THE IMPACT OF HERDING BEHAVIOR AND OVERCONFIDENCE BIAS ON INVESTMENT DECISIONS OF GEN Z INVESTORS IN SRI LANKA: THE MEDIATING ROLE OF RISK PERCEPTION

Abstract

In the current era of financial democratisation, Generation Z (Gen Z) investors in Sri Lanka are increasingly participating in the stock market, driven by digital platforms and social media influence. However, this participation often occurs amid cognitive biases such as herding behaviour and overconfidence, which can distort rational investment decision-making. This research aims to investigate the influence of herding behaviour and overconfidence bias on the investment decisions of Gen Z investors in Sri Lanka, with a specific focus on the mediating role of risk perception. The study employs a quantitative research approach and collects primary data through a structured online questionnaire using a seven-point Likert scale. The survey was conducted among a sample of 150 Gen Z investors representing diverse investment backgrounds. Statistical analyses, including correlation, regression, and structural equation modelling (SEM), were conducted using SPSS and SMART PLS to examine the relationships between variables. The results reveal that both herding behaviour and overconfidence bias significantly impact investment decisions, and risk perception plays a mediating role in these relationships. Findings from the study provide valuable insights into behavioural finance, particularly the cognitive patterns of young investors in emerging markets like Sri Lanka. The implications of this research extend to financial educators, policymakers, and institutions seeking to develop targeted interventions that promote informed investment practices among Gen Z. By enhancing awareness of psychological biases and risk perception, the study contributes to fostering more responsible and strategic financial behaviour among young investors in the country.