Behavioural factors in risk perception and financial decision making

Abstract

Adopting behavioural finance as a theory has emerged as an important field due to its opposition to finance principles that rely on rational decision-making and efficient market models. The research investigates behavioural finance elements that affect risk perception (RP) processes and financial decision-making (FDM) in equity market activities. Traditional finance depends on efficient markets with rational behaviour, but behavioural finance focuses on analyzing how psychological biases affect market participants. The Research Investigated the factors such as herding, disposition effect (DE), overconfidence, loss aversion (LA), and mental accounting (MA) that influence FDM with RP acting as a mediator. A total of 300 individual investors participated in the online survey, but researchers validated data from the responses of 270 participants. IBM SPSS version 26 employed SEM to evaluate the data collected. A Multiple Regression Analysis (MRA) evaluated how the behavioural finance factors impact FDM decision-making, while a Confirmatory Factor Analysis (CFA) tested the measurement model reliability. Research data shows that RP experiences meaningful changes due to herding behaviour and disposition effect, LA, and mental accounting, but overconfidence, along with over-optimism, directly affects FDM without changing RP levels. The link between RP and financial decisions is positive, and every behavioural variable affects investment choices indirectly through RP assessment. This demonstrates that behavioural biases affect investment choices, so investigators recommend that psychological factors become integral to the risk management framework creation. Investigator teams examine supplementary behavioural elements that enhance exposure to danger assessment while studying population and ethnic influences on investment actions.