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Title: The Impact of Psychological and Social Factors on Investment Decision: Mediating Role of Risk Perception
Authors: , Abdul Moueed
Keywords: Bussiness & Management
Business Administration
Issue Date: 2020
Publisher: National College of Business Administration & Economics, Lahore.
Abstract: Behavioral finance is the emerging field that counters the traditional finance theories and arguing that investors do not act as rational all the time. Individual investors perform a vital role in identifying and setting trends in the stock market. This study is conducted to address the problem that sometimes, investors make irrational decisions based on their perception or influenced by other internal or external factors. Investors' irrational decisions compel the financial markets to perform inefficiently, and investors cannot attain their desired results from investment. Psychological factors and cognitive biases affect investors’ decision making. This study's objective is to assess the role of psychological and social factors in the decision-making of investors mediated by risk perception. The target respondents of this study are individual investors of the Pakistan Stock Exchange (PSX), investing under different brokerage houses. Purposive sampling technique is used to extract a sample of 470 respondents in the present study. A self-administrated questionnaire is used to collect data from the respondents on a five-point Likert scale. The reliability and validity of the instrument are tested through pilot testing. The refined questionnaire was distributed to collect data from the respondents for the final analysis. The study applies different statistical techniques, i.e., confirmatory factor analysis (CFA), reliability, descriptive statistics, and structural equation model (SEM) to extract results. This study's results reveal that psychological and social factors play a significant role in the decision-making of individual investors. Psychological factors like anger, fear, and positive mood positively impact risk perception and investment decision-making. Furthermore, psychological factor ‘stress’ and social factors like social interaction and herding negatively impact risk perception and investment decision-making of individual investors. Risk perception positively impacts the investment decision and plays a mediating role between psychological factors, social factors, and investment decisions. This study has practical implications for individual investors, institutional investors, and mutual fund managers while making their investment decisions. The survey outcomes are beneficent for shareholders, financial securities traders, financial securities consultants, and financial advisors while making financial decisions. The results of this research suggest investors to make optimistic use of the factors with a positive impact on decision-making while avoiding the factors with negative influence. This study also expands the scope of behavioral finance as its theoretical contribution by x adding critical psychological and social factors and their impact on investment decisions and the mediating role of risk perception. The study results could be beneficial for the individual investors, financial analysts, and stakeholders of other developing countries where investors are little immature in predicting the market sentiments and markets are inefficient. It is recommended that investors should consider psychological factors as well as social factors while making an investment decision. Investors should not ignore but be prepared to deal with such factors, i.e., anger, fear, positive mood, and stress. Investors are recommended to avoid making decisions based on their social interactions, which leads them to consider more reliable information. Investors should avoid herding by relying on their knowledge and instincts when making an investment decision. This study examined six variables that influence the investor’s decision-making. This research could be extended by taking investment performance and investment satisfaction as dependent variables. Furthermore, other external social factors that appear to influence the investors' decision-making process could be researched, e.g., social and electronic media's role in an investor’s decision-making. Herd behavior in institutional investors is also the future direction of this study. KEYWORDS Investment decision, risk perception, psychological factors, social factors, individual investors.
Gov't Doc #: 22649
Appears in Collections:PhD Thesis of All Public / Private Sector Universities / DAIs.

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