TYPE Original Research

PUBLISHED 26 September 2022

DOI 10.3389/fpsyg.2022.977444

An empirical assessment of
OPEN ACCESS financial literacy and behavioral
EDITED BY
Paola Iannello,
Catholic University of the Sacred
biases on investment decision:
Heart, Italy

REVIEWED BY
Fresh evidence from small
Raja Rehan,
Ilma University, Pakistan
Sajid Mohy Ul Din,
investor perception
University of Lahore, Pakistan
*CORRESPONDENCE Sun Weixiang1 , Md Qamruzzaman 2 , Wang Rui3* and
Wang Rui
shamengoubi@163.com Rajnish Kler4
1
SPECIALTY SECTION School of Business, Macao University of Science and Technology, Macau, Macau SAR, China,
2
This article was submitted to School of Business and Economics, United International University, Dhaka, Bangladesh, 3 School
Personality and Social Psychology, of Finance, Nanjing Agricultural University, Nanjing, China, 4 Department of Commerce, Motilal
a section of the journal Nehru College (E), University of Delhi, New Delhi, India
Frontiers in Psychology

RECEIVED 08 July 2022

ACCEPTED 25 August 2022
PUBLISHED 26 September 2022
To have enough financial literacy, an investor must be able to make intelligent
CITATION investment choices, and on the other hand, the heuristic bias, the framing
Weixiang S, Qamruzzaman M, Rui W
and Kler R (2022) An empirical effect, cognitive illusions, and herd mentality are all variables that contribute
assessment of financial literacy to the formation of behavioral biases, also known as illogical conduct, in the
and behavioral biases on investment
decision: Fresh evidence from small decision-making process. The current research looks specifically at behavioral
investor perception. biases and financial literacy influence investment choices, particularly on stock
Front. Psychol. 13:977444.
doi: 10.3389/fpsyg.2022.977444
market investment. For the research, a representative sample of 450 individual
investors was evaluated. A structured questionnaire was designed using the
COPYRIGHT
© 2022 Weixiang, Qamruzzaman, Rui Likert’s scale method to elicit the research variables, and the data acquired
and Kler. This is an open-access article were analyzed using the SEM method. According to the findings, there was
distributed under the terms of the
Creative Commons Attribution License a statistically significant link between heuristic bias and the development of
(CC BY). The use, distribution or behavioral bias in decision-making. Nevertheless, cognitive illusions, the herd
reproduction in other forums is
permitted, provided the original
mentality, and the framing effect all have a deleterious impact on behavioral
author(s) and the copyright owner(s) biases. In addition, investors often adhere to heuristic biases rather than other
are credited and that the original
irrational strategies when making investment judgments. Therefore, individual
publication in this journal is cited, in
accordance with accepted academic investors’ financial literacy level greatly influences the choices made about
practice. No use, distribution or investments in the stock market.
reproduction is permitted which does
not comply with these terms.
KEYWORDS

financial literacy, investor psychology, behavioral bias, investment decisions,

cognitive illusions

Introduction
Over the period, financial markets have evolved with technological development and
the information accessible to consumers has also become more complicated since people
can now choose from various alternatives in the financial markets (Sahi, 2017; Fang and
Qamruzzaman, 2021). The conventional financial theory holds that people are rational

