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Original Article | Volume 2 Issue 4 (ACR, 2025) | Pages 478 - 495
Role Of Behavioural Bias on Investment Decisions of Equity Investors: An Sem-Pls and Nca Approach
 ,
1
Department of Commerce, University of Delhi.
2
Shri Ram College of Commerce, University of Delhi
Under a Creative Commons license
Open Access
Abstract

Behavioral biases play a critical role in shaping the investment decisions of equity investors, often leading to deviations from rationality as posited by traditional financial theories. This study investigates the influence of four major categories of psychological biases—heuristic bias, prospect bias, herding bias, and the disposition effect—on the investment decision-making (IDM) processes of equity retail investors. Employing Structural Equation Modeling (SEM) combined with Partial Least Squares (PLS) and Necessary Condition Analysis (NCA), the research evaluates both the relative and individual impacts of these biases on IDM. Data was collected from 704 equity investors with at least five years of active portfolio management experience, using a rigorously validated survey instrument. The findings reveal that heuristic biases have the highest impact on IDM, followed by prospect biases, herding bias, and the disposition effect. SEM results show a strong explanatory power with 56.6% variance in IDM accounted for by these biases. Complementary NCA results highlight the sequential necessity of prospect and herding biases before the effects of heuristic bias and disposition effect emerge. This study contributes to behavioral finance by presenting a robust model integrating SEM-PLS and NCA to quantify bias impacts and proposing a framework to mitigate these effects. Practical implications include strategies for enhancing investor decision-making through tailored financial education and tools for bias recognition and management. These insights are valuable for academics, policymakers, and practitioners seeking to reduce the detrimental impact of biases on equity market efficiency

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