Through the lens of rational expectations theory, the study investigates the impact of environmental, social, and governance (ESG) awareness, economic expectations, and cognitive biases (including availability and confidence bias) among investors in Malaysia. This research seeks to elucidate the decision-making process in a turbulent financial landscape by analyzing the interaction of these components, with risk perception serving as the primary mediator and to strengthen and establish a consistent understanding of this concept across similar studies.
A total of 450 respondents’ data was gathered using standardized questionnaires administered to retail investors in Klang Valley, Malaysia. We ensured the reliability and validity through discriminant and convergent validity test. The research employed partial least squares structural equation modeling (SEM) using SmartPLS 4.0 to evaluate the intricate correlations among the variables, including the mediating influence of risk perception.
The SEM results demonstrates that economic expectation, availability bias, and risk perception have significant impact on investment decision-making behavior, which is in line with the results of various studies done previously, thus providing consistency in this research context. However, our study revealed that investors’ awareness of ESG does not shape their perception of risks, thereby impacting their investment decisions. Furthermore, our findings indicate that risk perception significantly mediates the relationship among economic expectation, availability bias, and investment decision.
Our findings have value added to existing research by highlighting how risk perception plays a key role in investment decisions in Malaysia. It improves existing theories such as rational expectations theory including knowledge of ESG consciousness, economic expectation, and cognitive errors as important factors that influence how investors see and respond to risk. To our knowledge, very limited research has addressed this intersection, as we introduce new instruments for the risk perception model.