HERDING BEHAVIOR AND RISK APPETITE AMONG RETAIL INVESTORS IN PAKISTAN: A MODERATED MEDIATION STUDY

Abstract

The rapid expansion of mobile trading applications has significantly changed the investment behavior of retail investors by providing easy access to stocks, forex, and cryptocurrency markets. However, this digital access has also increased the influence of behavioral biases on investment decision-making. This study examined the effect of herding behavior on risk appetite among retail investors in Pakistan, with anchoring heuristic as a mediating variable and overconfidence as a moderating variable. Data were collected from 335 retail investors who were active users of mobile trading applications and were investing or attempting to invest in stocks, forex, and cryptocurrencies. A structured questionnaire was used to collect responses, and the data were analyzed through SPSS using reliability, validity, regression, mediation, moderation, and moderated mediation analyses. The findings revealed that herding behavior positively influenced investors’ risk appetite, indicating that retail investors became more willing to take financial risks when they followed the actions and opinions of others. The results further showed that anchoring heuristic mediated the relationship between herding behavior and risk appetite.  Furthermore, herding behavior was positively associated with risk appetite both directly and indirectly via anchoring heuristic, which was reinforced by overconfidence. The study adds to the behavioral finance body of evidence by providing a conceptual model of the interaction among social influence, cognitive bias and investor confidence and how they all collectively influence risk-taking in digital investment platforms. The findings also provide practical insights for investors, financial advisors, trading platforms, and policymakers to promote more informed and responsible investment decisions.