Investor Behaviour And Decision-Making: The Impact Of Behavioural Biases And The Moderating Role Of Financial Literacy

Abstract

The primary objective of this study is to investigate the influence of behavioural biases on individual investment decisions during periods of financial crisis. While investors often rely on their knowledge and expertise to make informed financial choices, they may be unaware of the subconscious impact of behavioural biases that shape their decision-making processes, particularly during times of market volatility. This exploratory research specifically examines the effects of four widely recognized behavioural biases: overconfidence, mental accounting, availability bias, and herding behaviour, on investment decisions. The study employs primary data collected from investors active in the Indian capital market who have experienced at least one financial crisis. Data analysis was conducted using the Structural Equation Modeling (SEM) approach through SMART-PLS. To ensure the reliability and validity of the research instrument, Cronbach’s alpha was used to assess internal consistency. Furthermore, convergent and discriminant validity tests were conducted to evaluate the measurement model, and path analysis was employed to test the hypothesised structural relationships among variables. An additional focus of the study is the moderating role of financial literacy in the relationship between behavioural biases and investment decision-making. The findings indicate that while each behavioural bias significantly influences investment decisions, the presence of financial literacy moderates and somewhat reduces the negative impact of these biases. These results are consistent with previous research, further validating the study's conclusions. By highlighting the psychological factors that affect investment behaviour, the study offers practical insights for investors, enabling them to make more rational and informed investment choices. Specifically, understanding and mitigating behavioural biases—supported by financial literacy—can enhance investors’ ability to manage risk and improve decision-making, especially during periods of market uncertainty.