International Research Journal of Multidisciplinary Scope (IRJMS), 2025; 6(2): 1079-1090

Original Article| ISSN (O): 2582-631X DOI: 10.47857/irjms.2025.v06i02.03194

Decoding Individual Investors’ Behavior: Unveiling Risk

Perception as a Mediator in the Indian Stock Market
Infant Sebastian Paul H, Sundaram N*,
Department of Commerce, Vellore Institute of Technology, Vellore, India. *Corresponding Author’s Email: [email protected]
Abstract
The current study examines how overconfidence, herding, underconfidence, and risk perception influence the
investment decisions made by individual investors. Additionally, it delves into the mediating role of risk perception
in these relationships. The researchers collected 410 responses from individual investors in southern India using a
structured questionnaire, and the hypotheses were tested using partial least squares structural equation modeling
(PLS-SEM). The results indicate that overconfidence and risk perception significantly influence investors’ decision-
making. Analyzing how underconfidence, herding, and overconfidence influence investment decisions, in scenarios
with and without considering risk perception, revealed that risk perception serves as a partial mediator in the link
between overconfidence and investment decision-making. Whereas it fully mediates the link between herding, under
confidence, and investors’ decision-making. This research provides significant insights to aid in mitigating these biases
in decision-making. More importantly, it also enhances an understanding of biases and risk perception in investment
decisions, which could be beneficial for individual investors, investment advisors, portfolio managers, and
policymakers engaged in the stock market. This study is the first to link the variables of overconfidence, herding, under
confidence, and risk perception with investors’ decision-making, although numerous studies have examined prominent
biases and their impact on investors’ decision-making.
Keywords: Herding, Individual Investors, Overconfidence, PLSpredict, Risk Perception, Underconfidence.

Introduction
Traditional finance theories, such as Markowitz’s critique of expected utility theory, setting the base
principle of Modern Portfolio Theory, Modigliani for the discipline of behavioral finance (4).
and Millar’s Arbitrage Pricing process, Sharpe, Behavioral finance tries to understand investors’
Lintner, and Black’s Capital Asset Pricing Model, psychology and explain how it influences
and the Option Pricing theory introduced by Black, investment decisions (5). Behavioral finance
Scholes, and Merton (1). According to these researchers suggest that many behavioral biases
theories, investors are presumed to make well- have a substantial effect on individual investors'
informed decisions, and that the financial markets decision-making (6, 7). Bias is a natural tendency
are efficient, indicating that stock prices correctly to make mistakes in decision-making (8). Research
reflect all relevant information (1, 2). These on behavioral finance has shown that investors
presumptions are grounded on the expected utility often make poor investment decisions due to
theory and efficient market hypothesis (2). But in behavioral biases (9, 10). Investors tend to make
reality, investors behave irrationally; they buy irrational decisions driven by emotions and
stocks without considering their fundamental feelings (11). Research on investors’ decision-
value, follow the stocks purchased by friends, hold making is significant for understanding the
onto losing stocks while selling winning stocks, set behavioural components that influence
their investment decisions on previous investment decisions and, consequently, impact
performance, and trade excessively (3). the stock market (12). Individual investors are less
Traditional finance theories are incapable of informed and more prone to making bad
explaining stock market bubbles, crashes, and investment choices than institutional investors
anomalies (2). An alternative to standard finance because individual investors are vulnerable to
theories, a new field emerged called behavioral behavioural biases (13). Researchers in
finance. Prospect theory was developed through a behavioural finance have mainly concentrated on
This is an Open Access article distributed under the terms of the Creative Commons Attribution CC BY
license (http://creativecommons.org/licenses/by/4.0/), which permits unrestricted reuse, distribution,
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(Received 14th November 2024; Accepted 13th April 2025; Published 30th April 2025)
Infant and Sundaram, Vol 6 ǀ Issue 2

how biases influence investors’ decision-making overconfidence, underconfidence, and risk

