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NATIONAL TEXTILE UNIVERSITY

FAISALABAD

Research Project

TITLE:
Effect of Overconfidence and Risk perception on
Investment Decision

(Among gender)

NAME:
Bilal Javed Khan

REGISTRATION #
13-NTU-1183

SECTION/DEPT:
BBA 7th

SUBMITTED TO:
MR. Muhammad Ishfaq

EFFECT OF OVERCONFIDENCE AND RISK


PERCEPTION ON INVESTMENT DECISION
(AMONG GENDER)

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1.0 Introduction:

This work has been carried out in order to investigate the impact of demographics like gender

and age on behavioral biases like overconfidence and risk perception in Pakistani perspective as

best a small range of researchers have endeavored to consciousness in this trouble here.

This paper contributes to the literature in four distinct methods. First, at the same time as many

studies have established the effect of cognitive and emotional biases on the overall selection-

making manner, we distinguish the relevant literature which could apply the impact of those

biases to buyers and investment choices. For the sake of our observe, we classified each

behavioral bias into the types mentioned in Pompian (2006).

Second, we examined every bias to decide if there are any widespread variations within the

occurrence of those behavioral biases based on gender.

Third, even as this preceding studies has centered at the effects of biases on investor choices, this

examine also specializes in the effects of biases at the effects of investor choices (i.e., funding

portfolio performance and threat). Sooner or later, by means of together with behavioral biases in

our analysis of portfolio performance and risk, we offer lecturers and practitioners a greater

complete summary of the way behavioral biases and gender interrelate to basic funding

performance. The paper proceeds as follows. The Literature review and history section offers a

review of the applicable literature, which includes gender variations and behavioral biases on

investment overall performance and threat. We then offer a segment that outlines the look at

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technique, which is accompanied with the aid of the empirical results and evaluation section. The

paper concludes with a discussion of our outcomes and implications for enterprise and studies.

2.0 Theoretical Framework:

Independent Variable Dependent Variable

GENDER Overconfidence
INVESTMENT
DECISION

Risk Perception

3.0 Hypothesis:

Ho1: Gender and over confidence are not correlated.

Ho2: Gender and Risk perception are not correlated.

Ho3: There is no significant effect of overconfidence on investment decision.

Ho4: There is no significant effect of risk perception on investment decision.

4.0 LITERATURE REVIEW AND BACKGROUND

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4.1 Overconfidence:

By over confidence, we mean to point out the individuals faith in their cognition, intuition and

decision making. By being over confident one forgets that one can make mistakes just like others

do and starts over estimating themselves. Too many human beings overvalue what they're not

and undervalue what they may be (Chernoff, 2010). Resultantly they input into a addiction of

self-attribution wherein they take credit score in their successes even as putting the blame of

failures on external elements; and such humans have a motto like Heads I win, tails its danger

( Langer, 1975). Over assured human beings misread their own know-how, do not heed others

and indulge in excessive buying and selling thereby inflicting decrease returns. Ralph Waldo

Emerson most correctly defined knowledge as information is knowing that we cannot know.

As rightly defined by using Josh Billings, Its no longer what a man dont recognize that makes

him a idiot, however what he does recognize that isnt so.

A study by Barber and Odean (2000) on the trading patterns and returns of over 66,000 accounts

held by private investors with stockbrokers for the period 1991-96 show that the excessive

trading affected the returns of the investors as they earned less. A later study by Barber and

Odean (2001) on the effect of gender on the investment decisions depicted that men were more

confident than women as they traded more and earned lower returns.

4.2 Risk perception:

The traditional financial idea has a limited expertise regarding individual investors conduct

concerning investment risks. In the perception of the behavior economy we could have a higher

interpret of the man or woman investment technique. Chen and Tsai (2010) verify that external

and mental factors are had to study their impact on investment behavior. Gender is one of the

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strongest influencers that predict the degree to which risk is avoided for individual investors as

also debated by Gysler, Kruse and Schubert (2002).

