Heuristic Biases as Mental Shortcuts to Investment Decision-Making: A Mediation Analysis of Risk Perception

Abstract

In the last two decades, research on behavioural biases has grown dramatically, fuelled by rising academic interest and zeal for publication. The present study explores the mediating role of risk perception on the relationship between heuristic biases and individual equity investors’ decision-making. The study uses Partial Least Square Structural Equation Modelling (PLS–SEM) to examine the survey data from 432 individual equity investors trading at the National Stock Exchange (NSE) in India. Risk perception is found to play a partial mediating role in the relationship amid overconfidence bias and investment decision-making, availability bias and investment decision-making, gamblers’ fallacy bias and investment decision-making and anchoring bias and investment decision-making, whereas it is found to play the full mediating role in the relationship between representativeness bias and investment decision-making. The result of the present study provides valuable insights into the different behavioural biases of capital market participants and other stakeholders such as equity investors, financial advisors, and policymakers. The present study solely relied on the heuristic biases of individual equity investors. However, in the real world, many other factors may impact the investment decision of individual equity investors. This has been considered a limitation of the study. The present study solely relied on the heuristic biases of individual equity investors. However, in the real world, many other factors may impact the investment decision of individual equity investors. This has been considered a limitation of the study.

A Comparative Study on Factors Influencing Investment Decisions of Investors Based on Income Level in Coimbatore

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“…This evidence contributes to the strengthening of behavioural finance through the assumption that investors are not always rational, especially under risky and uncertain conditions (Jain et al, 2023;Kahneman and Tversky, 2013). For behavioural finance researchers, psychological aspects (i.e.…”

“…cognitive bias) or simplifications (i.e. heuristic) of psychological processes that occur during the decision-making process (Jain et al, 2023;Kahneman and Tversky, 2013;Pompian, 2011Pompian, , 2012.…”