The Impact of Behavioural Biases on Investment Decision Making and Mediating Effect of Risk Perception

Abstract

The current volatile markets have made significant strides in developing a new approach to the study of finance. Conventional forces no longer influence investors; instead, they tend to be influenced by some irrational forces. While making decisions, they are sometimes biased, as a result their financial prudence and efficiency in managing financial resources are affected. The present study attempts to analyse the impact of prejudices such as anchoring, loss aversion, overconfidence, and disposition and regret aversion on investment decision making. The study seeks to examine the effects of behavioural factors. It also studies the mediating role of risk perception in investment decisions. The research used a descriptive research design based on the theoretical framework of behavioural finance. A cross-sectional data collection design was used through a structured questionnaire from a sample of 536 retail investors trading in the FOREX market. The research tested the hypotheses through multivariate technique-structural equation modelling (SEM) based on the partial least square method (PLS), followed by the Baron and Kenny method to test the mediation effect of risk perception on the relationship between behavioural biases and investment decisions. The main findings are that the anchoring effect, availability heuristics, disposition effect, and overconfidence significantly impact investment decisions. Loss aversion and regret aversion have a significant adverse impact on investment decisions. Risk perception serves as a complete mediator between the overconfidence heuristic and investing decisions. The results suggest that behavioural biases can impair the quality of investment decisions, and risk perception can improve their quality.

Keywords: Anchoring Effect, Behavioural Biases, Decision-Making, Loss Aversion, Over confidence, Regret Aversion, Risk Perception