Effect of Behavioral Biases and Financial Literacy on Investors’ Investment Decision-making in Kerala, India

Abstract

The effect of behavioral biases and financial literacy on investment decision-making among individual investors in the Bombay Stock Exchange and National Stock Exchange were investigated in this research. The study explores the relationships between behavioral biases such as herding, overconfidence, and anchoring, and market anomalies, including fundamental and technical anomalies. Utilizing a structured questionnaire with a sample size of 220 and employed structural equation modeling (SEM) using AMOS, to evaluate the hypotheses outlined in conceptual framework. The findings reveal significant associations between these biases and anomalies, highlighting their substantial influence on investment decisions. Notably, herding bias (HB) and anchoring bias (AB) positively influence both fundamental anomalies (FA) and technical anomalies (TA), while overconfidence bias (OB) negatively impacts fundamental anomalies (FA). Moreover, financial literacy is identified as a crucial moderator, affecting the decision-making process. While limitations exist, such as potential biases in data collection, the study underscores the importance of addressing behavioral biases and enhancing financial literacy to promote informed investment strategies and market stability. These findings contribute to enhancing financial knowledge and market efficiency.