The risk perception in investment decision depends on the situation of uncertainty in the

data, as well on the degree of risk that the decision-maker is already familiar with, according his

previous experience. (Popescu 2004).

Risk perception shows that an actions danger how is perceived. Buyers perceive hazard

as a result of unfavorable loss opportunity, however with an advantage connected. In making an

investment, danger can be desirable if it's far compensated with extra advantages that can be

expected with a possibility. (Ionita 2001) An investors conduct in investment selections relies

upon on his threat belief which depends on his danger tolerance. Hazard tolerance method that

how he can be given and tolerate the presence of risk and its stage in an investment assignment.

5.0 Methodology

The data of this study was obtained from primary and secondary sources. The primary source is

that through which we directly collect data from questionnaire survey as well as interview

sessions. The secondary data was collected through the reference articles and websites.

5.1 Data collection method

We printed the hardcopies of the questionnaires and distributed in nearby Banks and other

financial institutions. We also conduct the face to face interviews that were also help full for data

collection. Regression and correlation of the related data and other statistical functions were

evaluated by using data analysis function of SPSS.

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5.2 Questionnaire design

The 1st section of the questionnaire consists of respondents demographic like Gender, The 2 nd

section consists of questions related to Overconfidence bias that effects investment decision, The

3rd section of questionnaire contains the respond view about Risk perception while investment.

The final section consists of dependent variable Investment Decision.

5.3 Data population and sampling

The data population size consists of the investors in Faisalabad, we distributed almost 150

questionnaire and 50 forms returned only. We take the sample size of 150. The research

respondents were the investors.

6.0 Results:
6.1 Correlation:
Correlations
overconfidenc
gender e
gender Pearson
1 -.463**
Correlation
Sig. (2-tailed) .001
N 50 50
overconfidenc Pearson
-.463** 1
e Correlation
Sig. (2-tailed) .001
N 50 50
**. Correlation is significant at the 0.01 level (2-tailed).

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Pearsons r value of -0.463

SPSS generated a Pearsons r value of -0.463, SPSS generated a negative Pearsons r value, we
could conclude that change in gender can cause the change in the effect of overconfidence.

Sig (2-Tailed) value


The Sig. (2-Tailed) value in our example is 0.001. This value is less than .05. Because of this, we
can conclude that there is a statistically significant correlation between gender and
Overconfidence.

Correlations
gender Risk
gender Pearson
1 -.468**
Correlation
Sig. (2-tailed) .001
N 50 50
Risk Pearson
-.468** 1
Correlation
Sig. (2-tailed) .001
N 50 50
**. Correlation is significant at the 0.01 level (2-
tailed).

Pearsons r value of -0.468

SPSS generated a Pearsons r value of -0.468, SPSS generated a negative Pearsons r value, we
could conclude that change in gender can cause the change in the effect of Risk perception.

Sig (2-Tailed) value


The Sig. (2-Tailed) value in our example is 0.001. This value is less than .05. Because of this, we
can conclude that there is a statistically significant correlation between gender and Risk
perception.

According to results

Ho1 is rejected

Ho2 is rejected

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6.2 REGRESSION:

Effect of Overconfidence on Investment Decision:

Model Summary
Adjusted R Std. Error of
Model R R Square Square the Estimate
1 .636a .456 .036 .50059
a. Predictors: (Constant), overconfidence

ANOVAb
Sum of
Model Squares df Mean Square F Sig.
1 Regression .708 1 .708 2.824 .009a
Residual 12.029 48 .251
Total 12.736 49
a. Predictors: (Constant), overconfidence
b. Dependent Variable: investmentD

Coefficientsa
Unstandardized Standardized
Coefficients Coefficients
Model B Std. Error Beta t Sig.
1 (Constant) 2.979 .408 7.296 .000
overconfidenc
.202 .120 .236 1.681 .009
e
a. Dependent Variable: investmentD

R= .636: It shows overconfidence and investment decision have 63.6% relationship.

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R-Sq= .456: It shows overconfidence has 45.6% effect on investment decision.

B= .202: The positive value of B represents a positive effect of overconfidence on investment


decision.

