Behavioral Biases and Investment Decisions: Mediating Role of FOMO and Moderating Role of Information Asymmetry among Pakistani Retail Investors

Abstract

Purpose: The purpose of this study is to examine the mediating role of Fear of Missing out (FOMO) between behavioral biases (anchoring and optimism) and investment decisions, while also testing the moderating influence of information asymmetry on these mediated relationships among Pakistani retail investors. Design/methodology/approach: A quantitative cross-sectional approach was adopted, gathering data through a structured questionnaire from 372 individual retail investors actively trading on the Pakistan Stock Exchange. The data were analyzed using PROCESS Macro (Models 4 and 14) with bootstrapping techniques to test the proposed moderated-mediation framework. Findings: The findings indicate that anchoring bias and optimism bias significantly predict investment decisions. FOMO partially mediates both relationships, explaining approximately 46% and 50% of the total effects, respectively. Information asymmetry moderates these mediating pathways, with indirect effects being significantly stronger when investors perceive higher information asymmetry. The model accounts for 38.7% of the variance in investment decisions. Research limitations/implications: The cross-sectional design limits causal inferences, and the reliance on self-reported measures may introduce common method variance. Future research should employ longitudinal designs and objective behavioral measures to strengthen causal claims. Practical implications: The study offers valuable insights for investors, financial advisors, and policymakers, emphasizing the need for self-awareness, transparent communication, financial literacy initiatives, and behavioral interventions to promote rational investment decisions. Originality/value: This study presents a novel moderated-mediation framework that integrates cognitive biases, emotional responses, and informational conditions in a single model. It contributes to the behavioral finance literature by providing empirical evidence from an emerging market context, thereby extending the generalizability of behavioral finance theories beyond developed economies.

Keywords: Anchoring bias, Optimism bias, FOMO, Information asymmetry, Investment decisions, Pakistan Stock Exchange, Behavioral finance.