Heuristic bias and investment decision: Exploring the mediating role of investors' risk perceptions

Abstract

This study examines the connections between heuristic prejudices, risk perceptions, and investment decisions among stock market investors in Nepal. The study explores how prejudices such as overconfidence, representativeness, availability, and anchoring and adjustment shape investment choices, with a specific emphasis on the mediating influence of risk perception. Through a quantitative approach, data were collected from 404 respondents via a self-administered survey, and Structural Equation Modeling (SEM) was used for analysis. The findings reveal that risk perception significantly mediates the effect of these biases on investment decisions, highlighting the complex interplay between behavioral factors and investor behavior. By highlighting the necessity of taking risk perceptions into consideration when addressing behavioral biases in investment strategies, these results have practical consequences for investors, financial consultants, and legislators. This research pays attention to the understanding of behavioral finance, particularly within the context of Nepal's capital market, and lays the groundwork for further studies on factors affecting investment decisions in real-world settings.