Supervised by: Mr. Ahmed Imran
Impact of Psychological Factors on Investment
Decision Making Mediating by Risk Perception
UIMS-PMAS Arid Agriculture University
The most critical challenge faced by the investors is the investment
they act in a rational manner and usually follow their instincts and
emotional biases while making investment decisions.
Previous studies reveals the importance of various psychological factors
- affect the investment decisions.
Psychologists found that decisions could be influenced by unavoidable
psychological and emotional factors;
will help the investors to select a better investment decision (Chira and
To avoid repeating the mistakes in future.
Behavioral finance is becoming an integral part of the decision-making
because it greatly influences investors’ behavior regarding decision
making (Chin, 2012).
Risk arises in any decision where there is some doubt about at least one of
the possible outcomes.
It is an individual’s perception and their reaction to risk that affects their
decisions of investment (Farrelly and Reichenstein, 1984).
A subjective role in determining the best alternative among different
investment decisions (Slovic, 2000).
At different levels of perception towards risk, the investor thinks differently
about his investment and make decisions differently (Chen and Tsai, 2010 ;
Hallahan et al., 2004).
Risk propensity has a great influence on the risk perceptions of the
investors (Sitkin and Pablo,1992).
The investors make proper tradeoffs between risks and return (Fischer
and Jordan, 2006).
Their decisions are the result of their perception towards risks and
expected returns (Azwadi, 2011).
Risk seekers - high returns, low risk perception,
Risk averse - high risk perception (Rana et al., 2011).
Perception of risk may be greatly influenced by the context/situation of the
investors when they make investment decisions. (Slovic, 2000)
The tendency to avoid risks (high risk perception), when a decision is
framed in terms of possible gains and to accept risk (low risk
perception), when a choice is framed in terms of possible losses
(Singh and Bhowal, 2010; Xiao and Wang, 2003).
The value of information may be determined by the quality of the decision
made by the investors using the information
Play a critical role while making investment decisions as it enables the
investors to form opinion about a firm’s value (Abosede and Ezekiel, 2011;
Nwezeaku and Okpara, 2010; Oluba, 2008; Murray, 2008; Rosser, 2001).
The less the investors share the same information, the more will be level of
risk perception towards their decisions in stock market (Mahmood et al., 2011)
Need of the Study
Due to global financial crisis, investment decisions are considered as the important tasks in daily
life. For this reason, it is necessary to understand various factors which prompt individual
investors to make investment decisions.
Effect of psychological factors along with demographic factors should
be examined to determine their influence on investor behavior.
(Rana et al., 2011)
Need to develop a suitable scale to measure the relationship of risk
perception and investment behavior.
(Singh and Bhowal, 2010)
There should be transparency, timely spread and asymmetry of
information about all the listed companies for every investor.
(Mahmood et al., 2011;
Wang et al., 2006)
There is a need to examine the impact on investment decisions by
varying framing and perceptions.
(Singh, 2012; Edwards et
The independent impact of risk propensity and problem Framing on
risk perception should be studied.
(Mahmood et al., 2011;
Rana et al., 2011; Chou et
Empirical testing of these relationships should be done to determine
the true effect of these factors on investment decisions.
(Mahmood et al., 2011)
In the case of Pakistani Stock Market it is observed that while making any financial
decision an investor perceives to invest in those stocks where investor assumes
low risk and high benefits according to his/her own perception and available
much information is available
How it is being presented True intention of this study
the risk is being perceived
Whether willing to take risk
Although traditional finance theory always suggests that investors’ investment
decisions are based on their objective evaluation of risks and expected
returns, psychological factors towards perception of risk may play critical
role in investors’ investment decisions.
Find the impact of risk perception on investor’s decision making.
Analyze the impact of psychological factors such as risk propensity,
problem framing and information asymmetry on the risk perception.
Identify some core factors which affect investors' behavior under risk and
Significant contribution in the area of behavioral finance through exploring
the relationship between various physiological factors that can affect the
overall investment decisions of the investors.
