Impact of Risk Perception, Overconfidence Bias and Loss Aversion on Investment Decision-Making

This study investigates how overconfidence, loss aversion, and perceptions of risk affect investment decisions in the Nepal Stock Exchange. Making investment decisions is a complicated process that is influenced by several psychological elements. Using structured questionnaires, data was collected from individuals actively involved in stock trading. Employing a quantitative approach, the research utilizes a descriptive research design and conducts multiple regression analyses. Findings reveal that risk perception significantly impacts investment decisions, with individuals perceiving higher risks displaying a greater propensity to invest in high-risk assets. Additionally, overconfidence bias positively influences investment decisions, indicating that individuals with higher confidence levels tend to favour riskier investments. Loss aversion bias plays a significant role, as individuals averse to losses prefer investments that minimize potential losses. These results underscore the substantial impact of behavioural biases on investment decision-making, with overconfidence bias exhibiting the most significant influence, followed by risk perception and loss aversion bias. The findings emphasize the importance of psychological biases in understanding investment behaviour. Investors, financial advisors, and policymakers can all benefit from understanding how risk perception, overconfidence, and loss aversion affect investment decisions. Investors can improve portfolio performance, lessen the chance of financial crises, and make more informed decisions by identifying and correcting these biases. Therefore, to encourage more effective and efficient investment decision-making processes, it is critical to increase awareness of these biases and develop measures to mitigate their negative consequences. Conducting more studies to examine these biases’ additional dimensions and how they affect investment decisions is advisable.