Impact of Financial Literacy and Behavioural Biases on Investment Decision-making

Abstract

Investors’ financial literacy entails making sound investment decisions and the behavioural biases or irrational behaviour in decision-making that are collectively formed by heuristic bias, framing effect, cognitive illusions and herd mentality factors. The present study examines the combined impact of financial literacy and behavioural biases on investment decisions. A questionnaire was developed using Likert scaling technique to elicit study variables and collected data was analysed using SEM technique. The results showed that heuristic bias had a significant positive association with the creation of behavioural bias in decision-making. However, the framing effect, cognitive illusions and herd mentality have negative associations in the formation of behavioural biases. Further, investors often practice and follow heuristic biases rather than other irrational techniques for making investment decisions. Therefore, the financial literacy of individual investors has a significant impact on affecting stock market investment decisions.

A systematic review on behavioral biases affecting individual investment decisions

“…Future research can further empirically analyze the effect of various demographic factors like gender to understand the gender-wise investment decision-making behavior of individual investors. Only a few researchers in the current study context have performed mediation and moderation holistically (Ahmad, 2020; Suresh, 2021), although data analysis tools like mediation and moderation have gained considerable attention. Hence, future research can be conducted by incorporating mediation and moderation analysis in a single framework.…”

“…Mental accounting bias causes arbitrary decision-making as the investors are unable to process the required information timely (Ahmad, 2021) which leads to the selection of nonprofitable investments (Baker et al, 2018). Framing bias amplifies the return expectations of investors and they feel a sense of disappointment in not achieving them (Suresh, 2021;Fehrenbacher et al, 2018). This brings down their confidence and optimism for future trading.…”

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

“…The major goal of the research was to evaluate the relationship between students' financial literacy and the cognitive biases they exhibit while making investment decisions in Germany. The previous studies that focused on similar topics majorly investigated these variables within other geographic populations such as India (Suresh, 2021), Turkey (Özen and Ersoy, 2019) and Pakistan (Rasool and Ullah, 2020), which created an opportunity for JM2 19,3 the researcher to fulfill the research gap by providing evidence from Germany. Furthermore, the research adopted simple yet coherent theoretical frameworks as a basis for the study that, therefore, can be used by future researchers to investigate the variables on a different research sample or even while adopting other research methods.…”

“…Financial literacy plays a vital role in contributing to one’s financial knowledge, which ultimately helps in making investment decisions (Suresh, 2021). Essentially, financial literacy is a combination of skills and knowledge necessary to undertake informed financial decisions and increase the likelihood of making a lucrative decision (OECD, International Survey of Adult Financial Literacy, 2020).…”

Sharia financial literacy: Decoding the nexus of civil Servants' investment choices

“…This includes the ability to understand financial concepts and risks, which is an essential prerequisite for making sound financial decisions. Enhanced financial literacy, in turn, correlates with improved financial behavior and attitudes, significantly influencing investment decision-making (Suresh, 2021). Conversely, a lack of financial literacy hinders individual access to the financial institution system, potentially reducing overall well-being.…”