Frontiers in Psychology 01 frontiersin.org

Weixiang et al.
and only make choices based on relevant facts (Mittal, 2010).
In the financial business, investors often make rational or
illogical decisions based on their knowledge, which is hotly
discussed in conventional and behavioral finance. Traditional
finance believes that investors are rational and make smart
investment decisions to maximize profit or gain by selecting
the best investment option, especially in difficult times
(Kumar and Goyal, 2015). According to the efficient market
hypothesis, the stock market is always perfect and efficient,
and the stock price reflects all general information (Putri
et al., 2021). However, in the era of financial and economic
globalization, investors in the twenty-first century have been
challenged in making appropriate investment decisions due to
intricate socio-economic phenomena. Eventually, the concept
of behavioral finance emerged for accelerating the investment
decision taking account of social, political, economic, and
geographical phenomena. Behavioral finance in the interactive
development with a multidiscipline approach dealing with
psychology, economics, finance and others (Andriamahery and
Qamruzzaman, 2022; Ritika and Kishor, 2022).
The irrationality of investors and the biases that investors
are prone to are considered in behavioral finance, a subfield
of finance. Investors’ incapacity causes these cognitive biases
to forecast the market’s movements, forcing them to make
biased investing choices (Stanovich and West, 2008). The sub-
field of behavioral economics known as behavioral finance
seeks to explain why investors often make choices that
defy rationality by combining psychological, cognitive, and
behavioral underpinnings with more conventional economics
and finance (Nugraha et al., 2021). In contrast to traditional
finance, the behavioral approach holds that arbitrage leverage
is limited and that not all investors are rational. The investment
choices of individual investors are greatly impacted by irrelevant
information and emotional concerns. The traditional view
assumes that investors are rational and always want to maximize
their profit by expanding their capital. Investors often depend
on the rule of thumb in place of long and laborious mental
calculations that may lead to poorer options and market friction
(Arora and Chakraborty, 2021; Yang et al., 2021). On the
other hand, investors are not always rational and do not have
an endless amount of processing power to account for all
conceivable variables when making sound investment choices.
According to Simon (1979), a person’s capacity to grasp all
the information and make suitable decisions is limited. It is a
human feature known as “bounded rationality.” Consequently,
illogical thoughts may impact financial decisions. When making
financial decisions, one must account for behavioral biases (Jain
et al., 2021).
Choosing investments is the result of a psychological
and mental process known as decision making, which
ultimately leads to the selection of those assets. When making
investment judgments, the behavioral finance approach pays
little attention to individual investors and does not consider
Frontiers in Psychology
10.3389/fpsyg.2022.977444
fundamental or technical research. Those who subscribe to the
behavioral hypothesis believe that investors act in fundamentally
predictable ways whenever they make investing decisions. This
demonstrates that investors often purchase equities when their
value increases and sell the same stocks when their value
decreases. Recently, academics and industry professionals have
been trying to find out how emotions and biases influence
the overall behavior of individual investors. They emphasized
the significance of heuristics, cognitive illusions, the framing
effect, and herd mentality in influencing irrational investment
judgments (Economou et al., 2010).
When taken into consideration as a whole, the level of
financial literacy possessed by individual investors significantly
influences investing choices. This investigation investigates the
relationship between financial literacy and behavioral biases
in investing choices. Financially savvy persons may, to some
degree, prevent illogical conduct (Li and Qamruzzaman, 2022;
Mehta et al., 2022). Financial literacy refers to the cognitive
comprehension of financial components and skills such as
budgeting, investing, borrowing, and taxation, as well as
personal financial management. Financial illiteracy is the lack
of knowledge and skills required to handle one’s finances.
A person’s financial literacy helps them to be more prepared
for specific financial obstacles, which reduces the possibility that
they would experience personal economic hardship (Natasya
et al., 2022b). Investors’ ability to properly manage their money
depends on their level of financial literacy since it will provide
the information and skills necessary to do so. Investors’ actions
and judgments regarding their savings and investments will lack
a solid basis if they do not have the same, leaving investors
without a solid foundation. On the other hand, having a
solid grasp of the fundamentals of money can make it easier
for investors’ to take charge of your financial situation and
