Pearson admits he understands if Vardy decides he wants to move on if the opportunity presents itself, but predicts the striker will stay at Leicester.
Vardy scored 19 goals for Leicester in 2015, earning an England call-up, and set a Premier League record for scoring in consecutive matches earlier this season.
Pearson said: "I would encourage him to stay, but it’s not for me to do that.
"You’ve got to protect your own interests, but there comes a point when you have to recognise when to keep hold of a player and when they no longer want to be there.
"A player’s state of mind is key. I think Vardy will stay there because he’s a fantastic lad as well as a player, and they’re such a strong group."
Pearson believes Vardy is not the type of player to go on strike to force a move, and is wholly committed to the club.
He was Vardy's manager at Leicester until he was fired in the summer, with the club enjoying unprecedented Premier League success under new boss Claudio Ranieri.
Vardy has an opportunity at Leicester, who currently sit in third in the Premier League, to help them qualify for Champions League football, and leaving in the midst of this exciting season could prove to be a mistake with Euro 2016 on the horizon.