IDEAS home Printed from https://ideas.repec.org/a/gam/jjrfmx/v18y2025i6p322-d1676449.html
   My bibliography  Save this article

Financially Savvy or Swayed by Biases? The Impact of Financial Literacy on Investment Decisions: A Study on Indian Retail Investors

Author

Listed:
  • Abhilasha Agarwal

    (Department of Economics and Finance, Birla Institute of Technology and Science, Pilani 333031, India)

  • N. V. Muralidhar Rao

    (Department of Economics and Finance, Birla Institute of Technology and Science, Pilani 333031, India)

  • Manuel Carlos Nogueira

    (GOVCOPP—Research Unit on Governance, Competitiveness and Public Policies, Department of Economics, Management, Industrial Engineering and Tourism (DEGEIT), University of Aveiro, Campus Universitário de Santiago, 3810-193 Aveiro, Portugal)

Abstract

Financial literacy plays a crucial role in shaping individual investment decisions by influencing susceptibility to behavioural biases such as heuristics, framing effects, cognitive illusions, and herding mentality. While most existing studies have examined financial literacy as a mediating factor, our study is among the first in the literature to analyse the role of behavioural biases as mediating factors in the relationship between financial literacy and investment decisions. Specifically, we investigate key biases, including overconfidence, herding, disposition effect, self-attribution, anchoring, availability, representativeness, and familiarity. Using purposive sampling, we collected 482 responses through a structured Likert scale questionnaire. The dataset underwent rigorous validation and reliability tests to ensure robustness. We employed Python-based statistical analysis and used Pearson’s correlation and mediation analysis to explore the relationships between financial literacy, behavioural biases, and investment decisions. With the help of these methods, we were able to uncover relationships and causal pathways which further our understanding of the role of behavioural biases in determining the impact of financial literacy on investment behaviour. The findings illustrate a notable positive correlation between investment decisions and financial literacy, implying that people with higher financial literacy levels possess greater and more rational financial decision-making capabilities. Other analyses have revealed that biases have a moderating effect on this relationship, showing another path through which financial literacy impacts behaviour at the level of the investor. By placing behavioural biases as mediating constructs, this research broadens the scope of investor psychology and the body of knowledge in behavioural finance, highlighting the need to change the approach to how financial literacy programs aimed at investors are structured and implemented.

Suggested Citation

  • Abhilasha Agarwal & N. V. Muralidhar Rao & Manuel Carlos Nogueira, 2025. "Financially Savvy or Swayed by Biases? The Impact of Financial Literacy on Investment Decisions: A Study on Indian Retail Investors," JRFM, MDPI, vol. 18(6), pages 1-22, June.
    • Handle: RePEc:gam:jjrfmx:v:18:y:2025:i:6:p:322-:d:1676449
    as

