COGNITIVE BIASES AND INVESTMENT DECISIONS: A MEDIATING EFFECT OF RISK PROPENSITY

Abstract

This research explores the intricate relationship between cognitive biases and investment decisions, with a particular focus on the mediating role of risk propensity. Cognitive biases, including recency bias, confirmation bias, and endowment bias, have been
recognized as influential factors in shaping investor behavior. This study aims to empirically investigate how these biases impact investment decisions and how risk propensity mediates these effects. Utilizing a quantitative approach, data was collected from a sample of investors in Pakistan through structured questionnaires. The research reveals that while recency bias significantly affects investment decisions, confirmation bias and endowment bias do not have a substantial impact. Furthermore, the findings indicate
that risk propensity plays a critical role in mediating the relationship between cognitive biases and investment decisions. This study contributes to the understanding of cognitive biases in investment contexts and provides insights into how risk propensity can influence the decision-making process. The implications of these findings offer valuable guidance for investors and financial advisors seeking to mitigate the adverse effects of cognitive biases and enhance investment strategies.