the time frame

available for the completion of this study was insufficient because for gathering responses from

individual investors’ and brokerage houses of twin cities in Pakistan, there were a need for an

extended time frame. A time frame with additional time must be provided to conduct appropriate

research covering more responses of individual investors’ of twin cities of Pakistan and

belonging to different parts of twin cities. An increased time span is required for a study to be of

broad scope.

Additionally, the sample size was another constraint. For covering the individual investors’ and

brokerage houses of twin cities of Pakistan, a sample size of 250 was not enough, as a sample

size of 250 might not be sufficient to represent the individual investors’ decision-making of cities
of Pakistan in an appropriate manner. Hence, an overall sample size has been required for

conducting more detailed research.

Similarly, research studies on this literature have primarily focused on cross-sectional research,

as the nature of research preferred for this type of research has been cross-sectional. However,

the use of cross-sectional analysis could be another limitation that needs to be addressed. A

longitudinal study could be performed to address this literature topic in the future. In addition, it

has been recommended that a survey be conducted while considering SMEs as the targeted

audience to investigate the relationship between variables of this study. Finally, the future

research direction is to increase sample size and factors to understand the financial decision

impact on performance. It will help practitioners determine and avoid errors in their decisions

and modify and enhance their overall investment approaches.

5.4 Conclusion

Based on the findings and results of this study, it has been concluded that loss aversion, greed,

and fear (independent variables) have a significant positive impact on the individual investors’

investment decisions (dependent variable). The prime objective of this study is to find the effect

of loss aversion, greed, and fear on individual investors’ investment decisions in Pakistan. To

investigate the impact of these variables, a structured questionnaire has been distributed amongst

the individual investors’ in the stock market and brokerage houses of twin cities (Islamabad and

Rawalpindi) of Pakistan for data collection, as the impact of each variable has been observed in

this study. The regression analysis and reliability test have been performed, and this analysis

revealed that loss aversion, greed, and fear have a significant impact on investment decisions.

Hence, it is concluded that loss aversion, desire, and fear positively impact the investment

decisions of individual investors.’

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 APPENDIX A

Questionnaire

“The Impact of Loss Aversion, Greed and Fear on the Individual Investors’

Investment Decisions”

The study is being conducted by the students of BS Commerce, Specialization in Accounting and

Finance, University of Gujrat, Hafiz Hayat campus. The primary objective of this study is to find

the impact of loss aversion, fear and greed on the individual investor’s investment decisions. We

wish to assure you that any response you make will be strictly confidential. If you have any

query, you can contact at E-mail.

Saniailyas248@gmail.com.

Section: 1 (Demographic Variables)

1) Gender: 1: Male ( ), 2: Female ( )

2) Age: 1: 18-31 ( ), 2: 32-44 ( ),

3: 45-57 ( ), 4: 58-70 ( )
 3) Education: 1: Under Metric ( ) 2: Metric ( ),

3: Intermediate ( ), 4: Under-graduate ( ),

5: Post-graduate ( ), 6: Masters or Higher ( )

4) Investment Experience: 1: Less than a Year ( ), 2: 1-3 Years ( ),

3: 4-6 Years ( ), 4: More than 6 Years ( )

Section: 2 (Research Variables)

Please Tick () your responses using the following Scale:

(1= Strongly Disagree, 2= Disagree, 3= Neutral, 4= Agreed, 5= Strongly Agree)

Sr. # Variables Rating

Loss Aversion (Parker and Decotiis, 1983) SDA DA N A SA

1 I have knowledge to invest my capital in business.

I am hopeful when undertaking investments that have exhibited a sure

2
loss.

I am cautious about losses which show sudden changes in price or trading

3
activity.

I usually have investing in capital that has a past positive performance in

4
trading.

My decision in business is largely based on knowledge, experiences and

5
education.

Fear (Howland, Lachman, Peterson, Cote, Kasten and Jette, 1998) SDA DA N A SA

1 Has fear of failing made you avoid any activity?

2 The fear of failing was assessed thought the question “are you afraid of
 failing?”

Have you stopped or do you less frequently carry out some of your
3
activities due to fear of failing?

Greed (Seuntjens et al., 2014) SDA DA N A SA

As soon as I have acquired something I start thinking about the next thing
1
I want.

2 It doesn’t matter how much I have, I’m never completely satisfied.

3 I think that happiness is not about the possessions that you have.

4 I prefer to spend my money on myself rather than on others.

5 I prefer to buy too much instead of taking the risk to have not enough.

Investment Decisions (Ahmed, 2013) SDA DA N A SA

1 I know about interest rates, Finance charges, And credit terms.

2 Money is most important goal of my life

3 I know how to manage the finances

4 I know how to invest my money.

5 It is more satisfying to save than invest money.

6 I would invest a large sum of money in stock.

The uncertainty of whether the market will rise or fall keeps me from
7
buying Stocks.

8 I budget my money very well.