Abstract
Unlike previous studies that examine the effect of behavioral biases on investor decision-making,this study explores the root causes of behavioral biases and examines the mediating role ofbehavioral biases in the relationship between different types of emotions and investment decision-making. The cognitive theory of depression, attentional control theory, and prospect theorytogether provide the foundation and anticipate that stress, depression, anxiety, and socialinteraction are the major sources of cognitive mistakes that, in turn, affect investment decision-making. Model testing relies upon the data collected from 252stock investors trading in differentstock exchanges of Pakistan; in order to test the hypothesized relationship, structural equationmodeling has been used. Depression is a major source of loss aversion bias. Anxiety is a strongsource of herding. Stress is a major source of representative bias. Social interaction is a root causeof overconfidence. Loss aversion bias, herding, and overconfidence fully mediate the relationshipbetween depression, anxiety, social interaction, and investor decision; however, anxiety has thestrongest impact on investor decision via herding bias, while stress has both insignificant direct andindirect effect on investment decision-making.
Keywords: Sources of biases, self-efficacy, behavioral pattern, investment decision.