How financial literacy moderate the association between behaviour biases and investment decision?

Abstract

PurposeThe purpose of the study is to examine the impact of behavioural biases (i.e. overconfidence, risk-aversion, herding and disposition) on investment decisions amongst gender. The authors further examine the moderation effect of financial literacy in the relationship between behaviour biases and investment decisions amongst gender.Design/methodology/approachThe study considered a cross-sectional research design. For this survey, the data have been collected through a structured questionnaire from 253 individual investors of the Delhi-NCR region. To analyse the validity and reliability, the Pearson correlation and Cronbach's alpha test have been taken into account respectively. For testing the hypothesis, hierarchical regression analysis has been used in the study.FindingsThe results of the study reveal that amongst male investors, the influence of risk-aversion and herding on investment decision was negative and statistically significant, while the influence of overconfidence on investment decision was positive and significant. However, the influence of disposition was found statistically insignificant. The results stated that amongst female investors the effect of risk-aversion and herding on investment decision was negative and statistically significant. However, the effect of overconfidence and disposition was statistically insignificant influence the investment decision. It has been observed that financial literacy has significantly influenced investment decisions amongst male and female investors. The results of the interaction effect amongst male investors stated that the interaction between overconfidence and investment decision was significantly influenced by financial literacy. However, the interaction of financial literacy with the remaining three biases, i.e. risk-aversion, herding and disposition was found insignificant. The results for the interaction effect of financial literacy with overconfidence, risk-aversion, disposition and herding were found statistically significant amongst female investors.Research limitations/implicationsBased on this present research finding, the study is more productive for the portfolio manager and policymakers at the time of making an investment portfolio for the investors based on their behavioural biases. The study recommends that investors need training programmes, workshops and seminars that enhance financial literacy and financial knowledge of investors which helps them to overcome the behavioural biases while making an investment decision.Originality/valueThe current study aims to explore whether several behavioural biases can affect investment decisions amongst gender. Moreover, the authors would like to examine whether these associations are moderated by financial literacy. In this sense, financial literacy might also show a substantial part in the prediction of investments. The current study might be of the first study that examines the moderation effect financial literacy amongst male and female investors.

The Effect Between Behavioral Biases and Investment Decisions Moderated by Financial Literacy on the Millennial Generation in Jakarta

“…Overconfidence bias is often experienced by novice investors who want to quickly get profits in investing. Research conducted by Adil et al (2021) found that overconfidence bias does not have a significant effect on investment decisions for investors in India. Primary et al (2020) conducted research on the Indonesia Stock Exchange and found that overconfidence bias does not have a significant effect on investment decisions for investors on the Indonesia Stock Exchange.…”

“…Economic theory says that the readiness of an investor is to be rational where they will first evaluate all available information before making a decision (Qasim et al, 2019). Research conducted by Adil et al (2021) stated that there is an effect of herding bias on investors' decisions in taking investments.…”

“…Decision making is a situation that covers all aspects, involves various dimensions and the process of choosing from a variety of available options. Several studies have stated that an investor tends to make investment decisions that are not fixed regarding their investment, resulting in a less favorable investment performance (Adil et al, 2021).…”

“…Much of the literature states that financial literacy is now documented worldwide as an important component of economic and financial stability. Financial literacy can help in managing financial resources effectively (Adil et al, 2021).…”

Indonesian Stock’s Influencer Phenomenon: Did Financial Literacy on Millennial Age Reduce Herding Behavior?

“…[21] explained that good financial literacy gave significant differences in financial behavior. Financial literacy helped investors to deny irrelevant information [23], gave an investor the ability to analyze in choosing the financial product [4] and isolated investors from herding behavior [2]. Low levels of financial literacy caused behavioral bias because the decision was influenced more by psychology than by knowledge [18].…”