Investor Sentiments Influencing Investor Decisions: The Mediating Role of Behavioral Biases

Abstract

This paper explores the impact of investor sentiments on decisions within the Pakistan Stock Exchange (PSX), with a focus on mediating behavioral biases like the herding effect, anchoring effect, and disposition effect. Employing a deductive approach grounded in behavioral finance theory, the study utilized quantitative methods and panel data analysis on data collected from 182 nonfinancial firms listed on the PSX. Hypotheses were rigorously examined through correlation analysis and both simple and hierarchical regression analyses, with the Baron and Kenny method employed to assess the mediating role of behavioral biases. The findings reveal that the herding and anchoring effects fully mediate the relationships between investor sentiments and investment decisions. Simultaneously, the disposition effect exerts a direct and significant influence while also partially mediating the connection between investor sentiments and decisions, indicating its moderating role. These results underscore the influence of sentiments and behaviors on investor decisionmaking, suggesting that policymakers should integrate socio-psychological factors into financial models. Regular sentiment surveys can aid in predicting market trends and help regulatory authorities manage noise trader disturbances in the market. This holistic approach can enhance market stability and efficiency.