This study will benefit the stock investors to understand how their decisions
are effected by the behavioral and psychological biases which will give
them an insight to overcome these biases and invest rationally.
Risk Propensity and
Funfgeld and Wang, 2009; Wood and Zaichkowsky, 2004;
Rohrmann, 2002; Weber, 2001; East, 1993; Sitkin and Pablo,
1992; Davis-Blake and Pfeffer, 1989; Schneider and Lopes, 1986;
Vlek and Stallen, 1980; Brockhaus, 1980; Markowitz, 1952
Attitudes towards risk can
be quite influential in
explaining an individual’s
Singh, 2012; Singh and Bhowal, 2010; Xiao et al., 2003; Edwards
et al., 2002; Kuhberger et al., 2002; Druckman, 2001; Kuhberger,
1998; Tversky, 1992, 1986, 1981; March and Shapira, 1987; Staw
et al., 1981; Sitkin and Weingart, 1995; Kahneman and Tversky,
Differences in investor’s
behavior based on
Mahmood et al., 2011; Akhtar et al., 2011; Nwezeaku and Okpara,
2010 ; Baik et al., 2010 ; Wang et al., 2006; Cheng, 2003;
towards the stock
markets play a critical
role while making
Risk Perception and
Chen and Tsai, 2010; Singh and Bhowal, 2008; Pennings and
Wansink, 2004; Hallahan et al., 2004; Weber, 2001; Slovic, 2000;
Weber and Hsee, 1998; Weber and Milliman, 1997; Adams, 1995;
Fischhoff, 1994; Weinstein, 1989; Slovic, 1972
process is greatly
affected by the risk
Mediation Impact of
Mahmood et al., 2011; Rana et al., 2011; Okpara, 2010; Lu et al.,
2010; Chang et al., 2008; Singh and Bhowal, 2008; Fischer and
Jordan, 2006; Xiao et al., 2003; Sitkin and Weingart, 1995; Sitkin
and Pablo,1992; Jackson and Dutton, 1988; MacCrimmon and
Wehrung, 1986; Staw et al., 1981;
Mediator variable strongly
predict the risky decision-
The higher an investor’s risk propensity, the riskier is his decision-making behavior.
An investor’s decision making behavior has a positive (negative) association with the way
information / problem is framed.
Asymmetry of information has a positive association with the investor’s decision making
The extent to which individuals make risky decisions has a negative association with their
level of risk perception.
Risk propensity has a negative association with risk perception of the investors.
Risk perception has a positive or negative association with problem framing in terms of
gains or losses.
Information asymmetry has a positive association with risk perception of the investors.
Risk perception has a mediator effect on risk propensity in risky investment decisions.
The impact of problem framing on risky investment decisions is mediated by risk
The effect of information asymmetry on risky decision-making behavior is mediated by risk
Independent Variables: Risk propensity, Problem framing, Information Asymmetry
Dependent Variable: Investment decisions
Mediating Variable: Risk perception
Materials and Method
For this study, the population was the investors of Islamabad Stock Exchange,
In this study, random sampling was used for collection of data.
The sample size in this study consisted of 200 financial investors of Islamabad
Stock Exchange, Pakistan.
Instrument And Measures/ Research Tools
Investment Decisions Pasewark and Riley (2010) and Wood et al., (2004)
Information Asymmetry Wang et al., (2006)
Risk Propensity Byrne et al., (2007), Mayfield et al., (2008)
Problem Framing Vlaev et al., (2009) and Grable et al., (1999).
Risk Perception Nosic and Weber (2010),
Comparison of Direct and Indirect Effects
Without the mediation impact of risk perception Risk Propensity, Problem Framing
and Information Asymmetry explain 13% of the variance in Investment Decisions;
With the inclusion of risk Perception as a mediator, explains variance of 22% on
Investment Decision making behavior of the investors.
The regression weights has been substantially reduced but are significant. If the
regression weight is reduced, but it is still significant, it provides evidence of partial
mediation (Baron & Kenny, 1986).
