How can Financial Literacy Mitigate the Relationship between Behaviour Biases and Investment Decision-making? Evidence from Pakistan Stock Exchange

Abstract

The study aims to analyse the influence of behavioural biases, such as overconfidence, risk aversion, and herding on investment decision-making. The authors additionally investigate how financial literacy moderates the association between behaviour biases and investing decision-making. The study employed a cross-sectional research design. The survey gathered data from 284 individual investors of Pakistan Stock Exchange (PSX) using a standardized questionnaire. The validity and reliability of the data were assessed using the Cronbach's alpha test, respectively. The study employed regression analysis to test the hypothesis. The study findings indicate that risk-aversion and herding have a negative and statistically significant impact on investment decision-making among investors. On the other hand, overconfidence has a positive and statistically significant influence on investment decision-making. Research has shown that financial literacy has a notable impact on the investment choices made by investors. The statistical analysis revealed that the interface effect of financial literacy with overconfidence, risk aversion, and herding was shown to be significant among individual investors. According to this current research, the study is particularly useful for portfolio managers and politicians when creating investment portfolios for investors, taking into account their behavioural biases. The study suggests that investors should participate in training programmers and seminars to improve their financial literacy and understanding. This would enable them to effectively address behavioural biases while making investment decision-making. The present study seeks to investigate the potential impact of various behavioural biases on investment decision-making. Additionally, the authors aim to investigate if these connections are influenced by the level of financial knowledge. Financial knowledge may play a significant role in predicting investments. This study is maybe the first to investigate the moderating impact of financial literacy on the investors in the PSX.

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