THE INVESTMENT PUZZLE: UNVEILING BEHAVIORAL FINANCE, RISK PERCEPTION, AND FINANCIAL LITERACY
DOI:
https://doi.org/10.2478/eoik-2025-0003Keywords:
behavior finance, risk perception, financial literacy, invest- ment decisionsAbstract
Contemporary financial theory upholds the market efficiency hypoth-
esis, asserting that stock prices inherently embody all available infor-
mation. In contrast, behavioral finance theory challenges this premise
by proposing that psychological and emotional factors can wield in-
fluence over stock prices. This study delves into the repercussions of
behavioral finance factors on investment decisions within the Saudi
equity markets, utilizing risk perception and financial literacy as me-
diating variables. An online questionnaire was disseminated to 350
individual investors, yielding 315 completed responses deemed suit-
able for analysis. Employing Structural Equation Modeling (SEM),
the collected data underwent rigorous scrutiny. The findings reveal
that herding, the disposition effect, blue-chip bias, and overconfidence
significantly and positively impact both risk perception and financial
literacy. Furthermore, all four behavioral finance factors exhibit a
substantial positive indirect effect on investment decision-making
through the intermediaries of risk perception and financial literacy.
It is imperative to acknowledge the study’s specific focus on these
factors while recognizing the potential influence of other elements on
risk perception, financial literacy, and investment decision-making.
The research underscores the critical importance of incorporating an
individual’s perception of risk into investment decisions, as it mark-
edly shapes their proclivity for risk-taking and, consequently, the
performance of their investment portfolio. The findings highlight the
necessity for investors to recognize and address their behavioral bias-
es. Additionally, the study advocates for advisors and policymakers
to formulate strategies aimed at mitigating the impact of these bias-
es. The comprehensive exploration of behavioral finance factors and
their implications for investment decisions yields valuable insights for
individual investors and stakeholders in financial advisory and poli-
cymaking roles.
References
Adil, M., Singh, Y., & Ansari, M. S. (2022). How financial literacy moderate the association between
behaviour biases and investment decision? Asian Journal of Accounting Research, 7(1), 17–30.
https://doi.org/10.1108/AJAR-09-2020-0086
Ahmad, M. (2022). The role of cognitive heuristic-driven biases in investment management activities
and market efficiency: a research synthesis. International Journal of Emerging Markets, 19(2),
-321. https://doi.org/10.1108/IJOEM-07-2020-0749
Ahmed, S. U., Ahmed, S. P., Abdullah, M., & Karmaker, U. (2022). Do socio-political factors affect
investment performance? Cogent Economics and Finance, 10(1). https://doi.org/10.1080/2332
2022.2113496
Aljifri, R. (2023). Investor psychology in the stock market: An empirical study of the impact of over-
confidence on firm valuation. Borsa Istanbul Review, 23(1), 93–112. https://doi.org/10.1016/j.
bir.2022.09.010
Akybayeva, G., Kazbekov, T., Mambetova, S., & Aikenova, R. (2024). Toward a new economy: Digi-
tal currency and international development. In Collection of papers: New economy: New par-
adigms in the economy: Connectivity, innovation and sustainability (pp. 47-62). https://doi.
org/10.61432/CPNE0201047a
Almansour, B. (2017). The Investment Decision Making Among The Gulf Investors: Behavioural Fi-
nance Perspective. International Journal of Management Studies, 24(1), 41-71. https://doi.
org/10.32890/ijms.24.1.2017.10476
Almansour, B. Y., Elkrghli, S., & Almansour, A. Y. (2023a). Behavioral finance factors and investment
decisions: A mediating role of risk perception. Cogent Economics and Finance, 11(2) 2239032.