(6, 7, 14). To the authors’ knowledge, no existing perception directly influence investors’ decision-
research has examined how risk perception making? Second, does risk perception serve as a
mediates the relationships of herding, mediator in the relationships between herding,
overconfidence, and underconfidence with overconfidence, under-confidence, and investors’
investors’ decision-making. There is a crucial need decision-making? The structure of the present
to explore the effect of biases on investment article is as follows: the second section covers the
decision-making by incorporating mediator literature review and hypothesis development.
variables to gain deeper insights into how Following that, we discuss the methodology,
psychological factors influence investment results, discussion, and conclusion of the research.
decisions, especially in developing markets In the end, we address the limitations of the
(3). While a substantial body of literature has current work and recommend future research
focused on investor behavior in developed avenues.
financial markets, emerging markets remain Conceptual Framework
relatively underexplored (1, 15–17). This research and Hypotheses Development
gap is significant because emerging markets often
The concept of behavioral finance theory posits
exhibit distinct characteristics, such as higher
that psychological aspects influence individual
volatility and evolving regulatory frameworks that
investors’ investment decision-making processes,
can lead to different investment dynamics
which subsequently impact the stock market. This
compared to their developed counterparts.
study employed prospect theory, which highlights
Additionally, factors like cultural nuances,
investors' decision-making based on risk
economic instability, and varying levels of financial
prospects (4). Cognitive biases, which have an
literacy in these regions may influence investor
impact on decision-making, are the driving force
decision-making processes. Adequate attention
behind this phenomenon (1). Cognitive biases
should be given to behavioral bias research,
impact investment decisions, resulting in
particularly in the Indian context (18). Based on
suboptimal investment decisions (22). Herding
past research, most studies were conducted in the
theory posits that investors often rely on the
northern region of India (19, 20). However, it is
decisions of others rather than their own judgment
observed that very few studies have been carried
(23). This study considers overconfidence,
out in the southern region of India. Therefore, it is
herding, and underconfidence as exogenous
imperative to study investors in southern India to
variables, with investors’ investment decision-
comprehend how these biases influence their
making as the endogenous variable. The primary
financial decision-making. Among the various
focus, however, is to probe how risk perception
behavioral biases, overconfidence is evidenced as
mediates the relationship between herding,
exerting the most substantial impact on
underconfidence, overconfidence, and investment
the decision-making of individual investors,
decisions. The following section discusses relevant
closely followed by herding, especially in the
studies from previous research.
Indian setting (6). Underconfidence is also an
Overconfidence Bias and Investment
important bias to check the impact on decision-
making (21). Therefore, the current study Decisions
attempts to fill these gaps by analyzing the In behavioral finance research, overconfidence
psychological effects of herding, overconfidence, bias is an often-used behavioral bias (24). Many
and underconfidence on the decision-making of researchers have widely accepted overconfidence
individual investors in the Indian stock market. It as a prominent behavioral bias in the stock market
further investigates the role of risk perception as a (25, 26). Overconfidence is one of the most
mediating variable in the connection between impactful criteria affecting equity investors’
herding, overconfidence, underconfidence, and decision-making (6). Overconfidence bias is
individual investors’ decision-making. Thus, we defined as “unwarranted faith in their own
make a valuable empirical contribution to the intuitive reasoning, judgments, and cognitive
existing body of literature by confronting the two abilities’’ (27). It indicates that investors
research questions: First, how do herding, overestimate their knowledge and abilities and
underestimate market information when making

