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DOI: 10.52131/pjhss.2023.v11i4.1876
4533 eISSN: 2415-007X
Pakistan Journal of Humanities and Social Sciences
Volume 11, Number 04, 2023, Pages 4533–4547
Journal Homepage:
https://journals.internationalrasd.org/index.php/pjhss
The Role of Behavioral Factors on Investment Decision Making: Moderating
Role of Financial Literacy
Haris Butt 1, Ali Sajjad2, Khurram Zafar Awan 3, Muhammad Haseeb Shakil4
1 MS Scholar, Faculty of Business and Management Sciences, Superior University Lahore, Pakistan.
Email: harisbutt749@gmail.com
2 Assistant Professor, Faculty of Business and Management Sciences, Superior University Lahore, Pakistan.
Email: alisajjadc@gmail.com
3 Lecturer, Institute of Education and Research, University of the Punjab Lahore, Pakistan.
Email: professorkawan@gmail.com
4 Executive Research Operation, Office of Research Innovation and Commercialization, Superior University Lahore,
Pakistan. Email: haseeb.shakeel@superior.edu.pk
ARTICLE INFO
ABSTRACT
Article History:
Received: October 25, 2023
Revised: December 19, 2023
Accepted: December 22, 2023
Available Online: December 23, 2023
The purpose of this paper is to examine the impact of behavioral
finance factors on stock market investment behavior. Moreover,
it also determines the moderating role of financial literacy in
behavioral finance factors and stock investment in Pakistan.
Studies have been conducted on Pakistan Stock market
investors. Data has been collected through a structured
questionnaire. The survey was performed among 165 investors
in the Pakistan stock market. SPSS and Smart PLS 3.0 were
used to test the hypotheses. The study concluded that
Overconfidence, Herding, Loss Aversion, and Risk Perception
significantly impacted the performance of Stock Investment
decision-making. Moreover, Stock Investment decision-making
was also moderated by Financial Literacy except for risk
perception. The findings of this study would help to comprehend
the behavior of investors in the Pakistan stock market.
Moreover, to achieve favorable outcomes, investors must
possess financial literacy about the stock market.
Keywords:
Overconfidence
Herding Behavior
Loss Aversion
Risk Perception
Financial Literacy
Stock Investment Decision
Funding:
This research received no specific
grant from any funding agency in the
public, commercial, or not-for-profit
sectors.
© 2023 The Authors, Published by iRASD. This is an Open Access article
distributed under the terms of the Creative Commons Attribution Non -
Commercial License
Corresponding Author’s Email: harisbutt749@gmail.com
1. Introduction
Stock exchange investment behavior has grown worldwide and is considered the most
reliable source for generating profit. As a result, organizations are increasingly connecting with
the stock exchange to attract investors, fulfilling dual objectives: investors benefit from
purchasing stocks while organizations secure investments. The stock exchange serves as a
substantial financial instrument, serving various purposes, and enabling the public to
participate in activities beneficial for both investors and organizations alike (Bonga, 2014). A
stock market is a financial mechanism that enables organizations to fulfill their long-term
financing needs by selling stocks or issuing bonds (Hartono, 2022). Investor decision-making
is a major tool for manifesting the micro and macro levels of an economy. Ventures play a
fundamental role in nourishing the economy (Chakraborty, Gupta, Mahakud, & Tiwari, 2023).
According to traditional finance, the stock exchange has always been beneficial for the
economy, and the costs associated with the stock exchange have consistently reflected all
relevant information. Additionally, conventional finance recommends that investors are usually
analytical in the market and base their portfolio development on these rational assumptions
(Ahmad, Sohail, Hussain, & Hussain, 2020).
Volatility is a measure of the vulnerability or risk associated with the magnitude of
changes in a security’s value. (Banumathy & Azhagaiah, 2015). Monetary markets are highly
unstable, with volatility and vulnerability causing high variance in revenue. Financial backers
do not achieve ideal results because they are human, and their behavior has been studied for
a long time (Yüksel & Temizel, 2020). The decision to invest is the process of acquiring assets
4534
from reserves that are easily accessible to achieve a splendid future outcome. Investment
decisions are conventionally based on realistic outcomes, with investors molding their notions
in view of present knowledge and increasing anticipated outputs at a certain hazard verge.
Latest research exhibits that financers strive to construct realistic conclusions Kubilay and
Bayrakdaroglu (2016) and utilize several samples and traditional monetary philosophies to
compute the risk and expected output of their decisions Arora and Kumari (2015) few
investors adopted long period investment while short term taken by other. In the investment
decision-making act Standard finance expects one’s behave realistic and take into
consideration all accessible data.