https://doi.org/10.1080/23322039.2023.2239032
Almansour, B. Y., Elkrghli, S., & Almansour, A. Y. (2023b). Unravelling the Complexities of Cryp-
tocurrency Investment Decisions: A Behavioral Finance Perspective from Gulf Investors. In-
ternational Journal of Professional Business Review, 8(7), e03265. https://doi.org/10.26668/
businessreview/2023.v8i7.3265
Almenberg, J., Lusardi, A., Säve-Söderbergh, J., & Vestman, R. (2021). Attitudes towards Debt and
Debt Behavior. Scandinavian Journal of Economics, 123(3), 780–809. https://doi.org/10.1111/
sjoe.12419
Alshammari, T. (2021). State ownership and bank performance: conventional vs Islamic banks. Jour-
nal of Islamic Accounting and Business Research, 13(1), 141–156. https://doi.org/10.1108/JI-
ABR-06-2021-0161
Areiqat, A. Y., Abu-Rumman, A., Al-Alani, Y. S., & Alhorani, A. (2019). Impact of behavioral finance on
stock investment decisions applied study on a sample of investors at Amman Stock Exchange.
Academy of Accounting and Financial Studies Journal, 23(2), 1-17. https://www.scopus.com/
inward/record.uri?eid=2-s2.0-85065986121&partnerID=40&md5=247ee42789fd88836e33b-
be36e50e67
Balcilar, M., Demirer, R., & Hammoudeh, S. (2013). Investor herds and regime-switching: Evidence
from Gulf Arab stock markets. Journal of International Financial Markets, Institutions and
Money, 23(1), 295–321. https://doi.org/10.1016/j.intfin.2012.09.007
Balcilar, M., Demirer, R., & Hammoudeh, S. (2014). What drives herding in oil-rich, developing stock
markets? Relative roles of own volatility and global factors. North American Journal of Eco-
nomics and Finance, 29, 418–440. https://doi.org/10.1016/j.najef.2014.06.009
Ballis, A., & Verousis, T. (2022). Behavioural finance and cryptocurrencies. Review of Behavioral Fi-
nance, 14(4), 545–562. https://doi.org/10.1108/RBF-11-2021-0256
Bazley, W. J., Cronqvist, H., & Mormann, M. (2021). Visual finance: The pervasive effects of red on inves-
tor behavior. Management Science, 67(9), 5616–5641. https://doi.org/10.1287/mnsc.2020.3747
Burton, N. (2017). Manias, panics and crashes: A History of Financial Crises. In Manias, Panics and
Crashes: A History of Financial Crises, Macat Library. https://doi.org/10.4324/9781912281145
Campbell, S., Greenwood, M., Prior, S., Shearer, T., Walkem, K., Young, S., Bywaters, D., & Walker, K.
(2020). Purposive sampling: complex or simple? Research case examples. Journal of Research
in Nursing : JRN, 25(8), 652–661. https://doi.org/10.1177/1744987120927206
Dickason, Z., & Ferreira, S. (2018). Establishing a link between risk tolerance, investor personality and
behavioural finance in South Africa. Cogent Economics and Finance, 6(1), 1–13. https://doi.or
g/10.1080/23322039.2018.1519898
Fairchild, R. (2009). Managerial overconfidence, moral hazard problems, and excessive life-cycle debt
sensitivity. Investment Management and Financial Innovations, 6(3), 35–42. https://www.
scopus.com/inward/record.uri?eid=2-s2.0-78649300614&partnerID=40&md5=5fa55b0e-
d4223859134e9183fc17dc
Fama, E. F. (1998). Market efficiency, long-term returns, and behavioral finance.The comments of Brad
Barber, David Hirshleifer, S.P. Kothari, Owen Lamont, Mark Mitchell, Hersh Shefrin, Robert
Shiller, Rex Sinquefield, Richard Thaler, Theo Vermaelen, Robert Vishny, Ivo Welch. Journal of
Financial Economics, 49(3), 283–306. https://doi.org/10.1016/S0304-405X(98)00026-9
Gavrilakis, N., & Floros, C. (2022). The impact of heuristic and herding biases on portfolio construction
and performance: the case of Greece. Review of Behavioral Finance, 14(3), 436–462. https://
doi.org/10.1108/RBF-11-2020-0295
Gupta, P., & Kohli, B. (2021). Herding behavior in the Indian stock market: An empirical study. Indian
Journal of Finance, 15(5–7), 86–99. https://doi.org/10.17010/ijf/2021/v15i5-7/164495
Hossain, T., & Siddiqua, P. (2022). Exploring the influence of behavioral aspects on stock investment
decision-making: a study on Bangladeshi individual investors. PSU Research Review. , (ahead-
of-print). https://doi.org/10.1108/PRR-10-2021-0054
Kasoga, P. S. (2021). Heuristic biases and investment decisions: multiple mediation mechanisms of risk
tolerance and financial literacy—a survey at the Tanzania stock market. Journal of Money and
Business, 1(2), 102–116. https://doi.org/10.1108/JMB-10-2021-0037
Khawaja, M. J., & Alharbi, Z. N. (2021). Factors influencing investor behavior: an empirical study of
Saudi Stock Market. International Journal of Social Economics, 48(4), 587–601. https://doi.
