Mitigating Role of Covid-19 in Relationship between Behavioral Factors of Investors

Abstract

The efficient market hypothesis (EMH) forms the basis of classical financial theories, assuming the rationality of investors. However, this hypothesis often proves inadequate in financial markets due to investors' tendency toward irrational behaviour. Behavioural finance investigates how individual investors analyse and interpret information when making investment decisions. This study explores the relationship between behavioural factors and investment decision-making, considering the moderating effect of COVID-19. Using convenient sampling and structured questionnaires, the researcher collects data from 364 investors actively trading on the Pakistan Stock Exchange. Structural Equation Modelling (SEM) with Smart PLS 4 software is employed as the research method to assess the influence of independent variables on the dependent variable, moderated by COVID-19. This research aims to encourage investors to carefully consider their decisions before investing and understand how psychological factors may impact their investment choices. The findings indicate a positive association between behavioural factors and investment decision-making, alongside a negative impact of COVID-19. This study is beneficial for both individual and institutional investors as it underscores the importance of behavioural factors (herding, loss aversion, and risk perception) in investment decision-making within the context of Pakistani investors.