FINANCIAL RISK PROPENSITY AND INVESTMENT DECISIONS: AN EMPIRICAL ANALYSIS USING BEHAVIOURAL BIASES

The study aims to determine the influence of behavioural biases on financial risk propensity. It also seeks to examine the effect of financial risk propensity on investment decisions and its mediating role between behavioural biases and investment decisions. Data was collected from 203 respondents through a survey using a purposive sampling technique targeting investors. Structural equation modelling was used to validate the proposed model and test the hypotheses formulated in the study. It has been found that dimensions of behavioural bias, such as prospect, herding, and heuristics, significantly impact financial risk propensity, which in turn significantly influences investment decisions. Additionally, financial risk propensity was found to mediate the impact of these behavioural biases on investment behaviour. The study highlights the importance of key behavioural biases in shaping individual investor behaviour, shifting it from rationality to irrationality. This study is the first of its kind to evaluate the mediating role of financial risk propensity concerning investment decisions in emerging economies like Jammu and Kashmir. Apart from the behavioural factors considered in this study, financial advisors can incorporate additional factors to explain the variance in both financial risk propensity and investment decisions. The results can help develop more realistic investment valuation models, considering the revised risk-return expectations of investors who deviate from the traditional concept of rational utility maximisers. Further, it is also expected to provide useful insights to investors at large and investment experts in particular, a step towards the development of customised portfolios matching the individual risk profile. The present study will also help in policy formulation and add value to the existing literature.