Cognitive and Emotional Drivers of Risk Perception and Financial Success: Pakistan Stock Market Perspective

This study investigates the impact of cognitive and emotional biases; herding behavior, loss aversion, cognitive biases, and overconfidence on risk perception and financial performance in the Pakistani stock market. Employing Structural Equation Modeling (SEM) to analyze data from 248 individual investors, the findings reveal that herding behavior, cognitive biases, and overconfidence significantly influence risk perception, whereas loss aversion has an insignificant effect. Risk perception mediates the relationship between psychological factors and financial performance, highlighting its critical role in investment outcomes. The study underscores the importance of addressing behavioral biases to improve decision-making and economic success. Practical implications include the need for investor education and strategies to mitigate biases, thereby promoting rational investment behavior in emerging markets like Pakistan. This research contributes to the behavioral finance literature by providing localized insights into the psychological drivers of investor behavior and their implications for financial performance.