An Empirical Study of Illusion of Control and Self-Serving Attribution Bias, Impact on Investor’s Decision Making: Moderating Role of Financial Literacy

Abstract

According to traditional financial theory investors are supposed to be rational and make decisions that reflect all available information but prospect theory explained a number of biases which affect the investor’s behavior and investors lead to irrational decision making. This study aims to investigate the influence of behavioral biases (self-attribution, illusion of control) on investment decisions with the moderating role of financial literacy in context of Pakistan. The relationship was examined by administering a questionnaire and by collecting empirical data from investors about their own perception of these biases. Questionnaire was distributed among the sample of 220 investors and two statistical tools correlation analysis and regression analysis were used to analyze the collected data. The study was found that the Illusion of control bias has significant positive impact on individual investor investment decision and no support were found for the positive impact of self-serving attribution bias on investment decision. It is also found that financial literacy moderates the relationship between illusion of control bias and investment decision so that it weaken the relationship. The findings of this study will helpful for investors to identify these biases which interrupted his decision making level and then formulate different strategies to overcome these biases and reduce irrational behavior. Other implications and limitations of the study are also discussed.

Keywords: Illusion of Control Bias, Self-Serving Attribution Bias, Financial Literacy, Investment Decision, Pakistan.