Mediating Role of Risk Perception Between Behavioral Biases and Investor’s Investment Decisions

Abstract

This study aims to examine the direct and indirect links between behavioral biases and investor’s investment decisions via the mediating role of risk perception through structural equation modeling. The study is conducted among individual investors who are engaged in investment for several years in Pakistan Stock Exchange. Purposive sampling technique was used for data collection and the sample size was consisted of 450 questionnaires. The findings contribute that risk perception mediates between blue-chip stocks and investment decisions. Furthermore, risk perception does not play the mediating role between herding bias, disposition effect, and investment decisions. However, the disposition effect has a strong direct relationship with risk perception. The study is beneficial to individual investors who can make investment decisions by self-estimation rather than to follow the others’ opinion. The proper training and education to the investors is also an appropriate path to overcome these biases. Risk is the major factor that discourages investment decisions but blue-chip stocks are a major risk eliminating factor while building investment decisions. Most of the prior studies focused on behavioral biases and investment decisions of individual investors but this study contributed to the mediating effect of risk perception. Human capital, anomalies, computer literacy, and artificial technology could also be used as a mediator and moderator for future orientation.

The impact of disposition effect, herding and overconfidence on investment decision making moderated by financial literacy

“…This is similar to the behaviour of investors who sell stocks when the price rises and hold stocks when the price falls (Z. Ahmed et al, 2022). This type of decision-making makes capital market conditions inefficient.…”

“…This type of decision-making makes capital market conditions inefficient. Several previous studies, including one by Ahmed et al, (2022), have found empirical evidence that there is an influence between the disposition effect and investment decision making. Furthermore, Atif Rasool & Ullah, 2020;Khan, 2020;Candraningrat et al, 2018;Alrabadi et al, 2018;Hayat & Anwar, 2016) research shows that the disposition effect has a positive and significant effect on investment decision making.…”

UNLOCKING THE INVESTMENT PUZZLE: THE INFLUENCE OF BEHAVIORAL BIASES & MODERATING ROLE OF FINANCIAL LITERACY

“…Providing investors with knowledge regarding the fundamental concepts of risk and return, the advantages of diversification, and enduring possibilities of equities can aid in debunking fallacies and promoting a more equitable investment strategy. Enhancing transparency and trust within the financial system may mitigate the risk aversion of retail investors, thereby promoting a more dynamic and effective capital market (Ahmed et al, 2022). Based on the above discussion it is hypothesized that: H4: There is a significant effect of risk aversion on Investors investment decisions…”

Behavioral Dynamics in Pakistani Markets: Investigating the Roles of Behavioural Biases on Investors Investment Decisions

“…Providing investors with knowledge regarding the fundamental concepts of risk and return, the advantages of diversification, and the enduring possibilities of equities can aid in debunking fallacies and promoting a more equitable investment strategy. Enhancing transparency and trust within the financial system may mitigate the risk aversion of retail investors, thereby promoting a more dynamic and effective capital market (Ahmed et al, 2022).…”