org/10.1108/IJSE-07-2020-0496
Kumari, A., Goyal, R., & Kumar, S. (2022). Review on Behavioral Factors and Individual Investors Psy-
chology towards Investment Decision Making. ECS Transactions, 107(1), 8009–8023. https://
doi.org/10.1149/10701.8009ecst
Lather, A. S., Jain, S., & Anand, S. (2020). The effect of personality traits on cognitive investment bias-
es. Journal of Critical Reviews, 7(2), 221–229. https://doi.org/10.31838/jcr.07.02.39
Lentoor, A. G., & Maepa, M. P. (2021). Psychosocial Aspects During the First Wave of COVID-19
Infection in South Africa. Frontiers in Psychiatry, 12, 663758. https://doi.org/10.3389/fp-
syt.2021.663758
Liang, X., & Reiner, D. (2009). Behavioral issues in financing low carbon power plants. Energy Pro-
cedia, 1(1), 4495–4502. https://doi.org/10.1016/j.egypro.2009.02.267
Lima, T. S., Mail, R., Karim, M. R. A., Ulum, Z. K. A. B., Mifli, M., & Jaidi, J. (2020). An investigation
of financial investment intention using covariance-based structural equation modelling. Glob-
al Business and Finance Review, 25(2), 37–50. https://doi.org/10.17549/gbfr.2020.25.2.37
Madaan, G., & Singh, S. (2019). An analysis of behavioral biases in investment decision-making.
International Journal of Financial Research, 10(4), 55–67. https://doi.org/10.5430/ijfr.
v10n4p55
Madaan, V., & Shrivastava, M. (2022). Sectoral herding behaviour in the Indian financial mar -
ket. Global Business and Economics Review, 26(2), 185–213. https://doi.org/10.1504/
GBER.2022.121011
Marjerison, R. K., Han, L., & Chen, J. (2023). Investor Behavior during Periods of Crises:
The Chinese Funds Market during the 2020 Pandemic. Review of Integrative Busi-
ness and Economics Research, 12(1), 71–91. https://www.scopus.com/inward/record.
uri?eid=2-s2.0-85148047689&partnerID=40&md5=1d270920ea912d737c29e2fd142ea915
Mumtaz, M. Z., & Smith, Z. A. (2021). The behavior of household finance on demographic charac -
teristics in Pakistan. Economic Research-Ekonomska Istrazivanja, 34(1), 1409–1427. https://
doi.org/10.1080/1331677X.2020.1825107
Mushinada, V. N. C., & Veluri, V. S. S. (2019). Elucidating investors rationality and behavioural
biases in Indian stock market. Review of Behavioral Finance, 11(2), 201–219. https://doi.
org/10.1108/RBF-04-2018-0034
Nair, M. A., Balasubramanian, & Yermal, L. (2017). Factors influencing herding behavior among Indian
stock investors. 2017 International Conference on Data Management, Analytics and Innovation,
ICDMAI 2017, 326–329. https://doi.org/10.1109/ICDMAI.2017.8073535
Navaneeth, S., & Menon, R. B. (2018). An empirical study on behavioral finance and investment prefer-
ence congruent in particular to construction companies in Mysuru City. International Journal of
Civil Engineering and Technology, 9(11), 1153–1163. https://www.scopus.com/inward/record.
