Impact of Financial Literacy and Investment Experience on Risk Tolerance and

Investment Decisions: Empirical Evidence from Pakistan

According to Mustabsar (2016) for those former business owners, it may be easy for
them to invest but still struggle with the actions that they should probably carry out or what kind of
investment they can profit augmented in their business. Thus, they can manage to avoid some losses
that perchance encountered inside their trading in the long run. Taking a risk in business investment
may grasp a threatened still, it can assist your business to gain more profit.

In their financial decisions, investors must pursue risks. Higher levels of investment
experience and financial literacy lead to increased risk tolerance, and investors must choose risky
investment securities to match their high level of risk tolerance. Experienced investors have a portfolio
of good and bad experiences. (Mustabsar, et. al 2016)

Financial literacy and the need for financial education: evidence and implications

Individuals today are more in charge of their personal finances than they have ever been.
Financial literacy is a key indicator of an individual's ability to make sound investment decisions.
Individuals have been affected by labor market changes. As skills become more valuable, wage
disparities between those with a college education or higher and those with less education are
becoming more pronounced. (Lusardi, 2019)

Financial literacy is low, according to the study; only about a third of young adults have a
basic understanding of interest rates, inflation, and risk diversification. Financial literacy was found to
be strongly linked to socioeconomic status and family financial sophistication. Financial literacy is
also linked to higher investment returns and investment in more complex assets like stocks, which
typically have higher rates of return. (Lusardi, 2019)

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Without risk, there can be no return. Investment is the long-term commitment of funds with the

goal of providing additional income to regular receipts and increasing the value of an investor's funds.

Investments are considered very important and useful if they are made with proper planning because

they provide regular and stable income as well as tax relief.

 The investor's goal is to find a variety of investments that meet his or her risk and expected

return preferences. Low-risk, high-return investments are preferred by investors. The decision to

invest is an optimization problem, but the objective function differs from one investor to the next.

There is different behavior when it comes to decision-making involving their finances. They always

depend on their finances to see if they would invest or not. Investors may encounter immeasurable

challenges in investment, such as risk, ambiguity, and overloads, particularly if you're new in the

business industry.

Taking a chance on a business investment may seem risky, but it can help your company

make more money. A successful investment decision may entail a significant amount of risk taking.

For those business owners who want to make successful investment decisions, having mature

knowledge about how you handle your financial decisions is a huge honor. Financial literacy is a key

indicator of an individual's ability to make sound investment decisions. Financial literacy is also linked

to higher investment returns and investment in more complex assets like stocks. Findings demonstrate

that financial literacy is not a gimmick, but rather a critical component of saving and wealth

accumulation.

Reference:
Lusardi, A. 1 (2019). Financial literacy and the need for financial education: evidence and implications.
Swiss J Economics Statistics 155, 1. https://doi.org/10.1186/s41937-019-0027-5
Mustabsar A., Muhammad F. L., Nilofer R., Aisha K. (2016). Impact of Financial Literacy and
Investment Experience on Risk Tolerance and Investment Decisions: Empirical Evidence from
Pakistan International Journal of Economics and Financial Issues, 2016, 6(1), 73-79.
https://www.researchgate.net/publication/292464426