Behavioral finance factors and investment decisions: A mediating role of risk perception

Modern finance theory assumes that the stock market is efficient, and stock prices reflect all available information. However, behavioral finance theory argues that stock prices can be influenced by psychological and emotional factors. This study aims to examine the impact of behavioral finance factors on investment decisions in the Saudi equity markets through the mediating variable of risk perception. An online questionnaire was distributed to 150 individual investors, out of which 134 were returned and ready for analysis. The data is analyzed using structural equation modeling (SEM). The results show that herding, disposition effect, and blue chip bias have a significant positive impact on risk perception. Overconfidence has a significant positive effect only on investment decision making, but not on risk perception. Risk perception is found to be significantly positively related to investment decision making. All four behavioral finance factors have a significant positive indirect effect on investment decision making through risk perception. This study is conducted in a particular cultural context, namely Saudi Arabia, and may not be generalizable to other cultural contexts. Moreover, this study focused only on four behavioral finance factors, and there may be other factors that could impact risk perception and investment decision making. The results highlight the importance of considering an individual’s perception of risk when making investment decisions, as it can significantly impact their willingness to take risks and ultimately affect the performance of their investment portfolio. The results suggest the need for investors to consider their behavioral biases and for advisors and policymakers to develop strategies to mitigate their impact.