Impact of Overconfidence Bias on Investment Decision Making: Mediating Role of Risk Tolerance among NEPSE Investors
DOI:
https://doi.org/10.67556/3fws8j75Keywords:
Overconfidence bias, risk tolerance, investment decision-making, behavioral finance, NEPSEAbstract
Based on the behavioral finance theory, this study aims at investigating the role of overconfidence bias in the investment behavior of individual investors who transact on Nepal Stock Exchange (NEPSE) and whether risk tolerance acts as a mediator between the two. The research design adopted was quantitative, cross sectional and the primary data are collected using a structured questionnaire to the active retail investors of NEPSE. Correlation, multiple regression, and mediation analysis (Hayes' PROCESS macro) were used to analyze the data in SPSS. The results suggest that the relationship between overconfidence bias and investment decisions is direct, and that the relationship between overconfidence bias and investment decisions is partially mediated by risk tolerance. Finally, the study reveals that overconfidence is an important behavioral factor in the investment decision-making process in the Nepalese capital market, both directly and indirectly via the investors' willingness to take risks. The findings indicate that there is a need for a better targeted investor education and regulatory awareness program to promote more rational investment behavior of NEPSE investors.
##plugins.themes.default.displayStats.downloads##
References
Abdin, ul Syed Zain, Fiza Qureshi, Jawad Iqbal and Sayema Sultana
(2022). “Overconfidence bias and investment performance: A me-
diating effect of risk propensity.” In: Borsa Istanbul Review 22.4,
pp. 780–793. 10.1016/j.bir.2022.03.001.
Gurung, Rajesh, Rewan Kumar Dahal, Binod Ghimire and Nis-
chal Koirala (2024). “Unraveling Behavioral Biases in De-
cision Making: A Study of Nepalese Investors.” In: Invest-
ment Management and Financial Innovations 21.1, pp. 25–37.
10.21511/imfi.21(1).2024.03.
Aryal, Nikhil (2021). “Behavioral Biases and Nepali Investors: A
Study on the Effect of Biases on the Investment Performance.”
SSRN Electronic Journal, working paper. 10.2139/ssrn.3977747.
Kandel, M., B. J. Basnet and M. Aryal (2024). “Impact of Behav-
ioral Biases on Investment Decisions.” In: DEPAN 6.1, pp. 68–80.
https://www.nepjol.info/index.php/depan/article/view/75495.
Awalakki, Manjunath (2023). “Overconfidence Bias and
Its Effects on Portfolio Decisions.” In: International
Journal of Creative Research Thoughts 11.8, g74–g83.
https://www.ijcrt.org/papers/IJCRT2308664.pdf.
Madaan, Geetika and Sanjeet Singh (2019). “An Analysis of
Behavioral Biases in Investment Decision-Making.” In: In-
ternational Journal of Financial Research 10.4, pp. 55–67.
10.5430/ijfr.v10n4p55.
Barber, Brad M. and Terrance Odean (2001). “Boys Will Be
Boys: Gender, Overconfidence, and Common Stock Invest-
ment.” In: Quarterly Journal of Economics 116.1, pp. 261–292.
10.1162/003355301556400.
Pandit, Kul Chandra (2021). “Trading Practice and Behavioral
Biases of Individual Investors in Nepalese Stock Market.”
In: Nepalese Journal of Management Research 1, pp. 55–62.
10.3126/njmgtres.v1i0.37323.
Broekema, Stijn P. M. and Marc M. Kramer (2021). “Overconfi-
dence, Financial Advice Seeking and Household Portfolio Under-
Diversification.” In: Journal of Risk and Financial Management
14.11, p. 553. 10.3390/jrfm14110553.
Sattar, Muhammad Atif, Muhammad Toseef and Muhammad
Fahad Sattar (2020). “Behavioral Finance Biases in Invest-
ment Decision Making.” In: International Journal of Ac-
counting, Finance and Risk Management 5.2, pp. 69–75.
10.11648/j.ijafrm.20200502.11.
Chaudhary, Manoj Kumar (2025). “Impact of Risk Perception,
Overconfidence Bias and Loss Aversion on Investment Decision-
Making.” In: American Journal of Financial Technology and In-
novation 3.1, pp. 14–22. 10.54536/ajfti.v3i1.4061.
Statman, Meir, Steven Thorley and Keith Vorkink (2006). “Investor
Overconfidence and Trading Volume.” In: Review of Financial
Studies 19.4, pp. 1531–1565. 10.1093/rfs/hhj032.
Dangol, J. and R. Manandhar (2020). “Impact of Heuristics on In-
vestment Decisions: The Moderating Role of Locus of Control.”
In: Journal of Business and Social Sciences Research 5.1, pp. 1–
14. 10.3126/jbssr.v5i1.30195.
DOI: https://doi.org/10.XXXXX/ijmr.v1i1.XXXXX
Zalaghi, Hasan and Mahdi Khazaei (2016). “The Role of Deductive
and Inductive Reasoning in Accounting Research and Standard
Setting.” In: Asian Journal of Finance & Accounting 8.1, pp. 23–
37. 10.5296/ajfa.v8i1.8148.