make sound financial decisions. It will also assist investors
in efficiently administrating money, making sound financial
choices, and attaining financial stability (Qamruzzaman and
Jianguo, 2016; Shaik et al., 2022). To make informed investment
choices, one must consider all relevant information consistent
with the efficient market hypothesis. This will enable you to
maintain objectivity while examining securities and selecting
equities. However, since rational investors have access to
only partial knowledge and do not follow proper techniques,
they prefer to make satisfying rather than perfect investment
selections; as a consequence, investment options have become
opportunities rather than logical or rational judgments (Berthet,
2022; Qamruzzaman, 2022). Investors are expected to make
logical judgments, but their possibilities are limited by cognitive
capacity, which includes values, routines, knowledge, reflexes,
and external environmental elements; the influence of these
factors has hampered the decision-making process (Ahmad
and Wu, 2022; Sachdeva et al., 2022). On the other hand,
psychologists have suggested that individuals are not nearly as
rational as economists think.
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In the past, investors lacked the knowledge to analyze
a company’s fundamentals, industry, and economy. Ideally,
people would mix technical considerations with irrational
conduct while making financial decisions. Despite this,
contemporary investors have access to enough information
and a high degree of financial literacy, which they often use
while making investment choices. Therefore, the influence of
financial literacy and behavioral biases provides the necessary
impetus for initiating such an important empirical study. This
research assesses the investing decision-making aptitude of
Indian investors. It is feasible to quantify the degree to which
individuals prioritize financial literacy in decision-making and
the effect of behavioral biases. In addition, it aids in determining
if individual investors make sensible or irrational investing
choices owing to a lack of financial literacy.
The motivation of the study is to gauge the effects of
financial literacy and behavioral Biases on investment decisions
considering a sample of 450 small investors in India. The
elasticities of explanatory variables on investor behavior have
been derived with the implementation of structural equation
modeling (SEM). Following the estimation output, the study
revealed that financial literacy and cognitive behavior positively
influenced investment decisions, while the impact of behavioral
biases established averse assertion with framing effects. In terms
of implication of the study findings, the study advocated that
understanding and knowledge of financial information and
jargon assist investors in making an appropriate decision with
the trade-off between risk-return.
The remaining study structure is as follows: section
“Literature review and hypothesis development” deals with
a relevant literature survey and hypothesis development.
The veritable definition and methodology are explained in
section “Methodology.” Model estimation and interpretation
are displayed in section “Estimation and interpretation.”
Discussion and Conclusion are reported in section “Discussion,”
and Research Implication is available in section “Conclusion.”
Literature review and hypothesis
development
Heuristic bias and investment decision
The heuristic bias, also known as a rule of thumb, is
a method that simplifies the decision-making process for
investors, particularly in uncertain and complex circumstances.
This method reduces the complexity involved in evaluating the
possibilities and predicting the benefits, enabling investors to
reach decisions more quickly. This is particularly important
for investors who must make judgments in complicated
and unpredictable situations (Kahneman and Tversky, 2013).
There is a risk that heuristic bias may impede investment
earnings, which would, in turn, replicate lower portfolio
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returns. A few distinct interpretations may be offered for the
phenomenon known as heuristic bias. These interpretations
include overconfidence, anchoring bias, and representativeness
bias. Anchoring bias is an emotional state of things that
arises when investors attach undue attention to anchors that
are statistically random and emotionally determined, leading
to them making irrational judgments. This emotional state
of affairs is known as “anchoring” (Tseng, 2011; Liang and
Qamruzzaman, 2022). Anchoring bias may also be understood
as the tendency of investors to base their investment decisions
on a factor that is illogically unrelated to the problem at hand,
known as the inclination of investors to anchor their thinking.
The phenomenon known as anchoring bias refers to risk-free
trading behavior on the part of investors (Ofir and Wiener,
2012).
In a study, Tversky and Kahneman (1974) outlined
heuristics that help decision-making during times of ambiguity.
Described representativeness in judgment, frequent scenarios
for classification and relevance of number-based forecast.
Adjustment and anchoring biases occur when investors
have incomplete value and estimations. Investors apply
