Financial Literacy and Behavioral Bias of Individual Investors: Empirical Research in Indonesia

Abstract

Financial literacy and behavioural biases are critical factors that influence investment-decision making individual investors. This study aims to identify financial literacy relationships and behavioural biases (overconfidence, representativeness, and illusion of control) which can lead to irrational behaviour in investment decision making. The population in this research data is individual investors who are on Java. Based on the purposive sampling method, the sample was 83 respondents through a questionnaire. The data obtained, passed the validity test, reliability test, classical assumption test, and multiple regression analysis to test the hypothesis. Hypothesis testing concludes that financial literacy has a negative effect on behavioural biases, meaning increasing financial literacy, so individual investors are increasingly objective in making investment decisions, and will reduce behavioural biases.

Unraveling the impact of financial literacy on investment decisions in an emerging market

“…The studies on investment biases (Ahmad & Shah, 2020; Kumar & Goyal, 2016; Mittal, 2022), the influence of FL in reducing investment biases (Baker et al, 2019; Ozen & Ersoy, 2019; Rasool & Ullah, 2020; Wijayanto et al, 2023) are plenty. However, less attention has been paid to examining the impact of financial literacy level (FLL) on investment decisions in general (Saleem et al, 2023; Weixiang et al, 2022) and in the Indian context in particular.…”

“…Empirical studies (Ozen & Ersoy, 2019; Wijayanto et al, 2023) have shown that FL plays a substantial role in mitigating the biases inherent in individual investment decisions and financial decision‐making processes. Liu and Lu (2023) note that high levels of FL enhance the comprehension of risky financial products and information attention.…”