The Moderating Influence of Motivation and Financial Literacy on the Relationship between Behavioral Biases and Financial Decision Outcomes

Abstract

Research in behavioral finance has attracted substantial attention in recent years. It is an area of study which focuses on how behavioral biases affect the financial decision outcomes. The investment decisions of individual investors are influenced by the colleagues’ peers and friends and family. These decisions involved investing, saving, spending, insurance, and retirement in daily life. Investors perform when motivated and require greater financial literacy to understand the transforming environments and behave accordingly. There is a need to study the behavioral biases in four markets (stock, saving certificates, poultry, and real estate). The study aimed to assess the behavioral role of personality and biases in financial decision outcomes. Motivation and financial literacy are tested as moderators. A total of 1500 questionnaires were distributed among the individual investors of four markets and 799 investors respondents, the response rate was 53.2 %. PLS-SEM is used for investigation for its usefulness in analyzing complex models. Evidence was found that financial literacy weakens the contribution of biases towards financial decisions whereas motivation significantly enhances the contribution of personality traits towards financial decision outcomes while significant differences among markets were found comparing the investment behavior in stock, saving certificates, real estate, and poultry markets of Pakistan. The study found that personality is highly significant in saving certificate & stock markets. Availability bias is highly significant in poultry, real estate & stock markets. Cognitive dissonance bias is highly significant in the real estate market. Anchoring bias is highly significant in real estate and stock markets. Regret Aversion bias is highly significant in poultry, real estate, and stock markets. Regarding the moderation impact, it can be concluded that motivation and financial literacy varies among the investors of all the four assets because poultry product is consumable and depend on the seasons and market demand whereas stocks and certificates represent bundles of the fund. Similarly, real estate represents a long-term solid investment that extends to generations. Study has limitation of restricted only to four investment markets and a smaller population. Future research can be expanded to more markets and in vast areas.