Financial literacy and behavioural biases of individual investors: empirical evidence of Pakistan stock exchange

Nosheen Rasool,Safi Ullah

doi:10.1108/jefas-03-2019-0031

Abstract

Purpose Financial literacy is a crucial element of financial decision-making, exerting significant influence on the behaviour of individual investors, while making budgetary, house financing, stock investing and retirement planning decisions. So, the purpose of this research is to determine the relationship between financial literacy and behavioural biases of individual investors in Pakistan. Design/methodology/approach In this research paper, a sample of 300 observations was obtained through questionnaires from individual investors residing in Lahore and invested in Pakistan Stock Exchange. The data obtained, was passed through Cronbach’s Alpha and Exploratory Factor Analysis (EFA). The hypothesis developed for the research was tested by Pearson’s Chi-square and Ordinal Regression Analysis. Findings The hypothesis testing of the research concluded that there is a negative association between financial literacy and behavioural biases of individual investors. So, it means; with an increase in level of financial literacy, the likelihood of investor facing behavioural biases reduces. It also appeared that male respondents have more financial literacy than female respondents Originality/value Previous studies in the field of finance, identified different factors causing the financial behaviour of individual investor of Pakistan, and also focused on level of financial literacy in Pakistan, but these studies have not emphasized the crucial relationship between financial literacy and behavioural biases of individual investors. Thus, the unique empirical analysis developed in this paper has accentuated the financial literacy as a factor that mitigates behavioural biases of individual investor.

Highlights

Introduction and literature reviewAccording to Lusardi and Mitchelli (2007), the importance of financial literacy has developed widely, with the escalating complication of financial products and the growing significance of financial selection, made by households
A survey, conducted on Turkish monetary clients on their acquiring behaviour, suggested that financial clients with a higher degree of financial education are rather more anticipated to use their credit cards in a sufficient and educated way (Sevim et al, 2012). Previous studies, such as modern portfolio theory, have shown that investors are riskaverse, which means that among two investment alternatives, the investor will choose the one with lower risk (Calvo-Silvosa et al, 2017)
To find the true relationship between financial literacy and behavioural biases of individual investors, this paper aims to contribute towards the importance of financial literacy and depicts the empirical evidence on this relationship in the context of Lahore

Summary

Introduction and literature review

According to Lusardi and Mitchelli (2007), the importance of financial literacy has developed widely, with the escalating complication of financial products and the growing significance of financial selection, made by households. A survey, conducted on Turkish monetary clients on their acquiring behaviour, suggested that financial clients with a higher degree of financial education are rather more anticipated to use their credit cards in a sufficient and educated way (Sevim et al, 2012) Previous studies, such as modern portfolio theory, have shown that investors are riskaverse, which means that among two investment alternatives, the investor will choose the one with lower risk (Calvo-Silvosa et al, 2017). This part consisted of multiple statements and different financial concepts were summarised in the following way: numeracy, interest compounding, inflation, time value of money, money illusion, investing, diversification of risk, debt management, retirement saving, housing, life insurance and annuity. These questionnaires were entered into SPSS by coding each question’s answer with a numeric value and considered each question as a variable and all biased questionnaires were removed due to their missing values and illogical ratings

LITERATURE REVIEW

Findings

Conclusion