The effect of financial literacy on behavioral biases of individual investors in the Egyptian stock exchange

Abstract

The purpose of this paper is to examine how the dimensions of financial literacy could affect the behavioral biases of individual investors in the Egyptian stock exchange. The study examines the data collected from 403 individual investors in Egypt. The findings revealed the presence of some kinds of behavioral biases among individual investors in the Egyptian stock exchange, which could be categorized into three main categories: belief perseverance biases, information processing biases, and emotional biases (Pompian, 2012). This supports the view that individual investors do not necessarily act rationally. The findings also support the general view that financial literacy has a negative effect on behavioral biases; however, the effect differs between the categories of the behavioral biases, with the most effect on information processing biases, moderate effect on belief perseverance biases, and low effect on emotional biases. Also, this study indicated that the impact of financial literacy on behavioral biases is greater on females than males (Baker, Kumar, Goyal, & Gaur, 2019). Financial intermediaries and consultants can possibly become more effective by understanding the decision-making processes of individual investors. This study adds to the limited academic research that attempted to tackle the impact of financial literacy on the categories of behavioral biases

Impact of financial literacy on consumer financial behavior: A systematic review and research agenda using TCCM framework

“…The reported relative frequencies relate the absolute number of studies that feature a given industry or country to the total number of individual studies (not articles). Malik, 2023; Kim et al, 2019;Youssef et al, 2021) Banking Sector (Andreou & Anyfantaki, 2021;Khandelwal et al, 2022;Robb, 2011) and Investment Sectors (Adil et al, 2022a(Adil et al, , 2022bHüsser, 2015;Legenzova & Leckė, 2024;Zhang et al, 2023). This emphasis is largely due to the substantial number of studies centered around these domains.…”

“…Adding to the discourse, Youssef et al (2021) expounded upon behavioral finance, contending that it operates on the premise that individuals typically deviate from rational behavior. Their approach to portfolio planning adheres to the tenets of behavioral portfolios, while the theory fundamentally questions the efficiency of markets.…”

“…“Investment behavior,” “stop‐loss and take‐profit habits,” and “trust” function as practical mediators, reflecting the translation of financial literacy into tangible actions and behaviors. “Financial literacy” itself serves as a mediator, influencing other variables like “confidence” or “investment behavior,” thereby shaping consumer actions (Adil et al, 2023; Morris et al, 2022; Tang & Baker, 2016; Yong et al, 2018; Youssef et al, 2021).…”

A systematic review on behavioral biases affecting individual investment decisions

“…Such individual investors are unable to appropriately account for inflation or deflation. Investors under the influence of self-attribution bias and conservatism bias attribute their financial achievements to their hard work and rational decisions (Hsu et al, 2021;Mushinada and Veluri, 2018;Youssef et al, 2021). At times this leads to over-trading which does not give the required return.…”

“…Due to anchoring bias and hindsight bias, individual investors start assuming the existence of relationships in financial markets that do not exist in reality. Thus, as a result, end up taking wrong investment decisions (Madaan and Singh, 2019;Raut et al, 2020;Youssef et al, 2021). Subsequently, due to the illusion of control bias and herding bias, investors are unable to realize that they have no control over the activities of financial markets (Hsu et al, 2021;Sumathy and Nabeel, 2020).…”