Moderating-Mediating Role of Age and Financial Literacy in the Relationship of Behavioral Biases and Equity Investors Decision Making

Abstract

The study examines the Pakistani equity market, where many investors unknowingly fall prey to these biases, affecting both individual investment outcomes and the investor-advisor relationship. The study is carried out by considering that humans are not fully rational agents and their decision making is based on heuristic and shortcuts. Primary data were collected using a structured questionnaire from the 1015 individual equity investors. The data were analyzed by using the multivariate analysis, followed by the Confirmatory Factor Analysis (CFA) and Structural Equational Model (SEM). The results show that there is statistically significant effect of representative bias, overconfidence bias, anchoring bias, and availability bias on investment decision making whereas optimism bias is no effect of investment decision making. The behavioral biases including representative bias, overconfidence bias, availability bias and optimism bias significantly influence the investment decision making and anchoring bias does not affect the investment decision making. The behavioral biases including representative bias, overconfidence bias, availability bias and optimism bias significantly influence the investment decision making through the mediators like financial literacy. The anchoring bias does not affect the investment decision making through the mediator as anchoring bias. Age significantly moderates the relationship between certain behavioral biases and investment decision-making. Specifically, age strengthened the effects of overconfidence bias and availability bias on investment decisions, while it negatively moderated the relationship between optimism bias and investment decision-making. However, the moderating effects of age on representative bias and anchoring bias were found to be insignificant.