Exploring the missing link:Financial literacy and Cognitive biases in Investment Decisions

Abstract

Purpose The purpose of this study is to explore and understand, how strong financial literacy influences the cognitive biases of students in Germany while investing. Second, it also evaluates the most influential cognitive biases that students encounter when undertaking their investment decisions within this environment. Design/methodology/approach A quantitative approach is used to assess the relationship between financial literacy and students’ investment-related cognitive biases by using the frameworks proposed by Clercq (2019) and Pompian (2012). Findings The results advocate that the students’ financial literacy positively impacts their cognitive biases within the investment process. It additionally revealed the most significant biases regarding students’ investment decision-making and proposed the possible reasons behind their behavioral distortions. Research limitations/implications The study provides a detailed review of the behavioral tendencies of the younger generation while investing and creates recommendations for prospective researchers. Originality/value This research lies at the junction of the behavioral finance field, suggesting that it assists in developing a theoretical framework of cognitive biases within students’ financial decisions. Furthermore, it serves as an addition to the financial management subject course that would provide valuable insights about, first and foremost, financial literacy and subsequently, the theory behind the investment process.