Do Personality Traits and Cultural Norms Influence Investment Decisions? The Role of Financial Literacy and Investor Overconfidence

Abstract

Behavioral finance assumes that investors are irrational and several psychological factors, behavioral biases, and personality traits influence their investment decisions. Therefore, this study intends to examine how behavioral factors, such as personality traits and cultural norms, affect Pakistani investors’ decisions while considering the moderating effect of financial literacy and the mediating role of investor overconfidence. The study used PLS-SEM for statistical analysis on a final useable sample of 396 observations obtained from surveying investors based in Karachi, Lahore, and Islamabad. Our results indicate that overconfidence, extroversion, introversion, individualism and collectivism positively affect investment decisions. Further, we found that overconfidence reduces herding bias while financial literacy moderates the relationship. The empirical results also show that overconfidence mediates the association between (i) financial literacy and herding bias and (ii) financial literacy and investment decisions. Hence, we argue that investors should enhance their financial literacy to improve their investment capabilities and skills that are imperative for unique and independent investment decisions. Investors should also become financially literate for outperforming the market and not imitate other investors. Similarly, we urge policymakers to regulate and protect investors' interests by encouraging them to enhance their financial literacy.