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investment decisions. Overconfident investors are (21). Therefore, the proposed hypotheses of this
more prone to disregard market information and study are as follows:
rely on their own information (28). Previous H3: Underconfidence negatively affects the
research has revealed that overconfident investors investors’ decision-making.
tend to overvalue their predictive abilities, leading Risk Perception and Investment
to inaccurate forecasts (29). Overconfident Decisions
investors trade excessively, leading to lower
Risk perception refers to how investors evaluate
profits (30). It has been reported that investors in
assets based on their experiences and concerns
the Chinese market frequently make poor trading
and perceive the risk as either low or high (16).
decisions as a result of their overconfidence (31).
Risk perception is vital when dealing with
Previous research has also shown that
investment decisions in uncertain situations (39).
overconfidence bias significantly influences
It is an important cognitive characteristic of
investment decisions (7, 14, 26). Therefore, this
financial behavior that influences investment
study proposes the following hypothesis:
decisions (40). Many behavioral biases induce
H1: Overconfidence significantly affects the
investors to make poor investment decisions (10).
investors’ decision-making.
However, investors’ risk perception helps them to
Herding Bias and Investment make an appropriate investment decision under
Decisions risk. Past literature has also reported that risk
Investors often mimic others’ decisions, regardless perception significantly impacts investors’
of their own risk-bearing capacity (32). Investors decision-making (17, 41, 42). Therefore, the
do not usually follow a fundamental analysis but hypothesis of this study is formulated as follows:
rather imitate others while making investment H4: Risk perception significantly affects
decisions. Prior research has observed that the investors’ decision-making.
investors exhibit herd behavior during extreme Mediating Role of Risk Perception
market conditions (33). Empirical evidence The behavioral finance literature provides
underscores that herding bias exerts a substantial substantial evidence that behavioral biases
positive influence on investors’ decision-making significantly influence an individual’s perception of
(34). Individual investors are more susceptible to risk, often leading to distorted judgments and
herd behavior during the bearish market (35). decision-making (43). Studies have shown that
Additionally, investors tend to engage in herd behavioral biases influence the risk perception of
behavior under both bullish and bearish market individual investors (41,44). Researchers have
conditions (36,37). In particular, investors exhibit identified a substantial connection between the
herd behavior more often in bearish markets (36). perception of risk and investors’ decision-making
Prior research has also revealed that herding bias (16,17,45). The studies mentioned above confirm
significantly influences investment decision- that risk perception acts as both a dependent and
making (6,14,38). Therefore, we propose the independent variable; consequently, this makes it
following hypotheses: appropriate to consider it as a mediator. Based on
H2: Herding significantly affects the investors’ these existing studies, we developed the following
decision-making. hypothesis:
Underconfidence Bias and Investment H5: Overconfidence significantly influences risk
Decisions perception in investors’ decision-making.
Underconfidence causes individuals to H6: Herding significantly influences risk
underestimate their own knowledge and abilities perception in investors’ decision-making.
when making investment decisions. Investors H7: Underconfidence significantly influences risk
often lack confidence in their knowledge and perception in investors’ decision-making.
abilities, which makes them doubtful about their H8: The association between overconfidence and
decision-making. Underconfident investors investors’ decision-making is proposed to be
typically perceive themselves as less efficient than mediated by risk perception.
others do (21). Underconfidence can induce H9: The association between herding and
investors to exaggerate their exposure to potential investors’ decision-making is proposed to be
losses, resulting in suboptimal investment choices mediated by risk perception. H10: The association

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between underconfidence and investors’ decision- perception. Figure 1 below demonstrates the
making is proposed to be mediated by risk proposed research model used in this study.

Figure 1: Research Model

Methodology of its high precision in conducting power analyses

for statistical techniques such as SEM (48). To
The current study adopted a quantitative research
measure latent constructs, this study adopted
approach, utilizing a survey method in which a
measurement scales from the existing literature.
structured questionnaire was circulated to
The seven-item scale was adopted for investment
respondents to obtain data from individual
decisions from previous research (49). The
investors in the southern region of India, namely
questions include, “I am confident that I can take
Tamil Nadu, Kerala, Karnataka, Telangana, and
investment decisions accurately”. Both
Andhra Pradesh, using snowball sampling.
overconfidence bias and herding were measured
Investor details are unavailable, and brokers
with four items each, adopted from (50). The
hesitate to share information owing to internal
questions for overconfidence include, “I trade
policies (24). Due to this significant challenge in
more frequently than other people”. The questions
obtaining the data, we employed snowball
for herding include, “Other investors’ decisions on
sampling (46). We assessed and confirmed the
buying and selling stocks have an impact on my
questionnaire’s reliability and validity through a
investment decisions”. The underconfidence scale,
pilot study with 80 investors. As no further
comprising three items, was adopted from prior
adjustments were necessary, the finalized version
research (21). The questions include, “I feel my
of the instrument was subsequently distributed to
skills and knowledge of the stock market are not
investors for the final data collection. The data was
enough for excessively trading in the stock
collected between April 2024 and August 2024.
market”. The five-item scale measures risk
The questionnaire was distributed across various
perception, adopted from existing literature (17).
social media platforms, including Instagram,
The questions include, “I am cautious about stocks
Facebook, and WhatsApp. We obtained 410 valid
which show sudden changes in price or trading
responses from participants, which were
activity”. The questionnaire is structured into two
subsequently used to analyze the data and evaluate
sections. The first section covers demographic
the stated research hypotheses. The current study
details, including gender, age, occupation, annual
employed the G*power software to determine the
income, and investment experience in stocks. The
sample size (47), which suggested a minimum
second section comprises 18 items related to the
required sample size of 129. This calculation relied
study’s constructs: herding, overconfidence, under
on the inclusion of four predictors, with an alpha
confidence, risk perception, and investment
level set at 0.05. Subsequently, we used a medium
decisions. A 5-point Likert scale was used to
effect size of 0.15 for our analysis, accompanied by
measure all constructs, where 1 = ‘strongly
a power level of 0.95. G*power was chosen because

