Abstract:
This study examines the effects of psychological factors on the investment decisions with a focus on the mediating role of financial anxiety. The study is based on behavioral finance framework and examines the impact of loss aversion, financial literacy, and herding on investment decisions. In the present study, a structured questionnaire was employed to gather data from 250 investors in Islamabad and Rawalpindi, Pakistan. The study adopts a quantitative research design to analyses the relationship between the various variables using reliability analysis, regression analysis, and mediation analysis. The results show that psychological biases play an essential role in determining investment choices. This is because loss aversion makes people become cautious in their investment decisions, and they end up not investing in projects that can give them better returns. Financial literacy helps in making improved decisions on investments while on the other hand herding behavior depicts investors copying the decisions of other investors. This paper finds that financial anxiety acts as a significant moderator, amplifying the influence of loss aversion and herding behavior and reducing the beneficial influence of financial literacy on investment choices. The study emphasizes numerous psychological factors that affect the investors in emerging markets such as Pakistan due to scarce resources and lack of market knowledge. This underlines the need to encourage financial literacy and provide coping mechanisms such as stress reducing measures to counter the effects of financial stress. Overall, this study enhances understanding of the psychological factors that influence investments and provides suggestions for enhancing decision-making in this area. Finally, the dissertation offers directions for future research, insisting on the further identification of other psychological biases and on replication of the research across different samples and countries
