1. bookVolume 29 (2021): Issue 1 (March 2021)
Journal Details
First Published
16 May 2013
Publication timeframe
4 times per year
access type Open Access

Role of Behavioral Biases in Real Estate Prices in Pakistan

Journal Details
First Published
16 May 2013
Publication timeframe
4 times per year

The study aims to explore the effect of behavioral biases on financial decision making in the real estate sector of Pakistan. The data of a sample of 244 real estate investors are collected through a survey carried out using different sources. The findings of the study show the relationship of different biases, including overconfidence, herding effect, gambler’s fallacy, and regret aversion on prices of real estate. Real estate prices are more affected by overconfidence and gambler’s fallacy than herding effect and regrets aversion bias in Pakistan. The findings furthermore reveal that these biases do not depend on gender, education, and demographics. It is recommended to carefully consider the market factors while making decisions in real estate, as the prices do not always show the real value of the property.


JEL Classification

Aigbovo, O., & Ilaboya, O. J. (2019). Does Behavioural Biases Influences Individual Investment Decisions. Management Science Review, 10(1), 68–89. Search in Google Scholar

Asad, H., Khan, A. A. T. I. Q. A., & Faiz, R. (2018). Behavioral Biases across the Stock Market Investors: Evidence from Pakistan. Pakistan Economic and Social Review, 56(1), 185–209. Search in Google Scholar

Atif Sattar, M., Toseef, M., & Fahad Sattar, M. (2020). Behavioral Finance Biases in Investment Decision Making. International Journal of Accounting, Finance and Risk Management, 5(2), p.69. https://doi.org/10.11648/j.ijafrm.20200502.11 Search in Google Scholar

Barberis, N., & Thaler, R. (2003). A survey of behavioral finance. Handbook of the Economics of Finance, 1, Vol. 1B. Financial markets and asset pricing, pp.1053-1128. Search in Google Scholar

Babajide, A. A., & Adetiloye, K. A. (2012). Investors’ behavioural biases and the security market: An empirical study of the Nigerian security market. Accounting and Finance Research, 1(1), 219–229. https://doi.org/10.5430/afr.v1n1p219 Search in Google Scholar

Brown, D. T. (2000). Liquidity and Liquidation: Evidence from Real Estate Investment Trusts. The Journal of Finance, 55, 469–485. https://doi.org/10.1111/0022-1082.00213 Search in Google Scholar

Bracha, A., & Brown, D. J. (2012). Affective decision making: A theory of optimism bias. Games and Economic Behavior, 75(1), 67–80. https://doi.org/10.1016/j.geb.2011.11.004 Search in Google Scholar

Burtch, G. (2011). Herding behavior as a network externality. In International Conference on Information Systems 2011, ICIS 2011, 1061-1076. Search in Google Scholar

Chhapra, I.U., Kashif, M., Rehan, R. & Bai, A. (2018). An empirical investigation of investors behavioral biases on financial decision making. Asian Journal of Empirical Research, 8(3), pp.99-109. DOI: 10.18488/journal.1007/2018.7.3/1007.3.99.109 Search in Google Scholar

Constantinescu, M. (2010). What is the “duration” of Swiss direct real estate? Journal of Property Investment & Finance, 28(3), 181–197. https://doi.org/10.1108/14635781011048849 Search in Google Scholar

Choka, D. (2014). The effect of investor sentiment on real estate investment decisions in Kenya (Doctoral dissertation). Search in Google Scholar

Caparrelli, F., D’Arcangelis, A. M., & Cassuto, A. (2004). Herding in the Italian stock market: A case of behavioral finance. Journal of Behavioral Finance, 5(4), 222–230. https://doi.org/10.1207/s15427579jpfm0504_5 Search in Google Scholar

De Bondt, W. F., & Thaler, R. H. (1995). Financial decision-making in markets and firms: A behavioral perspective. Handbooks in Operations Research and Management Science, 9, 385–410. https://doi.org/10.1016/S0927-0507(05)80057-X Search in Google Scholar

Daniel, K., & Hirshleifer, D. (2015). Overconfident investors, predictable returns, and excessive trading. The Journal of Economic Perspectives, 29(4), 61–88. https://doi.org/10.1257/jep.29.4.61 Search in Google Scholar

Darrat, A. F., Zhong, M., & Cheng, L. T. (2007). Intraday volume and volatility relations with and without public news. Journal of Banking & Finance, 31(9), 2711–2729. https://doi.org/10.1016/j.jbankfin.2006.11.019 Search in Google Scholar