representativeness or similarity heuristics while identifying
samples, and unwarranted confidence leads to errors. Cautioned
about errors of predictions besides improvement of decisions
and judgments. Zhang and Zheng (2015) explained how
heuristics biases might lay out clarifications and offer suitable
solutions against market anomalies. While observing Chinese
investors, he revealed that institutional investors are more
talented or confident than ordinary investors, resulting in huge
market changes, indicating overconfidence heuristics. Further
advocates that biases cannot be avoided even after gathering
experiences. Shah et al. (2018) established that overconfidence
& anchoring heuristics usually impact negatively on investors’
judgments. Representativeness and availability also show an
adverse impact on individual investors’ decisions. Findings
suggest that this causes tandems in the Pakistan stock market,
largely due to overreaction. In the case of Saudi Africa,
Lowies et al. (2016) revealed a positive heuristics impact
of anchoring and adjustment on fund manager decisions.
Investors anchor to their previous decision even though
they get some new information. According to the research
findings, investors from established countries and investors
from developing nations should take note of the extremely
unpredictable conditions under which property fund managers
in emerging economies like South Africa have to make
investment choices. Future returns may be affected by the
likelihood of unrealized profits resulting from cautious investing
techniques. In another study, Otuteye and Siddiquee (2015)
presented that investors commonly use heuristics tools to tackle
complex information and data. The heuristic is developed for
value decisions, advanced rule formation for strict adherence
and avoiding emotional or cognitive bias. Elucidated how
developed heuristics can be used for buying and selling.
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Only investors are willing to make a commitment of
this kind, and representativeness may be characterized as the
committed inclination to link new events to those with which
one is already aware. Only investors are prepared to commit
to this nature (Anderson and Marcouiller, 2002). In order to
arrive at the best possible conclusions, we first examine previous
situations similar to the one we are now working on, and
then we make our bets per our findings. As a direct result
of this, investors may experience cognitive dissonance, leading
them to place a greater emphasis on events that occurred
more recently while reducing the importance they place on
the prospect of long-term profit (Kubilay and Bayrakdaroglu,
2016). When market players are overconfident, they engage in
bigger quantities of trade and take more risks, both of which
lead to an increase in market volatility and mispricing as well
as a loss in market efficiency (Kasoga, 2021). When market
participants are overconfident, the market is less efficient.
Overconfidence can have two significant effects on an investor’s
actions: first, it can cause the investor to fail to generalize
their knowledge, which can result in wasteful trading; second,
it can cause the investor to trade more frequently than they
normally would. These effects can harm investors’ returns
(Shefrin and Statman, 2000). The statement that follows is
a postulation, and it is founded on the premises that were
discussed before.
H1 : Anchoring bias, representativeness, and overconfidence
collectively form the heuristic bias in investment decision-
making.
H2 : Heuristic bias has a significant favorable influence on
behavioral biases.
Framing effect
The “framing effect,” which describes how investors cope
with unpredictability and risk in their investments, is sometimes
referred to by the phrase “prospect theory,” which is typically
used to refer to that impact. According to the framing effect,
deciding which investments to make may be divided into two
stages: the phase in which the framing effect is considered
and the phase in which the evaluation impact is considered
(Dhar and Zhu, 2006). In addition, it is seen as inconsistent
and illegitimate within the decision-making process framework.
Because of the framing effect, it is highlighted that investors
should base their decision-making on the potential value of
both losses and return rather than on the actual results.
This is because the prospective outcomes may influence the
actual outcomes. Consequently, it would help if you based
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your decisions more on the seeming advantages than the real
expenses (Kahneman and Tversky, 2013).
Thaler (1980) argued that “Foregone gains are less
painful than Perceived losses,” which indicates endowment
effect strongly manifests in investor’s judgment of losses and
opportunities. Shiller (2006) found that investors usually avoid
disinvestment when prices of the stocks are devalued and
buy actively when prices go up, which displays higher regret
behavior. In the case of the USA, Kumar and Lim (2008)
indicates that framing has significant stimuli on the decision
of U.S individual investors. Investors using frames have less
disposition effect and better portfolio choices. Barberis and