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disagree’ and 5 = ‘strongly agree’. The proposed About annual income, most respondents, 35.37%,
research hypotheses of the study were rigorously reported earning between Rs. 2.5–5 lakhs. Notably,
tested using a “partial least squares structural 53.17% of the respondents had 2-5 years of
equation modeling” (PLS-SEM) with SmartPLS 4, a experience in the stock market. Table 1 below
method known for its effectiveness in addressing presents the key information highlighting the
multiple constructs and intricate relationships respondents' demographic details.
(51). Common Method Bias
Common method bias (CMB) in PLS-SEM is a
Results serious issue, especially in behavioral studies (52).
Demographic Profile of the CMB arises when data is obtained using a single
Respondents instrument; therefore, it is essential to ensure that
Out of the 410 respondents, 321 were male, and CMB issues are absent (53). In this study, we
the remaining 89 were female. A significant assessed CMB using Harman’s one-factor test. The
portion, specifically 50.49% of the total results highlight that a single factor explains
participants, fell within the 26–35 age group. 46.35% of the total variance, which is below the
Additionally, 30.24% of the participants were in standard threshold limit of 50% (54). Thus, the
the 36-45 age group, while 10% were aged 25 or present research concludes that CMB is not an
younger, and 9.27% were above 46 years old. issue.

Table 1: Demographic Profile of the Respondents

Variables Category Frequency Percentage (%)
Gender Male 321 78.29
Female 89 21.71
Age < 25 41 10
26 - 35 207 50.49
36 - 45 124 30.24
Above 46 38 9.27
Income < 2,50,000 121 29.51
2,50,001– 5,00,000 145 35.37
5,00,001–7,50,000 84 20.49
7,50,001 –10,00,000 34 8.29
Above 10,00,000 25 6.09
Investment experience 2-5 218 53.17
(in years) 5 - 10 101 24.63
Above 10 91 22.19

Assessment of the Measurement Model Cronbach’s alpha along with composite reliability,
This study encompasses five latent variables: which were subsequently employed to gauge
herding, overconfidence, underconfidence, risk internal consistency. An acceptable threshold for
perception, and investors’ investment decision- both should fall between the range of 0.7 and 0.95
making. Using SmartPLS 4, we assessed the (57). As shown in Table 2, both values were within
measurement model by evaluating the validity and the suggested range, thereby affirming the internal
reliability of the independent and dependent consistency reliability. The average variance
variables. “This evaluation consists of indicator extracted (AVE) was evaluated to determine
reliability, internal consistency reliability, convergent validity, using the mean value of the
convergent validity, and discriminant validity” squared loadings for each indicator of the
(55). If the outer loadings of all items exceed the construct. The AVE should be 0.50 or higher,
recommended value of 0.708 (55,56), this indicating that the construct accounts for 50% or
indicates a satisfactory level of item reliability. more of the variance in its items (55). Thus, the
From Table 2, it is observed that indicator present study confirmed that the AVE for all
reliability is achieved. Next, we assessed constructs surpassed 0.5; hence, convergent

