Risk Perceptions as a Mediator in Behavioral Biases and Investment Decision Making: Evidence from Pakistan Stock Exchange (PSX)

Abstract

The study examined the mediating role of risk perception in relationship of behavioral biases and investment decision making among investors of Pakistan Stock Exchange (PSX). Based on the direct and mediating relationships, ten hypotheses were developed and tested. The respondents of the study included 268 randomly selected investors engaged in trading of stock in PSX. We collected data from the respondents using a survey questionnaire that measured disposition effect bias (6 items), herding bias (7 items), blue chip stock (5 items), risk perception (6 items), and investment decision (3 items). Data were analyzed using SPSS Version 23 through Hayes’ Process Macro. Results of linear regression analysis revealed a significant positive relationship of behavioral biases with risk perception and investment decisions. The results also revealed a positive relationship of risk perception with investment decisions. Further, the study revealed that risk perception fully mediated the relationship of behavioral biases and investment decisions. Based on the findings of the study, we offered recommendations and directions for further research.