uri?eid=2-s2.0-85057797050&partnerID=40&md5=ee7b6095e705168e475239185143f445
Ng, S.-H., Zhuang, Z., Toh, M.-Y., Ong, T.-S., & Teh, B.-H. (2022). Exploring herding behavior in an in-
novative-oriented stock market: evidence from ChiNext. Journal of Applied Economics, 25(1),
–542. https://doi.org/10.1080/15140326.2022.2050992
Niazi, Muhammad Khurram Shehzad; Malik, Q. A. (2019). Financial Attitude and Investment Decision
Making - Moderating Role of Financial Literacy. NUML International Journal of Business &
Management, 14(1), 102–115. https://numl.edu.pk/journals/subjects/1564377799Article-8.pdf
Ofir, M., & Wiener, Z. (2016). Individuals investment in financial structured products from rational and
behavioral choice perspectives. In Behavioral Finance: WHERE DO INVESTORS’ BIASES
COME FROM? (pp. 33-65). https://doi.org/10.1142/9789813100091_0002
Oyekale, A. S. (2022). Factors Influencing Willingness to Be Vaccinated against COVID-19 in Nigeria.
International Journal of Environmental Research and Public Health, 19(11), 6816. https://doi.
org/10.3390/ijerph19116816
Paisarn, W., Chancharat, N., & Chancharat, S. (2021). Factors Influencing Retail Investors’ Trading
Behaviour in the Thai Stock Market. Australasian Accounting, Business and Finance Journal,
(2), 26–37. http://dx.doi.org/10.14453/aabfj.v15i2.3
Paraboni, A. L., & da Costa N., J. (2021). Improving the level of financial literacy and the influence of
the cognitive ability in this process. Journal of Behavioral and Experimental Economics, 90,
https://doi.org/10.1016/j.socec.2020.101656
Parveen, S., Satti, Z. W., Subhan, Q. A., & Jamil, S. (2020). Exploring market overreaction, investors’
sentiments and investment decisions in an emerging stock market. Borsa Istanbul Review, 20(3),
–235. https://doi.org/10.1016/j.bir.2020.02.002
Pompian, M. M. (2011). Behavioral finance and wealth management: How to build investment strate-
gies that account for investor biases. In Behavioral Finance and Wealth Management: How to
Build Investment Strategies That Account for Investor Biases. https://onlinelibrary.wiley.com/
doi/book/10.1002/9781119202400
Putri Pa, A. N., Wiksuana, I., Suartana, I. W., & Sri Artini, L. G. (2022). The Influence of Social and Per-
sonal Factors in Individual Investment Decision Making. Quality - Access to Success, 23(191),
–88. https://doi.org/10.47750/QAS/23.191.10
Rapina, R., Meythi, M., Rahmatika, D. N., & Mardiana, M. (2023). The impact of financial literacy and
financial behavior in entrepreneurial motivation–evidence from Indonesia. Cogent Education,
(2), 2282827. https://doi.org/10.1080/2331186X.2023.2282827
Rasool, N., & Ullah, S. (2020). Financial literacy and behavioural biases of individual investors: empir-
ical evidence of Pakistan stock exchange. Journal of Economics, Finance and Administrative
Science, 25(50), 261–278. https://doi.org/10.1108/JEFAS-03-2019-0031
Richards, D. W., Rutterford, J., Kodwani, D., & Fenton-O’Creevy, M. (2017). Stock market investors’
use of stop losses and the disposition effect. European Journal of Finance, 23(2), 130–152.
https://doi.org/10.1080/1351847X.2015.1048375
Samsuri, A., Ismiyanti, F., & Narsa, I. M. (2019). The effects of risk tolerance and financial literacy
to investment intentions. International Journal of Innovation, Creativity and Change, 10(6),
–294. https://www.ijicc.net/images/vol10iss9/10904_Samsuri_2019_E_R.pdf
Sarstedt, M., Hair, J. F., Cheah, J.-H., Becker, J.-M., & Ringle, C. M. (2019). How to specify, estimate,
and validate higher-order constructs in PLS-SEM. Australasian Marketing Journal, 27(3), 197
– 211. https://doi.org/10.1016/j.ausmj.2019.05.003
Saudi Exchange. (2024). Market Data and Financial Trends. https://www.saudiexchange.sa
Shiva, A., Narula, S., & Shahi, S. K. (2020). What drives retail investors’ investment decisions? Evi-
dence from no mobile phone phobia (Nomophobia) and investor fear of missing out (I-FoMo).
