Risk tolerance as mediating factor in individual financial investment decisions: a developing-country study

Abstract

The key objective of this research paper is to estimate the impact of financial literacy, investor’s personality and overconfidence bias on investment decisions by using risk tolerance as a mediator variable. Inclusive finance makes numerous financial products and services accessible and affordable to the micro-finance community, remarkably those absent from the conventional financial system. Financial literacy is a leading factor affecting an individual’s ability to access financial services. This study employed Structural Equation Modelling to investigate whether financial literacy and other personality traits affect investment decisions. The Regression results showed that financial literacy, investors’ personality, and overconfidence bias are significantly relevant to risk tolerance and investment decisions (β = 0.128***, S.D = 0.047, t = 2.746; p < 1%; β 0.378***, S.D = 0.051, t = 7.414, p < 1%; β 0.269***, S.D = 0.052, t = 5.155, p < 1%; β 0.195***, S.D = 0.054, t = 3.619, p < 1%; β 0.371***, S.D = 0.055, t = 6.706, p < 1%; β0.195***, S.D = 0.061, t = 3.190, p < 1%). As mediation results showed, risk tolerance plays a significant role in financial literacy, investors’ personality, overconfidence bias, and investment decisions (β = 0.024**, S.D = 0.011, t = 2.15, p < 5%; β = 0.024**, S.D = 0.011, t = 2.17, p < 5%; β = 0.047**, S.D = 0.018, t = 2.55, p < 5%). The implications of this study also provide valued recommendations for regulatory institutions to improve financial inclusion in the emerging market context.