The mediating effect of the COVID-19 pandemic on heuristic techniques and cognitive biases on investment decision-making

Williams Kwasi  Peprah; Christopher Ampadu  Kwakwah-Oppong; Francis  Osei-Kuffour; Lenny Leorina  Evinita

doi:10.33094/ijaefa.v18i2.1400

Authors

Williams Kwasi Peprah Department of Accounting, Economics and Finance, Andrews University, Berrien Spring, Michigan State, USA. https://orcid.org/0000-0002-6802-2586
Christopher Ampadu Kwakwah-Oppong Department of Accounting, Economics and Finance, Andrews University, Berrien Spring, Michigan State, USA. https://orcid.org/0009-0005-9600-1976
Francis Osei-Kuffour School of Business, Valley View University, Ghana. https://orcid.org/0000-0002-9714-6238
Lenny Leorina Evinita Faculty of Economics, Universitas Negeri Manado, Indonesia. https://orcid.org/0000-0003-2302-9079

DOI:

https://doi.org/10.33094/ijaefa.v18i2.1400

Keywords:

Behavioral finance, Cognitive biases, COVID-19 pandemic, Heuristics techniques, Investment decision-making.

Abstract

US investors’ behavioral finance and investment decision-making approach became a concern during the COVID-19 pandemic era as the capital market crashed. The study used mediation analysis to explain how or why the COVID-19 pandemic intervened in the causal association of behavioral finance concepts of heuristic techniques and cognitive biases on their investment decision-making. This causal research design study was based on 500 snowball-sampled US investors who answered self-constructed, validated, and reliability-tested Likert-scale quantitative variables measured through a first-party data collection approach. The results showed that the COVID-19 pandemic was a specific moderate to partial significant mediator on the low positive significant relationships between heuristic techniques and investment decision-making, and the COVID-19 pandemic was a specific moderate to full significant mediator on the low positive not significant relationships between cognitive biases and investment decision-making among US investors. From the point of view of behavioral finance, the COVID-19 pandemic situation clearly and significantly demonstrated how US investors used 75.6% heuristics techniques (calculated guesses based on prior knowledge) and 87.5% cognitive biases (unintentional errors in their worldview) to cause the crash of the capital market. These findings confirm the rational expectations theory.