Psychology of Investment Choices in Pakistan: Examining Overconfidence, Herd Behavior, and Risk Tolerance in Crypto and Stock Markets

The paper explores the psychological aspects of investment decision making in Pakistan in relation to overconfidence, herd behaviour and risk tolerance in stock and cryptocurrency markets. Primary data was gathered using a quantitative research design which used 250 active investors who filled the self-administered questionnaire. The relationships between the psychological factors and investment behavior were analyzed with the help of descriptive statistics, a reliability analysis and correlation analysis and structural equation modeling (SEM). Results show that the three psychological variables have a positive impact on investment decision, but risk tolerance is the most effective predictor. The findings underscore the fact that cognitive bias and social factors play a key role in influencing investor behavior especially in highly volatile markets like cryptocurrencies. The present research will not only give empirical support to the behavioral finance theories but also offers practical implications to investors, financial advisors and regulators in the emerging markets. Keywords: Behavioral finance; Overconfidence; Herd behavior; Risk tolerance; Investment decision-making; Stock market; Crypto-currency; Pakistan. https://doi.org/10.5281/zenodo.18751263