Does Financial Literacy Improve Cognitive Errors? Gender Differences and Modalities in Biases

Abstract

Traditional finance entails that all the decision taken by an investor are rationale and unbiased. The study aimed at examining contribution of financial literacy towards the moderation in behavioral biases that are responsible for causing irrationality in the decisions of financial decisions makers. On the basis of results obtained from literature research there were various behavioral biases that leads to irrationality in the behavior of financial advisors. The study selected four behavioral biases including over confidence bias, self-attribution bias, ambiguity aversion and availability bias. The technique used for analysis of data collected through questionnaires from a sample size of 297 individuals serving at various banks, financial institutions & higher education institutions correlation, simple linear regression for causal dependence detection and t-test of significant mean difference. The results of the study revealed the negative relationship between financial literacy and behavioral biases showing the reduced contribution of behavioral biases in financial decisions. Furthermore, no significant difference was detected between male and females with respect to financial literacy in Pakistan.