Feduzi, A., & Runde, J. (2014). Uncovering unknown unknowns: Towards a Baconian approach to management decision-making. Organizational Behavior and Human Decision Processes, 124(2), 268–283. https://doi.org/10.1016/j.obhdp.2014.04.001 Search in Google Scholar

Ehrlinger, J., Mitchum, A. L., & Dweck, C. S. (2016). Understanding overconfidence: Theories of intelligence, preferential attention, and distorted self-assessment. Journal of Experimental Social Psychology, 63, 94–100. https://doi.org/10.1016/j.jesp.2015.11.001 Search in Google Scholar

Filiz, I., Nahmer, T., Spiwoks, M., & Bizer, K. (2018). Portfolio diversification: The influence of herding, status-quo bias, and the gambler’s fallacy. Financial Markets and Portfolio Management, 32(2), 167–205. https://doi.org/10.1007/s11408-018-0311-x Search in Google Scholar

Hilton, D. (2006). Overconfidence, trading and entrepreneurship: cognitive and cultural processes in risk-taking (Vol. 280). Contributions to Economic Analysis. Search in Google Scholar

Jennergren, L. P. (2011). A tutorial on the discounted cash flow model for valuation of companies. SSE/EFI Working paper series in business administration, (1998), p.1. Search in Google Scholar

Kallinterakis, V., Munir, N., & Radovic-Markovic, M. (2010). Herd behaviour, illiquidity and extreme market states: Evidence from Banja Luka. Journal of Emerging Market Finance, 9(3), 305–324. https://doi.org/10.1177/097265271000900303 Search in Google Scholar

Kahneman, D., & Tversky, A. (1979). Prospect Theory: An Analysis of Decision under Risk. Econometrical, 47(2), 263–291. https://doi.org/10.2307/1914185 Search in Google Scholar

Kahneman, D., & Tversky, A. (1981). The simulation heuristic (No. TR-5). Stanford Univ CA Dept of Psychology. Search in Google Scholar

Kahneman, D., & Tversky, A. (2013). Choices, values, and frames. In Handbook of the fundamentals of financial decision making: Part I (pp. 269-278). https://doi.org/10.1142/9789814417358_0016 Search in Google Scholar

Kempf, A., & Ruenzi, S. (2006). Status quo bias and the number of alternatives: An empirical illustration from the mutual fund industry. Journal of Behavioral Finance, 7(4), 204–213. https://doi.org/10.1207/s15427579jpfm0704_3 Search in Google Scholar

Khan, D. (2020). Cognitive Driven Biases, Investment Decision Making: The Moderating Role of Financial Literacy. Investment Decision Making: The Moderating Role of Financial Literacy, January 5, 2020). Search in Google Scholar

Khan, M.T.I., Tan, S.H., Chong, L.L. & Ong, H.B. (2017). Investment characteristics, stock characteristics and portfolio diversification of finance professionals. Borsa Istanbul Review, 17(3), pp.164-177.https://doi.org/10.1016/j.bir.2017.04.001. Search in Google Scholar

Le Luong, P. & Thi Thu Ha, D. (2011). Behavioral factors influencing individual investors´ decision-making and performance: A survey at the Ho Chi Minh Stock Exchange. Search in Google Scholar

Lopes, P.N.(2016). Emotional intelligence in organizations: Bridging research and practice. Emotion Review, 8(4), pp.316-321.https://doi.org/10.1177/1754073916650496 Search in Google Scholar

Malmendier, U., & Tate, G. (2005). CEO overconfidence and corporate investment. The Journal of Finance, 60(6), 2661–2700. https://doi.org/10.1111/j.1540-6261.2005.00813.x Search in Google Scholar

Madaan, G. &Singh, S. (2019). An Analysis of Behavioral Biases in Investment Decision-Making. International Journal of Financial Research, 10(4), pp.55-67.https://doi.org/10.5430/ijfr.v10n4p55 Search in Google Scholar

Majewski, S. (201). November. Could the Volatility Be a Measure of Investors’ Optimism? In International Conference on Computational Methods in Experimental Economics (pp. 133-142). Springer, Cham. Search in Google Scholar

Mather, M., Mazar, N., Gorlick, M. A., Lighthall, N. R., Burgeno, J., Schoeke, A., & Ariely, D. (2012). Risk preferences and aging: The “certainty effect” in older adults’ decision making. Psychology and Aging, 27(4), 801–816. https://doi.org/10.1037/a0030174 PMID:23066800 Search in Google Scholar