The behavior of investment by individual investors has become famous in academic
circles owing to the assistance of one person. Investment decisions in the stock exchange
have quickly enhanced in modern times (Calvet, Célérier, Sodini, & Vallée, 2017). There are
several reasons for the increase in stock market profits. The primary reason is the exceptional
profit from the assets of the stock market. In investment of finance, investors have a chance
of making their money work and getting a profit on it. The vast convertible assets of financial
instruments, it meant investors, might immediately change their stock exchange tools into
money another supporting reason of it. Number of monetary instruments is accessible for
investors, they can select an asset according Their investment objectives it’s another assisting
cause of it. (Akhtar & Das, 2019). A large number of financers end in a smoke to construct
make realistic financing choices due to neglecting their venture objectives (Sabir, Mohammad,
& Shahar, 2019). In addition, masses are betrayed and misled in view of their venture goals
and lose to attain their asset objectives due to their inability to coordinate with anticipated
profits and adventuresome behavior (Hoffmann & Post, 2017). Overconfidence is a
psychological characteristic in the domain of behavioural finance which significantly intervein
on one venture choices , which might be venture choices or other venture selections (Joo &
Durri, 2017). ,Overconfidence is a psychological attribute which strongly intervein on one
venture choices, in the domain of behavioral finance (Haseeb, 2019). To estimate the venture
efficiency of a speculator that are abide by market fluctuation overconfidence is
correspondingly encouraging forecaster (ul Abdin, Farooq, Sultana, & Farooq, 2017). In the
field of stock market When number of investors simultaneously copy the activities of other
speculator by having insufficient exposure and constrained data it will be known as
Herding.(Ngoc, 2014). An often incline of human to share, observe and repeat others
behaviour in financial market throughout unstable state of financial market presence (Yu,
Dan, Ma, & Jin, 2018) Investors do not behave logically in their investment choices in the
existence of herding.
Financer desire to abide the notions and envisages of others when making financing
choices. Therefore, while investors abandon their decision and lead various others choices it’s
known as Herding Behaviour. When the market is behaving is in discomfort manner like in the
phase of market anomalies, future increase in prices and buzzes, the impact of herding
behaviour is highly abstruse (Mertzanis & Allam, 2018). Majority of the financer succeed the
behaviour of some other successful investor Investors have possessed the herding behaviour
deliberately copy the activities of future financer (Kamil & Abidin, 2017). Herding behavior
exhibited by an investor takes his decision to rely on others, which results in resentment about
the return on investment. If herding behavior is not revealed by investors they are competent
of succeeding independent investment choices and all they achieve their investments elevate
their confidence as well (Munoz Torrecillas, Yalamova, & McKelvey, 2016). Theory of prospects
describe the emotional bias in loss aversion behaviour. In Prospectus theory these two famous
scholars systematically exhibited the loss aversion phenomenon and placed the basis of
emotional biases. S-shaped kind of function was describe by the theory of loss aversion,
where all likely profits and losses in regard to a pre-determined standard by an investor
contrast and it’s been exhibited by investor the propensity of being more vigilant to losses
despite. B. Lee and Veld-Merkoulova (2016). Investor follows the loss averse emotional bias
always select investment opportunities with low projected losses in regard of profit. It’s been
discovered by them that loss aversion bias intervene on the financer commerce dealing
behaviour. Outcomes has been concluded that loss aversion and anchoring bias participate
toward the commercial decisions and periodic of the real state (Durand, Fung, &
Limkriangkrai, 2019). The phenomenon of resolution of separation or emphasize on delusion is
a crucial component in experiential implications of loss aversion. It refers to the tendency of a
Pakistan Journal of Humanities and Social Sciences, 11(4), 2023
4535
single decision to hold the entire situation (Lackes, Siepermann, & Vetter, 2020). In financial
markets, many investors believe that they make perfect, rational, and planned decisions in
any situation. However, this is not the case, as most investors lack experience (Onyekachi,
Marshal, & Solomon, 2016). In market the behaviour of non- habitual is one of the significant
questions that lead to the rational investment, In case of negligence it lead to more stress.
While making potential investments majority of investors can’t make understanding with the
scope of the market and truly consist on the decisions and efficiency of others (Bian, Xu, Li, &
Liu, 2016; Lan, 2020). The behavior of in habitually investors is the major issues that centrals
to irrational financing in the market, foremost to more pressure in the situation of
carelessness.. In order to do probable investments, majority of investors couldn’t make
compatibility with the market situation and wholly trust on decisions and activities of others
(Czaja & Röder, 2020; H. Wang, Wang, Bu, Wang, & Pan, 2018). In Addition Nguyen, Gallery,
and Newton (2019) in financial manufacturing goods investors who have greater experience
regarding product incline could observe less hazardous product.
