Psychological and Social Factors Determining Investment Decisions in Cryptocurrency: Exploring the Mediating Role of Cognitive Biases

Abstract

This empirical research investigates whether investment decisions of cryptocurrency investors in Pakistan are influenced by a set of cognitive biases, as propagated by the theories in behavioural finance. To fill a dearth in the existing literature, this study evaluates the psychological and social sources of the cognitive biases that in turn affect investment decisions in cryptocurrency, therefore, this research essentially examines the mediating role of cognitive biases (Herding, Overconfidence, Representativeness, and Self-serving biases) between the linkages of socio-psychological factors (Money Anxiety, Social Interactions, Stress and Internal Locus of Control) and investment decisions in cryptocurrencies. Sample size of 313 respondents has been used, employing snowball sampling method, to analyze the data using Partial Least Square Structural Equation Modeling. The results reveal that herding bias, overconfidence bias and representativeness bias partially mediate the relationship between money anxiety, social interactions, stress and investment decisions in cryptocurrencies whereas self-serving bias fails to exert any mediation effect between internal locus of control and investment decisions. The results reveal that money anxiety causes herding bias which, in turn, affects the investment decisions in cryptocurrency positively; Stress leads to representativeness bias which, in turn, undermines investment decisions in cryptocurrency and social interactions generate overconfidence bias which, in turn, affects the investment decisions negatively.

Behavioral finance impacts on US stock market volatility: an analysis of market anomalies

“…Behavioral finance is a field of study that has gained significant importance in recent years as it investigates the sophisticated relationship between human behavior and financial markets. While traditional finance theories assume that market participants always act rationally (Kamoune and Ibenrissoul, 2022), behavioral finance refers to emotions, cognitive biases and psychological factors which often play a substantial role in shaping financial decisions and market outcomes (Shahani and Ahmed, 2022). The understanding of human behavior in the context of the stock market is crucial because it sheds light on why markets can sometimes exhibit extreme volatility, speculative bubbles and unexpected price movements.…”

“…While behavioral finance has made significant progress in order to explain the relationship between human behavior and financial markets, there remain critical research gaps that need to be explored. The existing literature primarily accepts the influence of emotions, cognitive biases and psychological factors on investor decisions and market anomalies (Sharma and Kumar, 2019;Kamoune and Ibenrissoul, 2022;Shahani and Ahmed, 2022). However, a deeper exploration is required to understand the nuances of these behavioral aspects within the context of market volatalities.…”