Abstract
PurposeThe purpose of this research is to examine the effect of heuristic biases on investment decisions through multiple mediation mechanisms of risk tolerance and financial literacy in the Tanzanian stock market.Design/methodology/approachA sample of 316 individual investors in the Tanzanian stock market was obtained through questionnaires. The data were analyzed using structural equation modeling (SEM).FindingsThe findings show that financial literacy mediates insignificantly the effects of overconfidence, availability, anchoring and representativeness heuristics on investment decisions. Further, financial literacy does not influence the effect of risk tolerance and investment decisions. Risk tolerance is confirmed as a positive mediator of overconfidence, availability, anchoring and representativeness heuristics in investment decisions. Also, the study shows that overconfidence exerts a stronger influence on investment decisions, followed by availability, representativeness, risk tolerance, anchoring and financial literacy.Research limitations/implicationsThe study deals with real investors. Therefore, it uses fewer items to measure the constructs in order to avoid respondent bias. Further research could examine the effects of heuristic biases on investment decisions by adding or modifying the items of particular constructs and studying institutional investors.Practical implicationsThe findings can help individual investors to analyze and evaluate their behavior toward stock selection. Securities institutions can use this research to understand investors' behavior, evaluate future market trends and provide advice to the investors.Originality/valuePrevious studies have examined the impact of heuristics on the investment decisions of individual investors. The unique empirical analysis developed in this paper is that it examines the multiple mediation mechanisms of risk tolerance and financial literacy with respect to heuristic biases and investment decisions in the Tanzanian stock market.
Highlights
Whereas around the world, stock markets are being used to help companies and investors raise capital and expand their enterprises, the stock market in Tanzania is not strong enough compared to its peers as a source of capital for financial investors (Shayo, 2020). Ziorklui (2001) uncovered that the stock market in Tanzania is influenced by different components, among© Pendo Shukrani Kasoga
The rejection of H11 implies that financial literacy does not influence the effect of risk tolerance and investment decisions
This study examined the effect of heuristic biases on investment decision-making through multiple mediation mechanisms of risk tolerance and financial literacy in the Tanzanian stock market
Summary
Stock markets are being used to help companies and investors raise capital and expand their enterprises, the stock market in Tanzania is not strong enough compared to its peers as a source of capital for financial investors (Shayo, 2020). Ziorklui (2001) uncovered that the stock market in Tanzania is influenced by different components, among© Pendo Shukrani Kasoga. Stock markets are being used to help companies and investors raise capital and expand their enterprises, the stock market in Tanzania is not strong enough compared to its peers as a source of capital for financial investors (Shayo, 2020). Ziorklui (2001) uncovered that the stock market in Tanzania is influenced by different components, among. Published in Journal of Money and Business. The full terms of this licence may be seen at http://creativecommons.org/licences/by/4.0/ legalcode
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