The reasons for the self-control bias of investors in the Pakistan stock exchange and the degree of its growth

Purpose This study is conducted with the purpose of investigating the causes of investors’ self-control bias in Pakistan’s stock market and to build a scale on it so that the research can be operationalized in the future. The study aims to identify potential precursors of self-control bias and to characterize the extent to which each precursor contributes to its development among Pakistan Stock Exchange (PSX) investors during the investment decision-making process. The self-control bias is a state in which people show a lack of ability to control their emotions. The study’s first section consists of semi-structured interviews with stock market experts. Expert responses based on semi-structured dialogues with investors are then approved, and NVivo is used on the main findings to create a word cloud that can be used to identify specific self-control bias precursors. The measures’ context and content validity are also checked by having five language experts and five market experts approve each measure in turn. In Section 2, the self-developed scale is floated to perform the following tests: the Bartlett’s sphericity test to verify item correctness; the Kaiser-Meyer-Olkin (KMO) test to assess sample size; an exploratory factor analysis to reduce overloading items based on outlier detection; and a check for outliers. To examine the inter-item association between items and create a more polished scale, the third segment includes the floatation of a refined scale with a limited sample size in comparison to previous floatations of the scale. The polished scale flotation in the fourth segment uses a smaller sample size compared to previous scale floatations to assess the consistency of factors (if an item is omitted), the relationship between factors and the cause-and-effect relationship between factors. In the final section, a refined scale with a smaller sample size is proposed for comparison with the previous flotation to validate the scale factors using Principal Component Analysis. By investigating and verifying the reasons behind investors’ self-control bias, it is possible to mitigate this bias through workshops for individuals. This could result in a more efficient stock market and economy. Design/methodology/approach A qualitative study is conducted with the purpose of identifying the reasons for the generation of emotional biases of investors in the PSX. This research critically investigates the various antecedents of emotional biases toward the behavior of investors in the PSX and then develops scales on such biases based on those identified antecedents. This paper provides a comprehensive explanation of the investor’s emotional behavior in the stock market of Pakistan. While based on exploratory research, another goal of the study is to gain an understanding of the emotionally biased behavior of the stock’s investors, too, to express more detailed views about the movement of the stock market, or to learn trends of the stock market. The key notion behind the use of an explanatory study is to describe well an opinion and approach, developed by a group of people on various emotions of the investors. The explanatory study further allows for measuring the importance of the results on the total population. In this way, it emphasizes counting and categorizing features and presents statistical figures to clarify what is detected. As an explanatory study, it is objective in method in the sense that it merely pursues specific dimensions and examination of target concepts to respond to its investigation. Findings Investors with a self-control bias become more positive about the market because they believe they can make money solely through their own decisions. Investors may not control their emotions toward purchasing in the market when they do not want to listen to the advice of others and just want to decide based on their own judgment, and they also do not know how to use their available resources. Financial illiteracy is another factor that acts as a catalyst in the production of self-control bias in investors in the market. Research limitations/implications The scale developed can be used to assess emotional bias among investors. Practical implications By investigating and verifying the reasons behind investors’ self-control bias, it is possible to mitigate this bias through workshops for individuals. This could result in a more efficient stock market and economy. Originality/value The scale for emotional bias has been developed for the first time to assess emotional bias.