According to Giesler and Veresiu (2014) a tool use to identify the best investment
options is financial literacy. Consequently, to take best investment decisions it’s wholly
assisted, Different techniques ,tools, strategies applied by those investors who have enough
knowledge about finance, while others one’s depend on their Friends advice who do not know
about finance. In order to apply technical analysis in decision making financial literate
investors have the superiority which illiterate one’s don’t have (Sultana, Zulkifli, & Zainal,
2018). It has been determined that financial literacy is an essential aspect that may assist
investors in making informed investment choices and avoiding irrational behavior in the
market. According to number of studies, having a strong understanding of finances may lessen
that cognitive biases can intervene the financing choices options and optimize the performance
of education programs in financial behavior (Agnew & Harrison, 2015). In addition, it has been
shown that one's factor in the knowledge of finance might limit the correlation among major
factors and the process of financing choices in stock exchange , Ul Abdin, Qureshi, Iqbal, and
Sultana (2022) the knowledge of finance is contributing as core dimension which could affect
the investor decision making. Future, It can increase the performance of individual
investment. In the domain of traditional finance, For the objective of profit maximization, its
supposed that the realistic members in the financial markets in order to take decision, but
occasionally, number of other elements like experience and moods intervene on investment
decision. So, in those conditions investors behave illogically and unwisely.(Gill, Khurshid,
Mahmood, & Ali, 2018) It is manifested by conventional finance that investors are rational.
regarding their choices of investment is associated with a true understanding of market
Information, but it's unfeasible for making investment options by each investors on a realistic
basis, as financial behaviour exhibited that financial biases have been prone to every
behavioral bias.to study the psychological (Metawa, Hassan, Metawa, & Safa, 2019).
Factors of investment decisions are essential to make strong compatibility with
perception of investor for making decision toward investment for the time being of market
irregularities (Kumar & Babu, 2018). The investors who possessed an overconfident attitude
they have determined to make the investment decisions on their own and concluded that
decisions taken by others could be characterized by emotions, envisage, and circumstances.
Their notion is truly supported by their overconfident behavior and guides them that the
choices and recommendations of others are illogical and aesthetic (Rachmatullah & Ha, 2019).
The masses who possess herd behavior decide to abide by the actions of others owing to that
they perceive it as more convenient. Consequently either one Investor or Institutional
investor, investment decisions will intervene irrational attitude and emotion of the herd (P.
Wang & Nuangjamnong, 2022). While making financial decision the Loss aversion behaviour
can not be acceptable. It induces one to truly oppose what investors are eager for; enhanced
risk, with lower returns. To diminish losses and increase the profit , investor have to take
risks(Areiqat, Abu-Rumman, Al-Alani, & Alhorani, 2019).Lower equity investment and vice
versa is lead to a intensity of risk perception (Bhattacharjee, Singh, & Kajol, 2020). For the
prosperity of the economy, investment is truly a significant tool. Owing to this the worthiness
of speculation decisions has been enhancing day by day. Therefore, it is highly recommended
to consider the compatibility with the factors of behaviour in the light of literacy of finance
when making verdicts. The main objective of the study is to examine the moderating role of
financial literacy in behavioral finance factors and stock investment decision-making. The sub-
objectives of the study are as follows:
4536
1. To investigate the relationship between overconfidence and stock investment decision-
making.
2. To evaluate the relationship between loss aversion and investment decision.
3. To determine the relationship between risk perceptions on stock Investment decisions.
4. To determine the relationship between herding behavior and stock investment decision-
making.
5. To examine the moderating role of financial literacy in the relationship between
overconfidence and stock Investment decision-making.
6. To determine the degree of moderating impact of financial literacy on the relationship
between loss aversion and stock investment decision-making.
7. To determine the degree of moderating impact of financial literacy on the relationship
between risk perception and stock Investment decision.
8. To determine the degree of moderating impact of financial literacy on the relationship
between Herding and Stock investment decision-making.
This research arises couple or questions that, will overconfidence, loss aversion, risk
perception, herding behavior increase stock investment decision? And can financial literacy
play moderating effect on their relationships?
2. Literature Review and Hypotheses Development
2.1. Loss aversion
Loss aversion is known to impact various facets of decision-making, encompassing
financial choices. This phenomenon can culminate in a psychological condition referred to as
"investor paralysis" (Kumar & Babu, 2018) state that, Loss aversion investors tend to be more
vigilant and deliberate in safeguarding their capital against potential declines, prioritizing the
avoidance of losses over the pursuit of gains, which aligns with the concept of loss aversion
from prospect theory. Individuals may also exhibit heightened attention to both losses and
gains due to their tendency to underestimate how swiftly they can adapt to such alterations.
