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<p>This study aims to evaluate the direct and indirect effects of behavioral biases on investment decisions (IDs), with financial risk tolerance (FRT) functioning as a mediating variable. A cross-sectional research design is used to collect responses from 420 individual investors who are investing in the Indian stock market via an online questionnaire, utilizing a purposive sampling method. Data was analysed using Structural Equation Modelling (SEM) through the SMART PLS software. Findings indicate that overconfidence, disposition effect, mental accounting, and herding significantly influence financial risk tolerance. Moreover, overconfidence, disposition effect, herding, and financial risk tolerance directly affect individual investors’ investment decisions. Additionally, all four behavioral biases indirectly influence investment decisions through financial risk tolerance. The study underscores the need for individual investors to recognize and mitigate their behavioral biases, aligning their portfolio strategies with their risk tolerance levels to reduce the potential for panic-driven decisions amid market volatility. Furthermore, it suggests that financial advisors should educate clients and implement strategies to minimize the influence of behavioral biases on investors’ irrationality.</p>

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Behavioral biases and individual investors investment decisions: mediating role of financial risk tolerance

  • 期刊论文

  • 发表日期：

    2025年9月2日

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  • Harshita Srivastava,
  • Sana Moid

摘要

This study aims to evaluate the direct and indirect effects of behavioral biases on investment decisions (IDs), with financial risk tolerance (FRT) functioning as a mediating variable. A cross-sectional research design is used to collect responses from 420 individual investors who are investing in the Indian stock market via an online questionnaire, utilizing a purposive sampling method. Data was analysed using Structural Equation Modelling (SEM) through the SMART PLS software. Findings indicate that overconfidence, disposition effect, mental accounting, and herding significantly influence financial risk tolerance. Moreover, overconfidence, disposition effect, herding, and financial risk tolerance directly affect individual investors’ investment decisions. Additionally, all four behavioral biases indirectly influence investment decisions through financial risk tolerance. The study underscores the need for individual investors to recognize and mitigate their behavioral biases, aligning their portfolio strategies with their risk tolerance levels to reduce the potential for panic-driven decisions amid market volatility. Furthermore, it suggests that financial advisors should educate clients and implement strategies to minimize the influence of behavioral biases on investors’ irrationality.