Investment Decision Quality (IDQ) as a Forensic Indicator: Multidimensional Scale Development and Validation

Abstract

Behavioral distortions, information asymmetry, financial illiteracy, and weak forensic oversight are the most common drivers of investment decision failures in emerging markets resulting in inefficient allocation of portfolios and a decrease in welfare to investors. Although past studies have studied behavioral biases and market inefficiency in detail, the available literature is still piecemeal, and most authors have concentrated on single predictors or outcomes of investment behavior. Consequently, the research area does not have a unified, theory based, and psychometrically sound instrument that can measure the overall quality of investment decisions as a multidimensional construct.

To fill this conceptual and methodological gap, the current study formulates and empirically evidences Investment Decision Quality (IDQ) as a new multidimensional construct based on decision quality theory, behavioral finance, prospect theory, and forensic behavioral views. IDQ is defined as a higher-order construct that is formative and consists of three reflective dimensions namely Process Rationality, Portfolio Appropriateness, and Outcome Satisfaction. Development of a scale consisting of 19 items was done with the help of a systematic literature review and expert judgment and then underwent demanding empirical testing. A total of 540 active individual investors of the Pakistan Stock Exchange (PSX) provided data. IBM SPSS Statistics was used to perform exploratory factor analysis (EFA) on the dataset and then confirmatory factor analysis (CFA) by means of partial least squares structural equation modeling (PLS-SEM) with hierarchical component modeling. The given approach allowed a strict test of the measurement structure and gave evidence of structural robustness and theoretical coherence.

Comprehensively, the results substantiate the strength of the reflective-formative hierarchical model and the fact that IDQ is a structured, empirically based instrument that can be used to test the level at which investors process information, form portfolios, and decide on the success of investment. The article has both theoretical and methodological implications: it was the first to conceptualize investment decision quality as a forensically directed multidimensional formative construct, and it validated a reflective-formative hierarchical scale in an emerging-market setting. In practice, the IDQ scale presents regulators, financial advisors and investor-protection agencies with a diagnostic and screening instrument on the basis of behavioral vulnerability, suitability misalignment and exposure to deceptive investment practices.