RISK PERCEPTION AND FINANCIAL DECISION MAKING

Abstract

Financial decisions play a crucial role in personal financial well-being and economic stability, especially in an environment of market volatility, financial innovation, and increased individual responsibility for financial outcomes. Previous research has extensively explored borrowing, saving, and investment behaviors; The current literature on the overall effect of behavioral and perceived variables on financial choices is still scattered; the literature gap that this research addresses is the investigation on risk perception as a mediator. Linking behavioral biases, financial literacy, and individual traits to financial decision-making.  Based on prospect theory and risk perception theory, this study employs a quantitative explanatory research design and uses cross-sectional survey data collected from individual financial decision-makers for analysis. This study employed Partial Least Squares Structural Equation Modeling (PLS-SEM) to examine the direct and indirect relationships among the constructs. The results showed that behavioral biases and personality traits significantly influence individuals' risk perception, while financial literacy improves the accuracy of risk assessment. Risk perception, in turn, has a strong and significant impact on financial decision-making, and quantitatively moderates the relationship between antecedents and financial outcomes.  The research findings confirm that financial decisions are influenced more by the perceived danger of risk than by simply relying on factual information. Financial choices made by people are more motivated by perceived risk as opposed to the objective information. The mediating variable of risk perception in behavioral biases, financial literacy, and personality traits is imperative, and this is the reason why specific literacy and risk awareness training programs should be conducted.