Loss aversion encompasses this dual aspect of being more attuned to losses than gains and
frequently reassessing the outcomes, which aligns with the concept of loss aversion (M. Z. U.
Khan, 2017).
2.2. Overconfidence
Overconfident investors make independent decisions, believing that the choices made
by others are influenced by emotions, circumstances, and perceptions. Their excessive self-
assurance reinforces their beliefs, causing them to view alternative options and suggestions
from others as irrational and unappealing. Overconfident traders, accepting risk as an inherent
part of their financial strategy, often disregard risk levels and engage in excessive trading
driven by their unwavering confidence, which may not always have negative consequences.
Nevertheless, critics argue that persistent overconfidence can lead to increased trading
activity, potentially diminishing market efficiency (Rachmatullah & Ha, 2019). Overconfidence
is characterized by an inflated sense of certainty, leading investors to both overestimate and
underestimate their predictions. Investors with high levels of confidence tend to be more
inclined to take risks, whereas rational investors always aim to maximize returns while
minimizing risk (Kartini & Nugraha, 2015).
2.3. Herding Behavior
Investors who deliberately replicate the actions of their peers are described as
displaying herding tendencies. These investors consistently imitate the trading and investment
approaches of others (Kamil & Abidin, 2017). Herding behavior often arises when investors
have insufficient information to make well-informed decisions about trading assets, as
discussed in the research by (Y.-C. Lee, Wu, & Lee, 2021).
2.4. Risk Perception
Riyadi (2016) suggests that investment risk can be seen as a departure from the
anticipated profit (Riyadi, 2016). Meanwhile, according to Tandio and Widanaputra (2016),
emphasizes that risk is a factor that evokes concerns in various individuals, including
investors. Investors exhibit varying levels of risk tolerance, with some opting for low -risk
options while others are willing to engage in high-risk ventures. According to Tandio and
Pakistan Journal of Humanities and Social Sciences, 11(4), 2023
4537
Widanaputra (2016), perception pertains to an individual's perspective or interpretation of a
situation. In contrast, risk represents a potential negative event that arises due to uncertainty.
2.5. Financial Literacy
Literacy of finance intervene a crucial part in aiding financer in constructing well-
informed speculation choices and avoiding irrational behavior within the market. Several
studies have indicated that a robust understanding of monetary concepts which diminish the
impact of of cognitive biases on investment decisions and improve the efficacy of financial
education programs. (Agnew & Harrison, 2015). Furthermore, research indicates that a person
standard of literacy of finance may moderate the relationship among important factors and the
financing choice making (Rasool & Ullah, 2020).
2.6. Loss Aversion and Investment Decision-Making
Loss aversion intervene a major role in shaping financing choices as it relates to the
risk-averse and rational nature of stock market investors (Mumtaz, Saeed, & Ramzan, 2018),
Investors tend to become risk-averse when the profit or return from their previous stock buy
surpasses their determined goal, while they may adopt a more risk-seeking approach when
their prior degree of output has resulted in a loss (Javed, Bagh, & Razzaq, 2017). Ghelichi,
Nakhjavan, and Gharehdaghi (2016), suggest that loss aversion has a negative impact,
implying that investors with a greater inclination towards risk-seeking behavior tend to engage
in more transactions and potentially experience higher returns. M. Z. U. Khan (2017). Our
study recommends that investors with loss aversion bias tend to make more irrational
investment decisions. Therefore, we identify two types of investors: one who is influenced by
loss aversion bias and avoids unnecessary risks to save capital from loss, resulting in positive
outcomes; and the other who is not affected by such bias and experiences negative impacts
on financing choices.
H1: There is a positive relationship between loss aversion and stock Investment decision-
making
2.7. Impact of Overconfidence on Stock Investment Decision Making
The overconfidence bias plays a significant role in shaping financing choices is
categorized by an extreme level of self-assurance (Chandra & Kumar, 2012; Ghelichi et al.,
2016) Overconfident individuals often disregard input from other realistic speculation, relying
instead on their exposure and experience when making transactions (Alquraan, Alqisie, & Al
Shorafa, 2016). According to Javed et al. (2017), there is a positive relationship between
overconfidence and investment decisions, primarily driven by the behavior exhibited by
overconfident investors. However, it's worth noting that this relationship has a negative
aspect, as overconfident investors may incur losses due to their psychological tendencies
rather than rational decision-making Boda and Sunitha (2018), These investors tend to have
unwavering confidence in their choices, believing they are consistently making the right
decisions (Bakar & Yi, 2016).
