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What Determines the Investor Risk Behavior?

Evidence from Pakistani Stock Market

There is a plethora of research literature available on determinants of investor risk behavior in
context of Western countries. Most of scholars who have studied individuals risky decisions
making behavior found contradictory results. Negatively framed situation leads to risk seeking or
taking behavior due to gambler fallacy while positively framed situation leads to risk aversion
due to protecting prior gains (Kahneman & Tversky, 1979). However, several studies have
contradiction with these results. The outcomes of an individuals prior risk seeking behavior
leads to future risk behavior (Osborn & Jackson, 1988); (Thaler & Johnson, 1990). When
individuals are threatened by losses (Negatively Framed Situation) then they become risk-averse
(Staw, Sandelands & Dutton, 1981).
Furthermore, it is also clear that Western context is different from Asian context. Asian cultures
tend to based on collectivist paradigm and collectivity is characterized by values that reflect a
tendency to prefer certain states of affairs over others (Hofstede, 1980). Tendencies to prefer
certainty versus uncertainty and risk seeking versus risk avoidance may be cultural risk values
(Douglas & Wildavsky, 1982). Literature has focused on nine key determinants of individuals
risk behavior; characteristics of individual decision maker, characteristics of organizational
context and characteristics of problem itself (Sitkin & Pablo, 1992). In this study one
characteristic related to individual decision maker (Risk Perception) and one characteristic
related to problem itself (Problem Framing) and last but not the least social influence are taken
into consideration. Furthermore risk perception has mediating role while problem framing and
social influence acting as independent variables.
Problem framing means influencing humans judgments about a problem by framing it into
positive or a negative ways or in terms of gains or losses. The usage of positive or negative
framing has a considerable influence on information processing and how information is
perceived and understood (Morris, Sheldon, Ames & Young, 2005). In context of Prospect
Theory, Tversky and Kahneman (1986) documented that framing same information in positive or
negative ways, may systematically affect the action of decision maker. The same finding in this
line of research literature that an object is assessed more favorably when it is presented in a
positive frame rather a negative frame in context of consumer research. For example, consumers
assessments are more favorable towards a beef product labeled 75% lean rather one labeled
25% fat (Levin & Gaeth, 1988). Similar findings in this line of research in context of
marketing, for example the use of pleasant music in a commercial can lead to a favorable image
of product, although the music is irrelevant to the merits of the product (Gorn, 1982).
This study attempts to address, unexplored area of Pakistan where investors risky decision
making behavior is different from Western countries. The reason for this difference could be
high gambler fallacy and behavioral biases in collectivist societies of Asian countries,
particularly Pakistan. It has been said that collectivist societies cause individuals to be trapped
more by behavioral biases (Kim & Nofsinger, 2008). People raised in Asian cultures trapped by
behavioral biases more, than people raised in Western cultures (Yates et al. 1989). To authors
best knowledge, despite interest of researchers on investors risk behavior in context of stock
markets, the majority of studies conducted in Western countries, is limited in regions such as
Pakistan. So it should be considered that how investor making risky decisions in collectivist
societies particularly in Pakistan.
The author of the view that study of investors risky decision making is important because, it
helps in understanding how individual investor decisions making varies in different societies and
what happens in financial markets. The importance of current study is encouraged by the
statement of De Bondt , Mayoral and Vallelado (2013), who were of the view that behavioral
biases (behavioral biases influence risk-seeking and risk-taking behavior) and social influence
have received a great deal of attention and are extremely relevant topics to figure out what
happens in financial markets. Furthermore, studies conducted in Western and some Asian
countries cannot be generalized and may not necessarily have any application in context of
Pakistan because of the difference in contextual paradigm (i.e. individualist v/s collectivist).
Hence, an attempt is being made to find out the determinants and their influence on risky
decision making behavior of investors regarding stock market in context of collectivist society of