Cognitive Shortcuts in Finance: Heuristics Biases on Investment Decision: Mediating Effect of Risk Perception
DOI:
https://doi.org/10.61506/Keywords:
Heuristics biases, prospect theory, investment decision, stock marketAbstract
The study aims to (a) investigate the effect of heuristic biases (availability bias, overconfidence bias, anchoring bias) on investment decisions of the investors and (b) examine the mediating role of risk perception in the relationship between heuristic biases (availability bias, overconfidence bias, anchoring bias) and investment decisions. The prospect theory supports the mediation model. Questionnaires were sent to stock investors in ten major cities of Khyber Pakhtunkhwa. A total of 330 valid questionnaires were received, a response rate of 82.50%. The gathered data was initially analyzed using reliability test. This study found that heuristic biases (availability, overconfidence, anchoring) positively impact investment decisions. Furthermore, it was shown that the perception of risk significantly mediates between the relationship between the three heuristic biases (availability, overconfidence, and anchoring) and investment decision. The results of this research have important implications for the field of behavioral shortcuts in finance, and more especially for the implementation of heuristics in making investment decisions. The findings of the current research provide significant insights into the numerous behavioral biases that are shown by participants in the stock market as well as other stakeholders, including investors in securities, financial advisers, and lawmakers.
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