ASSESSING THE INFLUENCE OF PSYCHOLOGICAL BIASES AND RISK TOLERANCE ON INVESTMENT DECISION-MAKING USING STRUCTURAL EQUATION MODELING

Abstract

Investment decision-making is a complex process influenced by many psychological and behavioral factors. This study aims to assess the influence of psychological biases, specifically overconfidence, loss aversion, herding behavior, anchoring, and individual risk tolerance, on investors' decision-making processes. Drawing on behavioral finance theory, the research employs Structural Equation Modeling (SEM) to examine the interrelationships between these constructs using primary data collected from a sample of individual investors. The findings mainly focus on psychological biases, followed by risk tolerance, which plays a vital role in shaping investment behavior. Overconfidence and herding tendencies have strong positive effects, meaning risk tolerance should be moderate and contain biased behavior relationships. This study mainly focused on the financial advisors and policy makers to consider the behavior dimension when designing investment strategies, along with educational interventions. Also, enhanced the investor awareness through explaining suboptimal decisions.