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validity was also established. Furthermore, we discriminant validity was established for all the
assessed the model’s discriminant validity by constructs. The second criterion involved
employing two criteria. The traditional metric, assessing the heterotrait-monotrait (HTMT) ratio,
referred to as the Fornell-Larcker criterion, serves which must fall below 0.9 for every single
as the first criterion for evaluation (58). In this construct (59). Table 4 depicts HTMT ratio values
method, each construct’s square root of the AVE that are less than 0.9 for all constructs. Hence, it is
should exceed its correlations with other concluded that there are no issues of discriminant
constructs in the model (55). This criterion was validity in the model.
fulfilled, as indicated in Table 3. Consequently,

Table 2: Measurement Model Results

Outer Cronbach’s
Items rho a CR AVE
Constructs Loadings Alpha
Overconfidence OV 1 0.730 0.799 0.800 0.869 0.624
OV 2 0.797
OV 3 0.836
OV 4 0.792
Herding HERD 1 0.816 0.847 0.847 0.897 0.686
HERD 2 0.873
HERD 3 0.841
HERD 4 0.779
Underconfidence UC 1 0.882 0.859 0.920 0.910 0.772
UC 2 0.866
UC 3 0.888
Investment decisions ID 1 0.806 0.885 0.887 0.910 0.593
ID 2 0.783
ID 3 0.780
ID 4 0.805
ID 5 0.702
ID 6 0.706
ID 7 0.801
Risk perception RP 1 0.762 0.835 0.841 0.884 0.605
RP 2 0.771
RP 3 0.783
RP 4 0.833
RP 5 0.813

Table 3: Discriminant Validity (Fornell and Larcker Criterion)

HERD ID OV RP UC
HERD 0.828
ID 0.484 0.769
OV 0.492 0.614 0.768
RP 0.561 0.525 0.629 0.766
UC 0.262 0.441 0.339 0.466 0.880
Notes: The square root of AVE is depicted in bold values

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Table 4: Discriminant Validity (HTMT ratio)

HERD ID OV RP UC
ID 0.558
OV 0.613 0.745
RP 0.665 0.724 0.779
UC 0.291 0.496 0.410 0.539

Assessment of the Structural Model the study’s structural model is displayed in Figure
The first step is to assess the collinearity issues of 2. The results reveal that among the behavioral
predictor variables in the model before measuring biases, only overconfidence bias (OC) (β = 0.111, t
the structural model. This study utilized the = 2.739) significantly affects investment decisions
variance inflation factor (VIF), a widely accepted (ID), supporting H1. However, herding (HERD) (β
approach for identifying collinearity problems in = 0.038, t =1.204) and underconfidence (UC) (β =
the model (49). The main cause of the collinearity 0.035, t = 1.029) show no direct association with
issues is the high intercorrelation among variables investment decisions, thus rejecting H2 and H3.
in any model (60). The VIF values should be less Next, the mediating variable, risk perception (RP)
than 5, signifying the absence of collinearity issues (β = 0.828, t =22.602) significantly impacts
in the model (61). In this study, VIF values below 5 investment decisions, supporting H4. Furthermo-
indicate that collinearity is not a concern for the re, OC, HERD, and UC positively influence risk
model. The next phase is to test the proposed perception. Among these three biases, OC (β =
hypotheses through bootstrapping to evaluate the 0.450, t = 12.317) exhibited the strongest influence
significance and relevance of the path coefficients. on risk perception, subsequently influenced by
Table 5 highlights the beta values, t-statistics, and HERD (β = 0.280, t = 7.317), and UC (β = 0.256, t =
p-values from the hypothesis testing results, and 7.386), hence confirming H5, H6, and H7.

