When Bias Drives Investment Decisions: The Mediating Role of Risk Perception

This research explores how heuristic biases impact investment decisions, with risk perception acting as a mediating factor. Based on Behavioral Finance Theory, the study analyzes the roles of overconfidence bias, availability bias, anchoring bias, representativeness bias, and gambler's fallacy. Data were gathered from 400 retail investors in Indonesia's capital market and scrutinized through Partial Least Squares Structural Equation Modeling (PLS-SEM). The results indicate that availability bias, representativeness bias, and gambler's fallacy have a significant effect on risk perception, while overconfidence bias and anchoring bias do not demonstrate such influence. Furthermore, risk perception has a positive impact on investment decision-making; additionally, both overconfidence bias and availability bias show significant direct effects. Mediation analysis reveals partial mediation for availability bias, full mediation for representativeness bias and gambler's fallacy, direct-only non-mediation for overconfidence bias, and no-effect non-mediation for anchoring bias. These outcomes underscore the critical role of risk perception as a psychological mechanism connecting heuristic biases to investment choices and suggest practical strategies for enhancing investor decision-making quality.