H2: There is a positive relationship between overconfidence and stock investment decision-
making.
2.8. Impact of Herding Behavior on Stock Investment Decision Making
To investigate the influence of herding bias on a financer choices, researchers proposed
an other technique to examine the asymmetric risk-return relationship with in stock market,
taking into account the presence of herding behavior. The study's findings revealed a reverse
feedback loop observed in Asian financial markets, attributed to the herding phenomenon
(Bekiros, Jlassi, Lucey, Naoui, & Uddin, 2017). In comparison to individual investors,
institutional investors exert a stronger herd effect, which tends to positively influence
individual investment decisions (P. Wang & Nuangjamnong, 2022). Herding, defined as
mimicking the investment choices of other fund managers simultaneously, and positive
outcome commercial, characterized by buying winners and selling losers, play significant roles
in financial markets. Following the herd and succumbing to the "fear of missing out" (FOMO)
are behavioral phenomena that impact investment decisions. These tendencies can lead
individuals to make irrational decisions with minimal research (Chhapra, Kashif, Rehan, & Bai,
2018).
4538
H3: There is a positive relationship between herding behaviour and stock Investment decision-
making
2.9. Impact of Risk Perception on Stock Investment Decision Making
Variables such as risk perception and motivation are believed to be influential factors in
the realm of investment. Risk is often linked to deviations from anticipated outcomes (Frans &
Handoyo, 2020). Hoffmann, Post, and Pennings (2015) described variables such as risk
perception and motivation are believed to be influential factors in the realm of investment.
Risk is often linked to deviations from anticipated outcomes. likely, Ainia and Lutfi (2019) have
documented that investors' decisions and the frequency of their commercial activities are
notably affected by their perception of risk and their prior profit history. Wibowo, Indrawati,
and Aisjah (2023) exhibit that investors' risk perception positively intervene on financing
choices, which means that if an investor has a high-risk perception, they frequently
reconsideration their speculation decisions.
H4: There is a positive relationship between Risk Perception and stock Investment decision-
making
H5: Literacy Moderates the relationship between Risk Perception and stock investment
decision-making.
2.10. The Moderating Role of Financial Literacy
Quddoos, Rafique, Kalim, and Sheikh (2020) elucidated that financial literacy assumes
a pivotal positive moderating role when positioned as an intermediary factor between
investors' overconfidence and their decision-making processes (Ullah, 2015). Furthermore,
their findings underscored that the inclusion of financial literacy as a moderator exerts a
favorable influence on self-serving bias and investor choices, while concurrently exerting a
mitigating effect on the impact of the illusion of control on investors' decisions Dinç Aydemir
and Aren (2017) ascertained that financial literacy exercises a modulating effect on the
correlation between investors' decisions and their proclivity towards embracing risky
investment ventures. A comprehensive study, focusing on middle-class individuals residing in
developing nations, sought to probe the repercussions of financial literacy on investment
behaviors. The outcomes revealed that individuals endowed with financial literacy tend to
allocate a more substantial portion of their investments toward assets, as opposed to
conventional savings accounts. These financially enlightened individuals also display a higher
propensity for utilizing credit cards. In contrast, it was discerned that financial literacy fosters
enhanced proficiency in making sound financial decisions (Grohmann, 2018).
H5: Financial Literacy Moderates the relationship between Risk Perception and stock
Investment decision-making
H6: The relationship between Overconfidence and Stock investment decision-making is
moderated by Financial Literacy.
H7: The relationship between Herding and Stock investment decision-making is influenced by
Financial Literacy.
H8: The relationship between Loss Aversion and Stock investment decision-making is
intervened by Financial Literacy.
2.11. Theoretical Framework
The Prospect Theory by Kahneman (1977) is followed in this study model which is main
theory. This theory is illuminating the behavior of investor toward investment in risk and
uncertain environment. It describes how people actually perform action according to their
observations (Altman, 2010). Most of the people are taking decision about investment in the
perspective of own knowledge and intuition not much considering the presence of wealth.
They observing the risk opportunities toward making investment decision and feel the
investment can be loss than more profitable. The individual investor felt lot of pressure for
taking decision in investment perspective and he/she would be felt more painful feeling after
loss than pleasure of gain. Individual feels two times more panic feelings as compared to the
pleasure-full feelings and celebrations after gain. Consequently, this theory explained the
effects of loss aversion feelings of the individual which further create pressure on his investing
behavior (Fisher & Dellinger, 2015). Based on this theory, this study formulates a theoretical
framework. The purpose of this framework is to examine the effect of herding, overconfidence,
Pakistan Journal of Humanities and Social Sciences, 11(4), 2023
4539
risk perception and loss aversion attitude of the investor for making decisions toward
investment. This study will test how individuals feel during the investment decision making.
