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.