“Overconfidence, Financial Literacy and Investment Success: Unravelling the Complex Relationships

Abstract

In the world of financial markets, where financial expertise and behavioural biases greatly influence results, investment decisions are crucial. The intricate relationship between overconfidence bias, financial literacy, and investment choices made by individual investors on the Pakistan Stock Exchange is investigated in this study. The study examines how overconfidence, which is defined as an overestimation of one's own talents, influences investment decisions and determines whether financial literacy moderates this link, drawing on behavioural finance theories. A structured questionnaire was used to gather information from 514 individual investors as part of a cross-sectional study design. SEM, or structural equation modelling, was employed to examine the connections between the structures. The findings confirm that overconfidence influences investor behaviour by showing a substantial positive correlation between overconfidence bias and investing decisions (β = 0.301, p < 0.000). Furthermore, financial literacy has a significant impact on making logical financial decisions by improving investment decision-making on its own (β = 0.440, p < 0.000). Additionally, the positive correlation between overconfidence bias and investment decisions is strengthened by financial literacy, which moderates the link (interaction effect = 0.145, p < 0.000). The protective function of financial literacy in reducing the possible hazards of overconfidence bias is highlighted by this moderating impact, which results in better informed and wiser investment choices. The results highlight the value of financial literacy initiatives to enhance investing behaviour and have important ramifications for financial institutions, educators, and legislators. Such programs can enable investors to make logical, fact-based decisions by eliminating behavioural biases and improving financial literacy, which will help to create more stable and effective financial markets.

Keywords- Investment Decisions, Financial Literacy, Behavioral Finance and Overconfidence