Discussion and Findings
To understand irrational behaviors of investors in the investment decisions, a
risk perception mediated model has been developed.
Finding of this research provide insight into the impact of Risk Propensity,
Problem Framing and Information asymmetry on the decision making behaviour
of the investors through the mediating role of risk perception in Pakistani culture
Relationship of all the psychological dimensions of investment decisions has
been investigated. The analysis indicates significant relationship among all the
dimensions of investment decisions.
The direct as well as indirect effects of the factors related to the investment
decisions as determined in the present study, have been supported by Sitkin
and Pablo (1992) and Sitkin and Weingart (1995).
Psychological factors have a significant effect on the investor’ decision
making behaviour was also declared as critical factors by Akhter et al., (2011).
Findings Hypothesis Support
Risk propensity as an influential and a critical factor
affecting the investor’s decision making behavior
Rana et al., 2011; Sitkin and Weingart
1995; Sitkin and Pablo 1992
The relationship between problem framing and
investment decisions is highly significant.
Sitkin and Weingart, 1995; Sitkin and
Asymmetry of informaton avaiable has significant
impact on decision making behaviour of the
Akhter et al., 2011; Baik et al., 2010;
Wang et al., 2006; Daniel et al., 2002;
Risk perception appears to have a significant
influence and is an important determinant of decision
Mahmood et al. 2011; Singh, 2010;
Investors with high risk propensity have a relatively
lower risk perception and vice versa.
Rana et al., 2011; Chou et al., 2010;
Chou et al., 2010; Fischer and Jordan,
2006; Bodie et al., 2001; MacCrimmon
& Wehrung, 1990
The relationship between problem framing and risk
perception is statistically significant which showed
that framing of a problem has significant impact on
risk perception of the investors.
Cohen et al., 2007; Edwards et al.,
2002; Sitkin and Weingart, 1995; Sitkin
and Pablo, 1992; Neale et al., 1986;
Singh, 1986; Tversky & Kahneman,
Findings Hypothesis Support
Information asymmetry has a significant association with
risk perception of the investors
Aliakbar et al., 2012; Ragab
and Omran, 2006; Coleman
and Eccles, 1997
Risk propensity has significant impact on investment
decisions partially mediated by risk perception
Significant relationships exists between problem framing
and investment decisions through the mediating impact of
Significant impact of information asymmetry on investment
decisions where risk perception acts as a mediator.
H8, H9, H10
Mahmood et al., 2011; Wang
et al., 2006; Bodie et al. 2001;
Sitkin and Weingart, 1995;
Sitkin and Pablo, 1992
While going for investment in shares, investors try to make proper tradeoffs between
risks and return;
The returns expectations from the investments strengthen their investment behavior
although they perceive risk towards the investment decisions.
Framing affects perception of how risky a situation is behavioral outcomes
Positive framing - Risk averse investment decisions,
Negatively framed situations - results in risk seeking
Information asymmetry-an important explanatory factor of investment decisions.
Conventions of transparently reporting of all relevant information, improved rules for
better disclosure and increased investment knowledge (investor’s biases, investment
environment risk) is required for an investor
Risk perception as a crucial influence on investor’s risk-taking behavior; that mediates
the effects of other factors on decision making behavior
Mediator variables strongly predict the risky decision-making behavior which provides a
view to more efficiently expect investor’s risk behavior
The investor’s behavior depends on how the available information is being presented to
them and how much they are prone to taking risk while making decisions; thus playing
a significant role in determining the investment style of an investor.
Overall, this study will be helpful in:
Exploring the intensity of the strength and weaknesses of the
Determining how much weight is attached to each independent
variable by the investors.
Providing an insight on the decision making
Raising awareness to the issue of subjectivity and performance
Help reduce these biases to improve profitability.
Limitation & Future Research Areas
Follow-up studies can collect the data on wider scale to re-verify the
The study can be further expanded in the future by using various other
behavioral and psychological factors.
May examine other variables identified in Sitkin and Pablo study.
Provides a conceptual and empirical springboard for future work on other
potentially important determinants of risky decision-making behavior.