An Examination of Behavioral Factors Affecting the Investment Decisions: The Moderating Role of Financial Literacy and Mediating Role of Risk Perception

Abstract

Purpose- This study is conducted to determine the impact of behavioral biases on individuals' investment decisions. The focus is to directly analyze behavioral factors' impact on retail investors' investment decisions, as individuals generally neither have in-depth knowledge nor the expertise to make effective decisions, and they do not understand the behavioral biases affecting their decisions. Study Design/methodology/approach- It is a primary study, and the relationships are developed using structural equation modeling. The respondents of the study are the retail individual security market investors of Pakistan. The instrument's reliability and validity were checked with a small sample before data collection. This study also employs a moderating variable of financial literacy to determine the impact of behavioral biases and financial decisions with the mediation of risk perception. SmartPLS is used to find out the impact. Findings- The results show that moderator financial literacy significantly affects the relationship between behavioral biases and investment decisions. Similarly, the mediation effect of risk perception is also found significant. Except for loss aversion, all the independent variables significantly impacted investment decision-making. The findings of previous studies support the results. Research Implications- This study has incorporated four behavioral biases, which are the most common of these. Hence, the findings can benefit individual investors in making financial decisions by reducing these biases, improving financial literacy, and developing a better understanding of risk. Future researchers may check the impact of other biases and study these for institutional investors. Originality/value- The originality of this study is well-supported by the fact that it is primary research. Most individual investors decide on available fundamental and technical data, ignoring behavioral biases in investment decision-making. Moderated mediation is the missing link addressed in this research.