Figure 1: Behavioral Factors
3. Research Methodology
This section of the study explains the purpose, research design, sampling technique,
target population, and setting. A quantitative study was conducted to analyze the impact of
investors’ stock market decision-making. Data was collected from a non-probability random
sample of (number) stock market investors in Lahore, Pakistan. A 30-item structured
questionnaire was designed to ascertain the hidden links between the influencers and the
target population. The target population of this study included both undergraduate and
postgraduate investors from stock markets. The sample size of the present study was 165.
This study examines the impact of Overconfidence, Loss Aversion, Risk Perception, and
Herding Behavior as independent variables, with Financial Literacy as a moderating variable,
and Stock Investment Decision Making as the dependent variable. The study used six major
constructs, including Overconfidence, Loss Aversion, Risk Perception, and Herding Behavior,
with Overconfidence being a construct on four dimensions. The overconfidence scale has been
adapted from the study of (Areiqat et al., 2019). Herding Behavior is also constructed on four
dimensions. The herding behavior scale has been adapted from the study of (Areiqat et al.,
2019). Loss Aversion is constructed on five dimensions. Loss Aversion scale has been adapted
from the study of (Areiqat et al., 2019). Risk Perception is constructed on six dimensions. Risk
Perception scale has been adapted from the study of (Areiqat et al., 2019). Financial literacy is
constructed on five dimensions. The financial literacy scale has been adapted from the study
of (M. U. Khan, 2017). Investment decision-making is constructed on eight dimensions. The
investment decision-making scale has been adapted from the study of (M. U. Khan, 2017).
4. Results and Findings
For assessing the measurement study model and structural equation model, this study
used SMART-PLS program version 23.0, which is a variance-based technique for testing the
study hypotheses. There is no need to test the normality distribution of data. Secondly, the
study tested the direct and moderating effects of study variables on the dependent variable,
which further examined whether the proposed hypotheses were supported or not.
4.1. Measurement Model Assessment
After entering and managing the data, the measurement model of the study was
assessed by testing the satisfaction of convergent and discriminant validities of the study
model.
Table 1 presents the factor loading scores of each item of related constructs, Cronbach’s
alpha, composite reliabilities, and average variance extraction of the study constructs. The
factor loading scores of each item of the study variables are greater than 0.5, and the average
variance extractions of each construct are also greater than 0.5. Additionally, Cronbach’s
alpha values and composite reliabilities of each study construct are greater than
0.7. Therefore, the convergent validity of this study measurement model is satisfactory, and
this study is eligible to test further result processes.
4540
Table 1: Convergent validity
Variables
Items
FL
HB
ID
LA
OC
RP
α
CR
AVE
Financial Literacy (FL)
FL1
0.891
0.865
0.904
0.654
FL2
0.871
FL3
0.758
FL4
0.714
FL5
0.794
Herding Behaviour
(HB)
HB1
0.87
0.773
0.835
0.569
HB2
0.906
HB3
0.629
HB4
0.549
Investment Decision
(ID)
ID1
0.874
0.908
0.932
0.732
ID2
0.856
ID3
0.86
ID4
0.847
ID5
0.84
Loss Aversion (LA)
LA1
0.903
0.918
0.942
0.803
LA2
0.928
LA3
0.865
LA4
0.889
Overconfidence (OC)
OC1
0.862
0.865
0.908
0.711
OC2
0.884
OC3
0.826
OC4
0.799
Risk Perception (RP)
RP1
0.632
0.799
0.867
0.623
RP2
0.778
RP3
0.886
RP4
0.838
Note: α = Cronbach’s Alpha, CR = Composite Reliability, AVE = Average Variance Extraction
Table 2: Discriminant Validity
Variables
Mean
SD
1
2
3
4
5
1. Financial Literacy
3.47
0.067
2. Herding Behavior
3.63
0.054
0.474
3. Investment Decision
3.87
0.043
0.683
0.508
4. Loss Aversion
3.11
0.078
0.576
0.828
0.674
5. Overconfidence
3.01
0.056
0.610
0.491
0.777
0.553
6. Risk Perception
2.87
0.049
0.223
0.189
0.222
0.139
0.160
Note: Heterotrait-Monotrait Ratio (HTMT) values shown in the matrix
Table 2 presents the Heterotrait-Monotrait (HTMT) Ratio values of each study
construct. If all the HTMT ratio values of each study variable are less than 0.90, then the
discriminant validity of the study measurement model is satisfied. The HTMT ratio values of
financial literacy with herding behavior (0.474), investment decision (0.683), loss aversion
(0.576), overconfidence (0.610), and risk perception (0.223) are less than 0.90, indicating
that the discriminant validity is true for the financial literacy construct. Similarly, the HTMT
ratio of herding behavior with investment decision (0.508), loss aversion (0.828),
overconfidence (0.491), and risk perception (0.189) are less than 0.90, indicating that the
discriminant validity is also true for the herding behavior construct. Likewise, the HTMT ratio
of investment decisions with loss aversion (0.674), overconfidence (0.777), and risk
perception (0.222) is less than 0.90, indicating that the discriminant validity is true for the
investment decision construct. The HTMT ratio of loss aversion with overconfidence (0.553),
and risk perception (0.139) are less than 0.90, indicating that the discriminant validity is true
for the loss aversion construct. Finally, the HTMT ratio of overconfidence with risk perception
(0.160) is less than 0.90, indicating that the discriminant validity is true for the
overconfidence construct. The overall values of HTMT ratios of all study constructs are less
than 0.90, therefore the discriminant validity of this study measurement model is
satisfactory. Consequently, this can precede further result analysis.
