Abstract:
Behavioural finance has become increasingly significant in explaining how
psychological biases shape investor behaviour in emerging markets. Despite global
attention, limited research has examined how these dynamics affect Generation Z
(Gen Z) investors in Sri Lanka. This group is digitally fluent, highly engaged in online
trading, and particularly vulnerable to cognitive distortions. This study addresses this
gap by investigating the impact of herding bias and overconfidence bias on Gen Z
investment decisions, with risk perception tested as a mediating variable. Adopting a
quantitative approach, primary data were collected from 150 Gen Z investors through
a structured online questionnaire using a seven-point Likert scale. The sample size
was considered sufficient for structural equation modelling and representative of the
growing youth investor segment in Sri Lanka. Data were analysed, employing
correlation, regression, and SEM techniques to assess direct and mediated
relationships. The findings revealed that both herding bias and overconfidence bias
exert significant positive effects on investment decisions. This study contributes to
behavioural finance theory by providing empirical evidence on the mediating role of
risk perception in an underexplored emerging market context. Practically, the results
underscore the need for targeted interventions, such as financial literacy programmes,
investor awareness campaigns, and regulatory guidelines, to mitigate the negative
effects of cognitive biases among young investors. Contextually, it enriches the
understanding of how Sri Lanka’s Gen Z navigates investment decisions, offering
insights for policymakers, educators, and financial institutions aiming to foster more
informed and resilient market participation.
