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Stock market efficiency: Behavioral or traditional paradigm?Evidence from Karachi Stock Exchange (KSE) and investors community of Pakistan

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  • Shahzad, Syed jawad hussain
  • Ali, Paeman
  • Saleem, Fawad
  • Ali, Sajid
  • Akram, Sehrish
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    Abstract

    Traditional finance explains the investment process on rational and logical grounds based on the assumption of rationality of average investor. This paper attempts to understand why traditional finance models fail to capture stock market movements and how behavioral finance explains that failure in the context of Pakistan’s financial market. Beginning with the basics of behavioral finance, the discussion unfolds to explain any association that investor’s decision making process has with the behavioral biases like overconfidence, regret, pyramid and risk. Primary data based on questionnaire and interviews of investors trading at Karachi Stock Exchange of Pakistan was used. The study concluded that behavioral traits have significant association with investment decision. The study will also open up the doors to further analyze the deviated scenarios which cause the market to create the loss spiral for one group and unbounded gain for the other.

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    File URL: http://mpra.ub.uni-muenchen.de/45095/
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    Bibliographic Info

    Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 45095.

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    Date of creation: 10 Mar 2013
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    Publication status: Published in Interdisciplinary Journal of Contemporary Research In Business, ISSN 2073-7122 10.4(2013): pp. 605-619
    Handle: RePEc:pra:mprapa:45095

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    Keywords: Behavioral finance; Regret; Pyramid; Overconfidence;

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    1. Milton Friedman & L. J. Savage, 1948. "The Utility Analysis of Choices Involving Risk," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 56, pages 279.
    2. Biais, Bruno & Hilton, Denis & Pouget, Sébastien, 2002. "Psychological Traits and Trading Strategies," CEPR Discussion Papers, C.E.P.R. Discussion Papers 3195, C.E.P.R. Discussion Papers.
    3. Shefrin, Hersh & Statman, Meir, 2000. "Behavioral Portfolio Theory," Journal of Financial and Quantitative Analysis, Cambridge University Press, Cambridge University Press, vol. 35(02), pages 127-151, June.
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