Journal of Content, Community and Communication, 10(6), 2–20. https://doi.org/10.31620/
JCCC.06.20/02
Shiva, A., & Singh, M. (2020). Stock hunting or blue chip investments?: Investors’ preferences for
stocks in virtual geographies of social networks. Qualitative Research in Financial Markets,
(1), 1–23. https://doi.org/10.1108/QRFM-11-2018-0120
Singh, Y., Adil, M., & Haque, S. M. I. (2022). Personality traits and behaviour biases: the moderating
role of risk-tolerance, 57(4), 3549-3573. Quality and Quantity. https://doi.org/10.1007/s11135-
-01516-4
Tadawul. (2021). Market performance overview. https://www.tadawulgroup.sa/wps/portal/tadawulgroup
Talapbayeva, G., Yerniyazova, Z., Kultanova, N., & Akbayev, Y. (2024). Economic opportunities and
risks of introducing artificial intelligence. In Collection of papers: New economy: New para-
digms in the economy: Connectivity, innovation and sustainability (pp. 117-128). Oikos Insti-
tute. https://doi.org/10.61432/CPNE0201117t
Verma, R., & Verma, P. (2018). Behavioral biases and retirement assets allocation of corporate pension
plans. Review of Behavioral Finance, 10(4), 353–369. https://doi.org/10.1108/RBF-01-2017-0009
Wattanasan, P., Bhupesh, L., & Pallela, S. (2020). An explorational study on influencing factors in
financial investment decisions in thailand securities market. International Journal of Ad-
vanced Science and Technology, 29(3), 8237–8243. https://www.scopus.com/inward/record.
uri?eid=2-s2.0-85083356382&partnerID=40&md5=3ec1e1b5bb0145578bd9dfc3a3f0a91d
Wildavsky, A., & Dake, K. (1990). Theories of Risk Perception: Who Fears What and Why? Daedalus,
(4), 41–60. http://www.jstor.org/stable/20025337
Worawachtanakul, P., Likitapiwat, T., & Lawsirirat, C. (2018). Supporting the understanding investor
behavior and the effective communication. JP Journal of Heat and Mass Transfer, 15(Special
Issue 1), 95–100. https://doi.org/10.17654/HMSI118095
Yu, J., Wang, S.-Z., Ng, P., & Yang, Z. (2013). Research on investment behavior on the perspective
of managerial overconfidence: Evidence from anhui listed companies. Information Technology
Journal, 12(19), 5154–5159. https://doi.org/10.3923/itj.2013.5154.5159
Zainul, Z. R., & Suryani, I. (2021). Identification of Herding Behavior, Overconfidence and Risk Tol-
erance Based on Gender Perspective on Stock Investors in Aceh. Proceedings of the 6th Inter-
national Conference on Tourism, Economics, Accounting, Management, and Social Science
(TEAMS 2021), 197(Teams), 157–164. https://doi.org/10.2991/aebmr.k.211124.024
Zhang, M., Nazir, M. S., Farooqi, R., & Ishfaq, M. (2022). Moderating Role of Information Asymmetry
Between Cognitive Biases and Investment Decisions: A Mediating Effect of Risk Perception.
Frontiers in Psychology, 13, 828956. https://doi.org/10.3389/fpsyg.2022.828956
Downloads
Published
How to Cite
Issue
Section
License
Copyright (c) 2024 ECONOMICS - INNOVATIVE AND ECONOMICS RESEARCH JOURNAL

This work is licensed under a Creative Commons Attribution-NonCommercial-NoDerivatives 4.0 International License.