4.2. Structural Equation Model
After analyzing the convergent and discriminant validities of the measurement model,
the study aims to examine the direct and moderating effects of the study variables on the
Pakistan Journal of Humanities and Social Sciences, 11(4), 2023
4541
dependent variable. The study will test the confirmation and non-confirmation of the assumed
hypotheses.
4.3. Direct effects
Table 3: Direct Relationship Analysis
Paths
Beta
Standard Deviation
T-Statistics
P Values
Decision
LA → SIDM
0.396
0.039
8.788
0.000
H1 Supported
OC → SIDM
0.478
0.046
9.879
0.000
H2 Supported
HB → SIDM
0.215
0.029
5.763
0.001
H3 Supported
RP → SIDM
0.194
0.037
4.997
0.002
H4 Supported
Note: FL = Financial Literacy, SIDM = Stock Investment Decision Making, OC = Overconfidence, HB = Herding Behavior, LA = Loss
Aversion, RP = Risk Perception
Table 3 reveals the direct relationships of study variables. Loss aversion (Beta = 0.396,
p < 0.05, t = 8.788), overconfidence (Beta = 0.478, p < 0.05, t = 9.879), herding behavior
(Beta = 0.215, p < 0.05, t = 5.763), and risk perception (Beta = 0.194, p < 0.05, t = 4.997)
all have significant and positive effects on stock decision-making. Therefore, the first (H1),
second (H2), third (H3), and fourth (H4) hypotheses are supported.
4.4. Moderating Effects
Table 4 indicates the moderating effects of the study variable. Results show that
financial literacy has no significant moderating effect on the relationship between risk
perception and stock investment decision-making (Beta = 0.022, p = 0.34, t = 0.954), so the
fifth hypothesis (H5) is not supported.
Table 4: Moderating Effects Analysis
Paths
Beta
Std Dev
T-Stat
P Values
Decision
FL*RP → SIDM
0.022
0.023
0.954
0.34
H5 Not Supported
FL*OC → SIDM
0.052
0.022
2.360
0.019
H6 Supported
FL*HB → SIDM
-0.057
0.027
2.076
0.038
H7 Supported
FL*LA → SIDM
-0.092
0.027
3.375
0.001
H8 Supported
Note: FL = Financial Literacy, SIDM = Stock Investment Decision Making, OC = Overconfidence, HB = Herding Behavior, LA = Loss
Aversion, RP = Risk Perception, * shown interaction/product of
However, financial literacy has a significant moderating effect on the relationship
between overconfidence (Beta = 0.052, p = 0.019, t = 2.360), herding behavior (Beta = -
0.057, p = 0.038, t = 2.076), and loss aversion (Beta = -0.092, p = 0.001, t = 3.375) with
stock investment decision-making. Therefore, the sixth (H6), seventh (H7), and eighth (H8)
hypotheses are supported.
Figure 2: Path Analysis with Regression Coefficient Values
5. Discussion
The first objective of this study to examine the effect of overconfidence on stock
investment decision. Consequently, the study proved the first study hypothesis such as
overconfidence has a positive relationship with decision-making) and this result is consistent
with previous studies (Adielyani & Mawardi, 2020; AHMED, Riaz, AQDAS, & Hassan, 2021;
Chandra & Kumar, 2012; Tabassum, Soomro, Ahmed, Alwi, & Siddiqui, 2021; Yuwono &
Elmadiani, 2021). They examined the significant relationships of overconfidence with the stock
investment decision making. Consequently, the study proved the second study hypothesis
4542
such as loss aversion has a positive relationship with decision making and this result is
consistent with previous studies (Rooh & Hussain, 2022; Yusbardini & Natsir, 2022; Yuwono &
Elmadiani, 2021). They examined the significant relationships of loss aversion with the stock
investment decision making. Likewise, the study demonstrated that herding behavior has a
positive relationship with decision making and this result is consistent with prior studies
(Kizys, Tzouvanas, & Donadelli, 2021; Quddoos et al., 2020; Yuwono & Elmadiani, 2021).