Montier, J. (2009). Behavioural investing: a practitioner’s guide to applying behavioral finance. John Wiley & Sons. Search in Google Scholar

Muhammad, N. M. N. (2009). Behavioural finance vs traditional finance. Adv. Manage, 2(6), 1–10. Search in Google Scholar

Mushinada, V.N.C. and Veluri, V.S.S., 2018. Investors overconfidence behaviour at Bombay stock exchange. International Journal of Managerial Finance. https://doi.org/10.1108/IJMF-05-2017-0093 Search in Google Scholar

Ndiritu, B. G. (2015). The effect of behavioral bias and frame dependence on real estate prices in Nairobi county (Doctoral dissertation, University of Nairobi). Search in Google Scholar

Njenga, E. N., & Kagiri, A. (2018). Effect Of Behavioral Bias On Real Estate Prices In Kenya (A Case Of Real Estates In Kiambu County). Search in Google Scholar

Odean, T. (1998). Are investors reluctant to realize their losses? The Journal of Finance, 53(5), 1775–1798. https://doi.org/10.1111/0022-1082.00072 Search in Google Scholar

Obeng-Odoom, F. (2015). Informal real estate brokerage as a socially-embedded market for economic development in Africa. Real estate, construction and economic development in emerging market economies, 224. Search in Google Scholar

Pompian, M.M. &Wood, A.S.(2006). Behavioral finance and wealth management: How to build optimal portfolios for private clients. Search in Google Scholar

Phan, T. C., Rieger, M. O., & Wang, M. (2018). What leads to overtrading and under-diversification? Survey evidence from retail investors in an emerging market. Journal of Behavioral and Experimental Finance, 19, 39–55. https://doi.org/10.1016/j.jbef.2018.04.001 Search in Google Scholar

Ritter, J. R. (2003). Behavioral finance. Pacific-Basin Finance Journal, 11(4), 429–437. https://doi.org/10.1016/S0927-538X(03)00048-9 Search in Google Scholar

Rabin, M. (2002). Inference by believers in the law of small numbers. The Quarterly Journal of Economics, 117(3), 775–816. https://doi.org/10.1162/003355302760193896 Search in Google Scholar

Rakesh, H. M. (2014). A study on individuals investors behavior in stock markets of India. International Journal of Management and Social Sciences, 2(2), 165–174. Search in Google Scholar

Razek, Y. H. A. (2011). An overview of behavioral finance and revisiting the behavioral life cycle hypothesis. IUP Journal of Behavioral Finance, 8(3), 7. Search in Google Scholar

Ritter, J. R. (2003). Differences between European and American IPO markets. European Financial Management, 9(4), 421–434. https://doi.org/10.1111/1468-036X.00230 Search in Google Scholar

Sekaran, U., & Bougie, R. (2003). Research Methods For Business, A Skill Building Approach, John Willey & Sons. Inc. New York. Search in Google Scholar

Shah, S. Z. A., Ahmad, M., & Mahmood, F. (2018). Heuristic biases in investment decision-making and perceived market efficiency. Qualitative Research in Financial Markets. https://doi.org/10.1108/QRFM-04-2017-0033 Search in Google Scholar

Statman, M. (2009). The cultures of insider trading. Journal of Business Ethics, 89(S1), 51–58. https://doi.org/10.1007/s10551-008-9905-y Search in Google Scholar

Stilwell, F. (2011). Political economy: The contest of economic ideas. OUP Catalogue. Search in Google Scholar

Tan, L., Chiang, T. C., Mason, J. R., & Nelling, E. (2008). Herding behavior in Chinese stock markets: An examination of A and B shares. Pacific-Basin Finance Journal, 16(1-2), 61–77. https://doi.org/10.1016/j.pacfin.2007.04.004 Search in Google Scholar

Tversky, A. & Kahneman, D. (1974). Judgment under uncertainty: Heuristics and biases. Science, 185(4157), 1124-1131. Search in Google Scholar

Waweru, N. M., Munyoki, E., & Uliana, E. (2008). The effects of behavioural factors in investment decision-making: A survey of institutional investors operating at the Nairobi Stock Exchange. International Journal of Business and Emerging Markets, 1(1), 24–41. https://doi.org/10.1504/IJBEM.2008.019243 Search in Google Scholar

Wenden, A.L. (1981). The Processes of Self Directed Learning: A Study of Adult Language Learners. Search in Google Scholar

Recommended articles from Trend MD

Plan your remote conference with Sciendo