Role of Financial Literacy in De-Biasing the Investment Decisions of Retail Investors in the Pakistan Stock Market

Abstract

This research study investigated the level of financial literacy of retail investors of Pakistani stock markets and also tries to explore the interdependency between financial literacy and decision making of investors by scrutinizing the mediating role of three cognitive biases (Herd Behavior, Hindsight Bias, and Confirmation Bias) between financial literacy and decision making. A cross-sectional approach was used and data were collected through a questionnaire. The target population was the retail investors of PSX and the sample was 478 respondents. Binary Regression, linear regression, and mediation processes were used to test the relationship between variables. The results of the study indicated that age, professional experience, Locality, Finance certification and training, employment status, and education have a statistically significant relationship (p<.005) with financial literacy and gender, marital status, and income do not have a statistically strong relationship (p>.005) with financial literacy. The study also explored that Herd Behavior, Confirmation Bias, and Hindsight bias completely mediates between financial literacy and the decision-making of investors. Theoretically, this study implicated a new link in the theory of financial literacy and cognitive biases and also a relationship between financial literacy and investment decisions. This study has practical implications for all financial participants to improve financial literacy for sound decisions making. Future researchers can use the findings of this study in other financial sectors of Pakistan as well.