Author(s): Muhammad Awais, Numair Ahmed Sulehri, Imran Bashir Dar, Muhammad Mohsin, Kashif Ur Rehman, James Estes
The purpose of this study is to explore the causes behind the optimism bias of investors in the stock market of Pakistan and to develop scale on it to operationalize this study in the future. The study theorized antecedents of Optimism bias to check and clarify that which antecedent is playing a part (strongest - weakest) headed for the generation of optimism bias in the investors of PSX at the time of decision making. Optimism bias causes a person to have faith in that they are at a slighter danger of facing an undesirable incident compared to others. The early part of methodology comprises semi-structured interviews taken from the professionals of stock market, and then reconfirm the responses of experts by taking semi-structured interviews from investors and apply NVivo on their concise outcomes to get a word-cloud for presuming the definite antecedents of optimism bias, and check the context and content validity of the established scale by approving the scale subsequently the endorsement of 5 language and 5 market experts. The second part comprises the floatation of self-developed scale and to: put on Kaiser-Meyer-Olkin (KMO) test to approve the sample size for the study; put on Bartlett’s test of sphericity to check the correctness of the items; check the outliers and put on Exploratory Factor Analysis (EFA) on the outcomes for the drop of over-loading items. The third part comprises the floatation of polished scale with lesser sample size as liken to past floatation of scale to check the inter-item correlation between items in order to get more polished scale. The fourth part comprises the floatation of polished scale with lesser sample size as liken to past floatation of scale to check the trustworthiness of factors (if-item deleted), association between factors, and cause and effect relationship between factors. The last part comprises the floatation of more polished scale with lesser sample size as liken to past floatation of scale to confirm the factors for scale through Principal Component Analysis (PCA). By exploring and confirming the causes of optimism bias of investors in the stock market of Pakistan, the controlling body of stock market (Securities and Exchange Commission of Pakistan - SECP) may control the optimism bias of individuals by providing workshops on it, which may lead to efficient stock market and economy as a whole.