Figure 2: Structural Model Obtained from the PLS-SEM

Table 5: Hypothesis Testing Results

P
Hypothesis Path Beta T- statistics VAF Decision
Values
H1 OV -> ID 0.111 2.739 0.006 - Supported
H2 HERD -> ID 0.038 1.204 0.229 - Not supported
H3 UC -> ID 0.035 1.029 0.677 - Not supported
H4 RP -> ID 0.828 22.602 0.000 - Supported
H5 OV -> RP 0.450 12.317 0.000 - Supported

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H6 HERD -> RP 0.280 7.317 0.000 - Supported

H7 UC -> RP 0.256 7.386 0.000 - Supported
H8 OV -> RP -> ID 0.112 4.148 0.000 77.23% Supported
H9 HERD -> RP -> ID 0.131 3.540 0.000 67.88% Supported
H10 UC -> RP -> ID 0.373 12.305 0.000 52.83% Supported

Furthermore, mediation effects were evaluated in On the other hand, indirect-only (full mediation)
line with established guidelines (61–63). was observed in the connection of RP between
Accordingly, the mediating role of RP in the HERD, UC, and ID. The researchers analyzed the
relationships between OC, HERD, UC, and ID was impact of OC, HERD, and UC on ID without
rigorously examined. The analysis revealed that including RP as a mediator, and the R² value was
the indirect effects of OC, HERD, and UC were found to be 59%. When RP was introduced as a
statistically supported, as specified in Table 5. mediator, the R² increased to 78.2%,
Next, we analyzed the total effect of these demonstrating that 78.2% of the variance in ID is
relationships and found to be statistically accounted for by OC, HERD, UC, and RP. This
significant for all three behavioral biases, demonstrates the model’s high explanatory power
indicating that the total effects of HERD (β = 0.193, (51). Further, the present study measured the
t = 4.419), OC (β = 0.483, t = 11.775), and UC (β = model’s predictive relevance using the Q2 value
0.212, t = 5.904) were significant. Additionally, to and PLSpredict (64). Q2 predict values for all
determine the strength of the mediation effect, the investment decision items are greater than zero, as
Variance Accounted For (VAF) was utilized, illustrated in Table 6. Regarding the PLSpredict
following the procedures outlined in a previous procedure, if the endogenous constructs of PLS MV
study (62). In Table 5, VAF values are shown, prediction errors are non-symmetric, it is
computed by dividing the indirect effect by the necessary to compare the partial least squares
overall effect for all relationships. A VAF of less mean absolute error (PLS MAE) values with the
than 20% indicates zero mediation; a VAF between linear regression model mean absolute error (LM
20% and 80% suggests partial mediation; and a MAE) values for each indicator to assess the
VAF exceeding 80% signifies full mediation (62). model’s predictive relevance (64). In this study,
The study showed that the VAF values indicate non-symmetric PLS MV prediction errors were
partial mediation for OC, HERD, and UC, as the VAF observed. Consequently, we compared the values
values were greater than 20% but less than 80%, of PLS MAE with the LM MAE values across all
as shown in Table 5. For OC, the direct and indirect investment decision indicators, as reported in
effects were both positive, whereas for HERD and Table 6. The results indicated that, for most
UC, the direct effects were insignificant, but the indicators, the values of PLS MAE were lower than
indirect effects were significant. Hence, it is those of LM MAE, suggesting that the model
concluded that complementary partial mediation exhibits medium predictive relevance (64).
exists in the relationship of RP between OC and ID.

Table 6: Results of PLS predict

Indicator PLS Q²predict PLS-SEM MAE LM MAE
ID 1 0.452 0.759 0.715
ID 2 0.127 0.785 0.774
ID 3 0.557 0.578 0.589
ID 4 0.067 0.852 0.873
ID 5 0.266 0.786 0.792
ID 6 0.036 0.713 0.702
ID 7 0.059 0.783 0.788

Discussion previous research has predominantly concentrate

-ed on the direct influence of biases on investment
The study examines how overconfidence, herding,
decisions, this study further advances the field by
underconfidence, and risk perception affect
investigating RP’s role as a mediator in the
individual investors’ decision-making. Although
connection of herding, overconfidence, and unde-