Moreover, to ascertain the effect Shah and Malik (2021) of Risk Perception on stock
investment decisions. Later, such as herding behavior has a positive relationship with decision
making and this result is consistent with previous studies (Bhattacharjee et al., 2020; Shah &
Malik, 2021). Furthermore, to examine the moderating effect of financial literacy in between
behavioral bias and stock investment decision-making. therefore, the study demonstrated that
financial Literacy has a positive moderating effect on Behavioral Bias and stock investment
decision making and this result is consistent with prior studies (Apochi, Ahmed, Okpanachi, &
Agbi, 2023; Wijaya, Sembel, & Malau, 2023). They examined the significant relationships of
financial literacy plays moderating effect with the stock investment decision behavior.
Figure 3: Path Analysis with T-Statistics Values
5.1. Practical Implications
The investors who possessed an overconfident attitude they have determined to make
the investment decisions on their own and concluded that decisions taken by others could be
characterized by emotions, envisage, and circumstances. Their notion is truly supported by
their overconfident behavior and guides them that the choices and recommendations of others
are illogical and aesthetic (Rachmatullah & Ha, 2019). The masses who possess herd behavior
decide to abide by the actions of others owing to that they perceive it as more convenient.
Consequently either one Investor or Institutional investor, investment decisions will intervene
irrational attitude and emotion of the herd (P. Wang & Nuangjamnong, 2022). In the process
of financial decision making the behavior of Loss Aversion cannot be acceptable. It induces
one to truly oppose what investors are eager for; enhanced risk, with lower returns. investors
need to take risks to enhance profits, not to mitigate losses (Areiqat et al., 2019). A high
degree of Risk perception leads to lower equity investment and vice versa (Bhattacharjee et
al., 2020). For the prosperity of the economy, investment is truly a significant tool.
5.2. Theoretical Implication
The Prospect Theory by Kahneman (1977) is followed in this study model which is main
theory. This theory is illuminating the behavior of investor toward investment in risk and
uncertain environment. It describes how people actually perform action according to their
observations (Altman, 2010). Most of the people are taking decision about investment in the
perspective of own knowledge and intuition not much considering the presence of wealth.
They observing the risk opportunities toward making investment decision and feel the
investment can be loss than more profitable. The individual investor felt lot of pressure for
taking decision in investment perspective and he/she would be felt more painful feeling after
loss than pleasure of gain. Individual feels two times more panic feelings as compared to the
pleasure-full feelings and celebrations after gain. Consequently, this theory explained the
effects of loss aversion feelings of the individual which further create pressure on his investing
behavior (Fisher & Dellinger, 2015). Based on this theory, this study formulates a theoretical
Pakistan Journal of Humanities and Social Sciences, 11(4), 2023
4543
framework. The purpose of this framework is to examine the effect of herding, overconfidence,
risk perception and loss aversion attitude of the investor for making decisions toward
investment. This study will test how individuals feel during the investment decision making.
5.3. Limitations and Future Directions
This study highlighted couple of limitations. Firstly, data was collected from individuals
who may create common method biases problem. Secondly, the data sample size was too
short so the sample size could be large. Thirdly, this study only was focused on few variables.
In future, some important independent variables can be added such as capital investment,
resources availability. There would also be taken an mediating variable such as knowledge
acquisition about stock markets and other environmental and cultural variables be treated as
moderator in this study in the future.
6. Conclusion
This study has been designed to examine the moderating effect of financial literacy
between behavioral factors and stock investment decisions. This study highlights practical,
policy, and management implications of factors affecting investor decision-making in the stock
market. It includes overconfidence, herding behavior, risk perception, and loss
aversion. Financial literacy moderates the relationship between these factors and stock
investment decision-making. The data obtained from this study would be valuable for
investors who are involved in the investment decision-making process, whether at an
individual or institutional level. This knowledge would assist managers in making investment
decisions and creating investment portfolios to achieve desired outcomes. This study’s results
help align investor behavior and attitude with their performance in emerging markets. It can
improve investor performance by empowering them to make immediate decisions in an
ambiguous environment under the influence of heuristic biases like overconfidence. It also
supports great investment returns in a volatile financial environment like Pakistan. Financial
literacy can help mitigate irrational behavior in investment decision-making.
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