Impact of behavioral biases on investment decision making and mediating effect of risk perception

Abstract

The purpose of the study is to analyze the impact of behavioral biases—anchoring, loss aversion, overconfidence, disposition and regret aversion—on investment decision making, and the mediating role of risk perception between the biases and investment decisions. Using data from over 500 retail investors trading in the stock and FOREX market, multiple hypotheses were tested. The results indicate that the anchoring effect, availability heuristics, disposition effect, and overconfidence significantly impact investment decisions, whereas loss aversion and regret aversion have a significant adverse impact on investment decisions. Further, risk perception serves as a complete mediator between the overconfidence heuristic and investing decisions. Implication for investors is that behavioral biases can impair the quality of investment decisions, and risk perception can improve their quality.

Keywords

• anchoring effect
• behavioral biases
• decision-making
• loss aversion
• overconfidence