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Impact of socio-psychological factors on investment decisions: The mediating role of behavioral biases

Sadia Jabeen,S. Shah,Naheed Sultana,Altamash Khan

Published 2020 in Unknown venue

ABSTRACT

Unlike previous studies that examine the effect of behavioral biases on investor decision-making, this study explores the root causes of behavioral biases and examines the mediating role of behavioral biases in the relationship between different types of emotions and investment decisionmaking. The cognitive theory of depression, attentional control theory, and prospect theory together provide the foundation and anticipate that stress, depression, anxiety, and social interaction are the major sources of cognitive mistakes that,in turn, affect investment decisionmaking. Model testing relies upon the data collected from 252stock investors trading in different stock exchanges of Pakistan; in order to test the hypothesized relationship, structural equation modeling has been used. Depression is a major source of loss aversion bias. Anxiety is a strong source of herding. Stress is a major source of representative bias.Social interaction is a root cause of overconfidence. Loss aversion bias, herding, and overconfidence fully mediate the relationship between depression, anxiety, social interaction, and investor decision; however, anxiety has the strongest impact on investor decision via herding bias, while stress has both insignificant direct and indirect effect on investment decision-making.

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