Behavioural Biases and Investment Decision-Making: The Mediating Role of Risk Perception and Return Expectations

Abstract

Purpose: This study investigates how behavioral biases influence investment decision-making among millennial retail investors in emerging financial markets, focusing on the cognitive mechanisms of risk perception and return expectations.

Design/Methodology/Approach: A survey-based empirical analysis was conducted on millennial retail investors to examine herding behavior, loss aversion, overconfidence, and anchoring bias. A General Linear Model with bias-corrected bootstrapping was employed to test both direct and indirect effects of behavioral biases on investment decisions.

Findings: Herding and overconfidence exert direct, action-oriented effects on investment decisions. Loss aversion operates indirectly via risk perception and return expectations, highlighting perception-driven evaluation. Anchoring bias exhibits competitive mediation, negatively impacting decisions directly but positively influencing return expectations.

Originality/Value: This study contributes to behavioral finance literature by distinguishing perception-driven versus action-driven biases and elucidating the dual cognitive pathways through which behavioral biases influence millennial investors in emerging markets.

Research Limitations/Implications: The study relies on a survey of a limited sample, which may affect generalizability. Future research could explore larger samples or multiple emerging markets to validate and extend the findings.

Practical Implications: Findings provide actionable guidance for financial advisors, policymakers, and investor education programs, suggesting strategies to promote informed investment behavior among millennial retail investors.

Social Implications: Understanding behavioural biases and their cognitive mechanisms can enhance financial literacy and support more stable, informed participation in emerging financial markets.