Effect of Regret Aversion and Information Cascade on Investment Decisions in the Real Estate Sector: The Mediating Role of Risk Perception and the Moderating Effect of Financial Literacy.

Kaixin Wangzhou,Muhammad Ishfaq,Sajjad Hussain,Mahnoor Khan,Rabia Farooqi

doi:10.3389/fpsyg.2021.736753

Abstract

The real estate sector plays a significant role in the economy of any country. However, many investors make irrational investments in the real estate market. Therefore, the purpose of this study is to assess the effects of regret aversion and information cascade on investment decisions while considering the moderating role of financial literacy and the mediating effect of risk perception in the real estate sector of developing countries. This research utilized a quantitative research technique, collecting data by distributing structured questionnaires to real estate investors, followed by convenience sampling. This study used both descriptive and inferential statistics to make the data more meaningful. SPSS 25.0 was utilized to interpret the data. Cronbach's alpha was used to test for internal consistency, while validity was checked through correlation. Confirmatory factor analysis (CFA) was applied to confirm that the items on the questionnaire are perfectly loaded on their construct. Furthermore, process macro, model 5, was used to investigate the moderation mediation. This work addresses a gap in the literature by studying financial literacy as a moderator and risk perception as a mediating variable in regret aversion bias and information cascade bias's relationships with investment decisions in the real estate sector. The results confirmed that financial literacy weakens the negative effect of behavioral biases (regret aversion and information cascade) on investment decisions. In addition, risk perception mediates the relationships between these cognitive biases (regret aversion and information cascade) and decision making. The effects of other behavioral biases in real estate and stock market contexts should be examined in future research.

Highlights

Behavioral finance assumes that imperfect information leads to irrational investment decisions
Extending our knowledge of the mediating mechanisms within this link and building on prospect theory, we proposed that risk perception mediates the effect between cognitive biases and irrational decision making
We proposed that risk perception mediates the effects of cognitive biases on irrational decision making

Summary

Introduction

Behavioral finance assumes that imperfect information leads to irrational investment decisions. Behavioral finance paradigms highlight that investment decisions of people are not based solely on market information, as thoughts, emotions, and judgment errors of the individuals are reflected in these decisions. Prospect theory suggests that investors are more likely to focus on gains rather than the perceived risk of loss when the outcome of an investment is uncertain. Regret theory relies on two basic assumptions: first, that many individuals experience feelings called regret and joy and, second, that people consider these feelings when making decisions in uncertain situations (Rasheed et al, 2018; Kaur and Bharucha, 2021; Zhuo et al, 2021)

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