Cognitive biases, risk perception, and investment decision-making under information asymmetry: A moderated mediation study

Investment decisions create an applied context for the analysis of judgment under uncertainty but, in conditions of unequal information, the psychological mechanisms of how judgment is influenced by cognitive biases are still poorly defined. In this study, a second-stage moderated mediation model was examined, where anchoring and framing biases affect the investment decision-making process via risk perception and information asymmetry heightens the risk perception-decision connection. A cross-sectional survey data was gathered from 620 individual investors of Pakistan Stock Exchange. Confirmatory factor analysis indicated the reliability, convergent and discriminant validity of the five-factor measurement model. The results indicated that anchoring bias and framing bias both had significant positive effects on the risk perception and that risk perception significantly influenced investment decision-making by the structural equation modelling method. Significant indirect effects of both biases were found in bootstrap mediation analysis. PROCESS Model 15 also revealed a conditional indirect effect of information asymmetry on the risk perception-decision path at the medium and high levels of information asymmetry but not at the low level. These results indicate that biased risk appraisals are more significant in the absence of reliable external cues that can help to correct subjective judgments for investors. The study not only offers a new perspective on psychological decision-making research but also provides a good illustration of how the behavioral consequences through anchoring and framing can be mediated through risk assessment and further enhanced by the information environment.