Prospect theory and investment decision biases: the mediating role of risk perception: case study of Pakistan stock exchange

Abstract

The emerging field of behavioral finance contends that investors may not always act rationally, challenging established financial theories. Individual investors mostly identify and develop stock market trends. Psychological and cognitive biases have an impact on investor decision-making. Investors' investment decisions are influenced by their propensity for taking risks and the information asymmetry; risk perception only partially mediates this connection. This study's objective is to assess how psychological and social factors impact investors' choices when those choices are influenced by risk perception. The surveys were individually given out to PSX investors that trade on the Pakistan Stock Exchange (PSE).The intended respondents each received one of 218 surveys. Target respondents who were willing to complete the questionnaire were given the questionnaire. Existing theories of behavioral finance and conventional finance are incorporated into the study to explore new hypotheses. Data has been gathered for all the study variables (behavioral factors) and coded into numbers. The presented hypotheses have been tested using structural equation modeling (SEM).The findings of this study showed that the hypothesis that there is a statistically significant mediating effect of risk perception on the relationship between the prospect theory variables and investment decision making is also supported. The study's main conclusions about how psychological variables affect investing choices showed that these elements have a big impact on investors' choices. The study's future focus will be on institutional investors' heuristic biases and behaviors.