Risk Perception as a Predictor of Heuristic Biases: The Role of Sex and Age

Abstract

This paper analyzes the relationship between investors’ risk perception, heuristic biases (overconfidence, representativeness, availability bias, and anchoring bias), and the moderating role of sex and age. Since it is evident from the literature that investor risk perceptions affect investors rationally, the study explores the impact of risk perception on mental shortcuts or heuristic decision-making. The authors collected the data from 447 individual investors using a self-administered questionnaire to investigate the proposed phenomenon. After confirming the validity and reliability of the data obtained, we employed structural equation modeling to evaluate the relationship between risk perception and heuristic biases. We used process macro to scrutinize the moderating effect of sex and age in the mentioned constructs. The study demonstrates that risk perception affects three heuristic biases (i.e. anchoring, representativeness, and availability bias). Further, the outcome exhibits that the sex of a person moderates the relationship between risk perception and availability bias. The study could be helpful for individual investors, investment advisors, and policymakers. The investment advisor can gain insights into the different mental shortcuts their customers take to guide them appropriately. Governments and relevant policymakers can gain insights into the roadblocks to rational investment decisions to ensure the correct appraisal of the stock market. The present study fills the necessity to realize the effect of investors’ risk perception on decision-making heuristics and the moderating role of sex and age in the phenomenon.