Analysis of Behavioral Biases Impact on Bank Operations: A Case Study of Pakistan

Abstract

The influence of psychological factors on financial decision-making has gained increasing attention within behavioural finance, challenging traditional assumptions of rational economic behaviour. This study examines the effect of behavioural biases on banking operations in Pakistan, specifically comparing conventional and Islamic banking institutions. The research investigates how biases including overconfidence, confirmation bias, conservatism bias, disposition effect, and herd behaviour influence risk perception and investment decision-making processes within the banking sector. Employing a quantitative research design, primary data were collected from 350 respondents associated with selected banks across Pakistan through a structured Likert-scale questionnaire. The data were analysed using Partial Least Squares Structural Equation Modelling (PLS-SEM) via Smart-PLS software. The findings reveal that behavioural biases significantly influence financial decisions and judgments, with herding behaviour (β = 0.231, p < 0.001) and overconfidence bias (β = 0.174, p < 0.001) emerging as particularly influential factors. Risk perception was found to mediate the relationship between behavioural biases and investment decisions (β = -0.397, p < 0.001). These results have important implications for banking professionals, policymakers, and financial institutions, highlighting the critical need for awareness of behavioural aspects in decision-making, enhanced risk assessment practices, and the development of evidence-based frameworks that account for psychological factors in banking operations.

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