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rconfidence with investors’ decision-making. The study’s findings provide numerous practical
findings reveal that overconfidence and risk implications pertinent to individual investors,
perception significantly impact the investors’ investment advisors, portfolio managers, and
decision-making. Overconfidence bias leads policymakers. The findings suggest that individual
investors to engage in excessive trading, investors should remain mindful of avoiding biases
overestimating their skills, abilities, and in their decision-making to select more
knowledge, and underestimating market appropriate stocks that are sound both
information. Overconfident investors believe that fundamentally and technically for their portfolios.
they can accurately determine the optimal Second, financial advisors should comprehend
moments to enter or exit the stock market (20). As their clients’ mindsets to mitigate the effects of bias
a result, overconfident investors incur significant on their investment decision-making.
losses. This finding is consistent with those of Consequently, they can make optimal investment
earlier studies (17,41). Regarding the concept of decisions and potentially generate higher returns
risk perception, the study participants believed by selecting the best stocks. Additionally, financial
that when it comes to buying stocks, their risk advisors can gain professional recognition by
perception helps them make the best investment addressing clients’ behavioral biases. Third, if
decisions. This tendency leads individuals to portfolio managers recognize investor psychology,
evaluate before investing in a specific stock. This they can enhance portfolio management and
finding aligns with previous research studies improve their risk control. Fourth, individual
(17,41,44). While the impact of herding and investors are more inclined to errors in judgment
underconfidence has not. Notably, the study due to behavioral biases; therefore, policymakers
demonstrated that overconfidence bias exerts a should conduct financial education programs to
significant influence on investment decision- elucidate behavioral biases and their implications.
making, even without accounting for risk
perception. Interestingly, the inclusion of risk Conclusion
perception in the model leads to a significant The current research substantiates the significant
increase in the influence of herding, influence of risk perception and overconfidence on
overconfidence, and underconfidence on decision- investors’ decision-making. However, the effects of
making. The reason behind this finding is that herding and underconfidence on investors’
overconfident investors are naturally inclined to investment decisions were found to be
perceive less risk, making riskier investment insignificant. Furthermore, this research examines
choices. They tend to believe that their skills and how RP mediates the connection among herding,
knowledge surpass those of other investors, which overconfidence, underconfidence, and investment
leads them to pick up the more volatile stocks in decisions. Notably, the findings show that the
their portfolio, potentially resulting in negative presence of risk perception significantly amplifies
returns. As far as herding is concerned, the the effects of herding, overconfidence, and
respondents indicated that investors do not base underconfidence on investors’ decision-making.
their decisions solely on the actions of others. Limitations and Future Research
However, through the indirect effect of risk Avenues
perception, herding reduces their perception of The current research investigates how the
risk, which in turn influences their investment proposed biases influence investment decisions.
decisions. This suggests that individual investors Further, the study evaluates the mediating role of
follow the crowd to generate profits, and they also risk perception, particularly in the Indian
believe that tends to reduce risks, which ultimately context. The current study collects data exclusively
adversely affects their investments. Furthermore, from the southern region of India. Further
underconfident investors often overestimate the research would focus on the entire country of India
risks associated with investment opportunities to validate the study’s results with a great diversity
because they underestimate their skills and of respondents. In this study, risk perception is
abilities. As a result, underconfidence amplifies taken into account. Future research would analyze
risk perception, which impairs decision-making the connection between potential behavioral
quality and creates low trading volume. The biases and investment decisions by incorporating

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different mediators and moderators to provide Market: A Case of Klang Valley and Pahang. Procedia
deeper insights into the effect of these biases on Econ Financ. 2016;35(1):319–28.
8. Shefrin H, Statman M. The disposition to sell winners
decision-making. Furthermore, this study focuses too early and ride losers too long: Theory and
exclusively on individual investors as the unit of evidence. J Financ. 1985;40(3):777–90.
analysis. Future studies would examine whether 9. Shefrin H. Behavioral Portfolio Selection. In:
Encyclopedia of Quantitative Finance. 2010; 4(3):1-
retail and institutional investors are equally
43.
susceptible to behavioral biases. 10. Baker HK, Ricciardi V. How Biases Affect Investor
Behaviour. Eur Financ Rev. 2014; 2(3):7–10.
Abbreviations 11. Tversky A, Kahneman D. Advances in prospect
LM MAE: Linear regression model mean absolute theory: Cumulative representation of uncertainty. J
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