Background: This study examines how four canonical behavioral biases (overconfidence, herding, anchoring, and loss aversion) influence investor decision-making in the Saudi stock market (Tadawul), and whether overconfidence and loss aversion operate as moderating forces on herding and anchoring, respectively. Methods: Employing a quantitative, cross-sectional design with a stratified sample of 384 retail investors, the study applies Partial Least Squares Structural Equation Modelling (PLS-SEM) to test six hypotheses derived from Modern Portfolio Theory and Behavioral Finance frameworks. The measurement model satisfies established thresholds for reliability, convergent validity, and discriminant validity. Results: Results confirm that loss aversion is the dominant predictor of behaviorally influenced decision-making (β = 0.402, p < 0.001, f2 = 0.188), followed by herding (β = 0.234, p < 0.001) and overconfidence (β = 0.164, p = 0.001), while anchoring does not exert a statistically significant independent effect (β = 0.102, p = 0.084 one-tailed, p = 0.168 two-tailed). Neither the overconfidence × herding (β = 0.005, p = 0.920, two-tailed) nor the loss aversion × anchoring (β = −0.039, p = 0.330, two-tailed) interaction terms reach significance, indicating that these bias pairs operate as independent additive forces rather than compounding systems. The model explains 55.7% of the variance in investor decision-making (R2 = 0.557). Conclusion: The findings advance behavioral finance theory in GCC and Islamic equity markets by (1) demonstrating non-equivalence of anchoring effects relative to Western-market benchmarks, (2) resolving competing theoretical predictions about bias interaction effects, and (3) providing context-specific evidence that loss aversion subsumes anchoring cognition in the Saudi market. Practical implications for the Capital Market Authority, financial educators, and individual investors are discussed and contextualized within the Saudi market setting.
Abdalla et al. (Mon,) studied this question.