Cognitive Driven Biases, Investment Decision Making: The Moderating Role of Financial Literacy

Abstract

Purpose – The purpose of this study is to examine the impact of cognitive Biases on investment decisions in Pakistani market while the financial literacy plays moderating role. A study model has been developed to describe the impact of cognitive biases i.e. herding bias, Disposition effect and mental accountability on investment decisions while the financial literacy is playing a moderating role in this study. Design/Methodology/Approach – The data for this study has been collected through an adapted structured questionnaire, which were self-administered by respondents: The questionnaires were distributed among 250 individuals. Correlation and regression analysis was used to test the direct and indirect effects of the identified cognitive biases on investment decision in Pakistani market. Expected Results – The findings of this research shows that herding bias, disposition effect and mental accounting has a positive impact on investment decisions. Financial literacy has negative moderating role in herding bias and positive moderating role in Disposition effect and negative moderating effect on herding and mental accountability bias in investment decision. Limitations – Despite the time limitation, random sampling technique for data collection was adopted involving only individuals from Pakistan. Follow-up studies can collect the data on wider scale to re-verify the proposed model. Practical Implications – The result of this research shows that, herding bias has negative impact on investment decision while disposition effect and mental accounting bias has a positive impact on investment decisions. Financial literacy has negative moderating role in herding bias and positive moderating role in Disposition effect and negative moderating effect on herding and mental accountability bias in investment decision. Originality/Values – The study can be further expanded in the future by using various other psychological and behavioral factors having a significant impact on investor’s decisions.