This research aims at testing and confirming existence of selected behavioral biases of investors that affect their decisions. Five behavioral biases affecting irrational behavior of investors were selected: overconfidence bias, illusion of control bias, confirmation bias and recency bias and optimism bias. Primary data was collected through a questionnaire from 300 investors from banks, insurance companies, stock exchanges etc. The results were obtained by employing a correlation and regression analysis for the presence of behavioral biases and to detect degrees of their influence on decision making. Correlation results indicate moderate association between behavioral biases and decisions of investors. Outcome of the research indicates that while making financial decisions investors are moderately affected by behavioral biases.

Theory of overconfidence states that investors are highly overconfident when valuing the stocks. Self-attribution has been found by the researchers as the root cause for overconfidence bias in investors. Investors attribute the high stock prices and returns with their own art of picking up the stocks, and thus they trade more frequently. In order to test overconfidence and self-attribution Vector Autoregressive (VAR) model has been employed to find out the long-term relationship between endogenous variables: market return and market turnover and exogenous variables: volatility and dispersion. Results revealed that there exists a strong positive relationship between market returns and trading turnover. Also, the crosssectional standard deviation in market prices i-e volatility and the cross-sectional variation in stock returns i-e dispersion has a very strong impact on trading pattern and returns. Since investment decisions made by Pakistani investor largely depend upon psychological factors, giving less weightage to all the fundamentals, the trading pattern exhibited may collectively tend the market behave in an irrational manner.