    Download full text from publisher

    File URL: https://www.mdpi.com/1911-8074/18/6/322/pdf
    Download Restriction: no
    File URL: https://www.mdpi.com/1911-8074/18/6/322/
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Mohd Adil & Yogita Singh & Mohd. Shamim Ansari, 2021. "How financial literacy moderate the association between behaviour biases and investment decision?," Asian Journal of Accounting Research, Emerald Group Publishing Limited, vol. 7(1), pages 17-30, March.
    2. Jappelli, Tullio & Padula, Mario, 2013. "Investment in financial literacy and saving decisions," Journal of Banking & Finance, Elsevier, vol. 37(8), pages 2779-2792.
    3. Timmermann, Allan & Granger, Clive W. J., 2004. "Efficient market hypothesis and forecasting," International Journal of Forecasting, Elsevier, vol. 20(1), pages 15-27.
    4. Fama, Eugene F, 1970. "Efficient Capital Markets: A Review of Theory and Empirical Work," Journal of Finance, American Finance Association, vol. 25(2), pages 383-417, May.
    5. Alireza Tourani‐Rad & Stephen Kirkby, 2005. "Investigation of investors' overconfidence, familiarity and socialization," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 45(2), pages 283-300, July.
    6. Brad M. Barber & Terrance Odean, 2001. "Boys will be Boys: Gender, Overconfidence, and Common Stock Investment," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 116(1), pages 261-292.
    7. Suresh G., 2024. "Impact of Financial Literacy and Behavioural Biases on Investment Decision-making," FIIB Business Review, , vol. 13(1), pages 72-86, January.
    8. repec:eme:mfppss:mf-10-2015-0269 is not listed on IDEAS
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Stefan Nagel, 2013. "Empirical Cross-Sectional Asset Pricing," Annual Review of Financial Economics, Annual Reviews, vol. 5(1), pages 167-199, November.
    2. You‐How Go & Wee‐Yeap Lau, 2023. "What do we know about informational efficiency? Three puzzles and the new direction forward," Journal of Economic Surveys, Wiley Blackwell, vol. 37(4), pages 1489-1525, September.
    3. Francisco Gomes & Michael Haliassos & Tarun Ramadorai, 2021. "Household Finance," Journal of Economic Literature, American Economic Association, vol. 59(3), pages 919-1000, September.
    4. Daniel, Kent & Hirshleifer, David & Teoh, Siew Hong, 2002. "Investor psychology in capital markets: evidence and policy implications," Journal of Monetary Economics, Elsevier, vol. 49(1), pages 139-209, January.
    5. Duygu Ider & Stefan Lessmann, 2022. "Forecasting Cryptocurrency Returns from Sentiment Signals: An Analysis of BERT Classifiers and Weak Supervision," Papers 2204.05781, arXiv.org, revised Mar 2023.
    6. Felicia Ramona Birau, 2011. "An Analysis Of Weak-Form Efficiency On The Bucharest Stock Exchange," Annals of University of Craiova - Economic Sciences Series, University of Craiova, Faculty of Economics and Business Administration, vol. 3(39), pages 194-205.
    7. Haugom, Erik & Ullrich, Carl J., 2012. "Market efficiency and risk premia in short-term forward prices," Energy Economics, Elsevier, vol. 34(6), pages 1931-1941.
    8. Roland Rothenstein, 2018. "Quantification of market efficiency based on informational-entropy," Papers 1812.02371, arXiv.org.
    9. Wen-Jun Xue & Li-Wen Zhang, 2016. "Stock Return Autocorrelations and Predictability in the Chinese Stock Market: Evidence from Threshold Quantile Autoregressive Models," Working Papers 1605, Florida International University, Department of Economics.
    10. Park, Cheol-Ho & Irwin, Scott H., 2004. "The Profitability Of Technical Trading Rules In Us Futures Markets: A Data Snooping Free Test," 2004 Conference, April 19-20, 2004, St. Louis, Missouri 19011, NCR-134 Conference on Applied Commodity Price Analysis, Forecasting, and Market Risk Management.
    11. Luc Arrondel, 2020. "Financial literacy and French behaviour on the stock market," Working Papers halshs-02505320, HAL.
    12. Alexis Direr, 2013. "Are betting markets efficient? Evidence from European Football Championships," Applied Economics, Taylor & Francis Journals, vol. 45(3), pages 343-356, January.
    13. Charfeddine, Lanouar & Khediri, Karim Ben & Aye, Goodness C. & Gupta, Rangan, 2018. "Time-varying efficiency of developed and emerging bond markets: Evidence from long-spans of historical data," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 505(C), pages 632-647.
    14. Stephen Foerster, 2011. "Double then Nothing: Why Stock Investments Relying on Simple Heuristics May Disappoint," Review of Behavioral Finance, Emerald Group Publishing Limited, vol. 3(2), pages 115-140, September.
    15. Hollstein, Fabian & Prokopczuk, Marcel & Tharann, Björn & Wese Simen, Chardin, 2025. "Predicting the equity premium around the globe: Comprehensive evidence from a large sample," International Journal of Forecasting, Elsevier, vol. 41(1), pages 208-228.
    16. Alex Richardson & Shirley Gregor & Richard Heaney, 2012. "Using decision support to manage the influence of cognitive abilities on share trading performance," Australian Journal of Management, Australian School of Business, vol. 37(3), pages 523-541, December.
    17. Sahar Afshan & Arshian Sharif & Abdelmohsen A. Nassani & Muhammad M. Q. Abro & Rubeena Batool & Khalid Zaman, 2021. "The role of information and communication technology (internet penetration) on Asian stock market efficiency: Evidence from quantile‐on‐quantile cointegration and causality approach," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 26(2), pages 2307-2324, April.
    18. Kristoufek, Ladislav, 2019. "Are the crude oil markets really becoming more efficient over time? Some new evidence," Energy Economics, Elsevier, vol. 82(C), pages 253-263.
    19. Beckmann, Daniela & Menkhoff, Lukas & Suto, Megumi, 2008. "Does culture influence asset managers' views and behavior?," Journal of Economic Behavior & Organization, Elsevier, vol. 67(3-4), pages 624-643, September.
    20. repec:idn:journl:v:1:y:2019:i:sp1:p:1-26 is not listed on IDEAS
    21. Vasilios Sogiakas, 2017. "Efficiency of the UK Stock Exchange," Journal of Risk & Control, Risk Market Journals, vol. 4(1), pages 51-69.

    More about this item

    Keywords

    ;
    ;
    ;
    ;
    ;

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:gam:jjrfmx:v:18:y:2025:i:6:p:322-:d:1676449. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: MDPI Indexing Manager (email available below). General contact details of provider: https://www.mdpi.com .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.