Understanding behavioural biases in investment decisions: empirical insights from an emerging market

Given the limited literature on behavioural biases, this study aims to examine the impact of three behavioural biases, specifically halo bias, framing bias, and locus of control on individual investment decision-making in the Pakistan Stock Exchange (PSX). Using a quantitative research approach, data were collected from 414 individual investors of firms listed on the PSX through a self-administered online questionnaire over the period of May 2023 to August 2023. The findings from structural equation modelling (SEM) show that halo bias, framing bias and locus of control positively influence investment decision-making. These findings remained robust across various diagnostic tests. The evidence suggests that policymakers should pay close attention to these behavioural biases to enhance investors’ decisions. Specifically, addressing pitfalls associated with overconfidence and informational framing contribute to mitigate adverse outcomes. Additionally, they should exercise regulatory reforms aimed at reducing the negative impact of such biases to enhance market efficiency in emerging markets, like Pakistan. This research contributes to advance the behavioural finance literature by empirically quantifying the psychological and cognitive determinants of investor behaviour in an emerging market context. Additionally, it offers actionable insights to enhance individual investment decision-making, promote investor protection and support overall market stability. Investment decisions are rarely made in a vacuum of pure logic, human psychology plays a crucial role. This study shows how behavioural biases including halo bias, framing bias, and locus of control, shape the way investors in the Pakistan Stock Exchange make financial choices. Drawing on responses from over 400 investors, the findings reveal that positive impressions, the way information is presented, and beliefs about control over outcomes can significantly sway decision-making. These insights highlight why investors in emerging markets often act in ways that diverge from rational financial models, sometimes at the expense of market efficiency. By uncovering these patterns, the study not only advances behavioural finance theory but also offers practical guidance for policymakers and regulators to strengthen investor protection, improve financial literacy, and build more resilient capital markets.