Ho3 is rejected

Effect of Risk perception on Investment Decision:

Model Summary
Adjusted R Std. Error of
Model R R Square Square the Estimate
1 .651a .503 .187 .45976
a. Predictors: (Constant), Risk

ANOVAb
Sum of
Model Squares df Mean Square F Sig.
1 Regression 2.590 1 2.590 12.254 .001a
Residual 10.146 48 .211
Total 12.736 49
a. Predictors: (Constant), Risk
b. Dependent Variable: investmentD

Coefficientsa
Unstandardized Standardized
Coefficients Coefficients
Model B Std. Error Beta t Sig.
1 (Constant) 2.496 .337 7.401 .000
Risk .333 .095 .451 3.501 .001
a. Dependent Variable: investmentD

R= .651: It shows Risk perception and investment decision have 65.1% relationship.

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R-Sq= .503: It shows Risk perception has 50.3% effect on investment decision.

B= .333: The positive value of B represents a positive effect of Risk perception on investment
decision.

Ho4 is rejected

Stem-and-Leaf Plots

The graph shows that males are more overconfident while investment decisions as compare
to females.

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The graph shows that the degree of perceiving risk is more in females than males while
making investment decisions.

7.0 Conclusion:

The purpose of this article was to shed light on the phenomenon of overconfidence and risk

perception observed in gender while making investment decisions. Gender is a demographic that

has a prominent impact on behavioral biases like overconfidence and risk perception. Our

research findings supported this theory and provided some new insights into the psychology of

Pakistani investors. Hence, we conclude that in Pakistan, men are more over confident whereas

women perceive more risk. In Pakistan, people who prefer risks are generally observed to be

more overconfident.

Our study is unique in that we examine biases in terms of gender and we relate the survey results

to investment decisions. We find that males and females do in fact exhibit different behavioral

biases and that these behavioral biases can ultimately affect investment decision. We are able to

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verify prior studies that display males are extra risk tolerant than females. but, our findings

suggest that this behavior may be due to a difference in the perception of risk and return by

males and females rather than the actual level of risk and return. These effects have important

practical implications as they indicate that it may be optimal to have a more gender balanced

approach to trading teams since females tend to cognizance extra on risk and males focus extra

on returns.

8.0 References:
Alrabadi, D. W., AL-Gharaibeh, M. A., & Ziad, M. Z. (2011). What Makes Investors
Overconfident? Evidence from Amman Stock Exchange. European Journal of
Economics, Finance and Administrative Sciences, (43).
Bayyurt, N., Kark, V., & Cokun, A. (2013). Gender Differences in Investment
Preferences. European Journal of Economic and Political Studies, 6 (1), 71-83.
Dittrich, D. A., Gth, W., & Maciejovsky, B. (2005). Overconfidence in investment
decisions: An experimental approach. The European Journal of Finance, 11(6), 471-491.
Malmendier, U., & Tate, G. (2005). Does overconfidence affect corporate investment?
CEO overconfidence measures revisited. European Financial Management, 11(5), 649-
659.
Hofstede, G. (2001). Cultures consequences. California: Thousand Oaks.
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Finance Vol. 62 Issue 4, P. 1999.
17. Jacobsen, B., Lee, J.B., and Marquering, W. (2008). Are Men More Optimistic?
http://ssrn.com/abstract=1030478
18. Jianakoplos, N. and Bernasek, A. (1998). Are Women More Risk Averse? Economic
Inquiry 36: 620-630.
19. Johnson, J. E. V. and Powell, P. L. (1994). Decision Making, Risk and Gender: Are
Managers Different? British Journal of Management 5, p. 123-138.
20. Loewenstein, G. F., Weber, E. U., Hsee, C. K., and Welch, N. (2001). Risk as
Feelings. Psychological Bulletin 127:267-286.
21. Lyons, A., Neelakantan, U., and Scherpf, E. (2008). Gender and Marital Differences
in Wealth and Investment Decisions: Implications for Researchers, Financial
Professionals, and Educators. http://ssrn.com/abstract=1109103.

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