Investors are thought of as rational individuals, who carefully take all economic decisions every time. But irregularities were noticed in the behavior of investors when economy of the world was shaken by the Financial Crisis of 2008 that started off in the USA and resulted in global recession. The news of international financial crisis affects investment strategies and help to estimate the shock absorbing abilities of capital market. Investors use heuristics in their financial decisions whenever they are faced with uncertain situation. For this study we have collected data of ten years (2005-2014) of 229 companies listed in all sectors of Pakistan stock exchange to find out the impact of behavioral heuristics on investment decisions of Pakistani investors. We have used Logit regression to find the relationship between disposition effect, anchoring heuristic and overconfidence bias of investors in Pakistani stock market. We have found that disposition effect and anchoring heuristic is used by Pakistani investors in their financial decision making and it helps them to generate positive returns. Overconfidence has negative but significant effect on investment returns for the investors.
Keywords: Heuristics, anchoring, overconfidence, disposition effect, EMH, Logit regression