Huang (2001) reveal that mental accounting, the term coined by
Thaler (1980), has two forms: loss aversion and narrow framing,
which significantly influence risk gambles. Stakeholders are
contrarily loss averse to “individual stock accounting” and
“portfolio stock accounting” brought up that most investors
escape selling those whose value has decreased and easily sell
shares whose value has grown faster, which confirms regret
aversion by the investors in the Nairobi Stock Exchange.
Antony and Joseph (2017) reveal that Kerala investors are
majorly impacted by undesired outcomes or regret aversion and
overconfidence, which is high among five heuristic and prospect
theory factors. Priority vector shows investors even feel bad
about small mistakes or errors and react accordingly.
Corporate financial activity is tracked and evaluated using
traditional accounting methods in firms. In contrast, mental
accounting relates to how individuals carry out these tasks in
their own lives. According to Thaler (1999), mental accounting
is “the collection of cognitive processes employed by individuals
and households to organize, assess, and monitor financial
activities,” and it covers how people classify costs, allocate
monies to these categories, establish budgets, and carry out
components of cost-benefit analyses. It is not uncommon
to see a tendency to break down investment decisions into
smaller decisions when looking at people’s financial behavior.
Decision units, also known as mental accounts, are examined
singly instead of taking the choice problem as a whole. The
study of Shefrin and Thaler (1988) explained that the marginal
investment propensity had guided individual investments to
expenses and income effects. The concept of mental accounting
has familiarized by Thaler (1985), who advocated that In the
building of portfolios, mental accounting is often used as part
of the process of making financial choices. According to the
rational portfolio theory, investors should only be concerned
with the expected utility of their portfolios, not the individual
components.
In Thaler (1980) view, mental accounting may be broken
into three parts. The first part of the evaluation focuses on how
results are obtained and experienced, the second analyzes the
incoming and outgoing funds associated with an account, and
the third assesses the account’s degree of consistency (Seiler
et al., 2012; Nigam et al., 2018). An investor will often evaluate
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the incoming and outgoing funds, and their attitude will likely
be unsure about the organization of investments with consistent
returns. Nevertheless, the components of mental accounting
reduce the financial norm of substitutability. Investors will
be encouraged to participate because of comparing parts of
the information, which will continue until increased returns
are achieved (Barberis and Huang, 2001). Endowment effects
are thought to be responsible for the gap between a person’s
willingness to accept something and their willingness to pay
for it (WTA/WTP), as well as the exchange asymmetry that
is frequently observed in settings where transaction costs are
assumed to be either minimal or non-existent (Kahneman
et al., 1990; Horowitz and McConnell, 2002). Thaler (1980)
was the first to propose the concept of endowment effects. He
linked it to the fact that losses are weighted more heavily than
profits, prospect theory (PT), and loss aversion in non-risky
circumstances. Investors’ aspirations were disclosed more in
their selling decisions than in their purchasing decisions due
to the endowment effect (Pu et al., 2021; Holden and Tilahun,
2022; SERFRAZ et al., 2022). The cost of selling shares from
an investor’s portfolio is considered a loss, but the opportunity
cost is considered a previous gain. Because investors dislike
change while holding stock, the former should be given more
weight.
Regret aversion is a common psychological phenomenon
that affects those who make mistakes in their decision-making
process, such as investors. The psychological phenomenon
known as regret aversion causes individuals who invest
money to feel remorse about specific investing decision-
making processes. This phenomenon is described as failing
to generate the anticipated return (De Mori et al., 2016).
Nevertheless, avoiding regret is an emotional condition
that investors find themselves in when they realize their
choice was incorrect, even though they initially felt it
was the right one to make. Investors are in this state
of mind when they realize their choice was incorrect.
The sense of dissatisfaction that results from blaming
external forces for disappointing outcomes is not the
same as the emotion of regret that results from making
decisions that you later come to regret (Moreira Costa
et al., 2021). The reasoning for taking responsibility for
one’s decisions is connected to the emotion of regret. The
hypotheses that are stated below may be determined using this
information.
H3 : Mental accounting, the endowment effect, and regret
aversion collectively form the framing effect in investment
decision-making.
H4 : The framing effect has a significant favorable influence
on behavioral biases.
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Cognitive illusions
Behavioral finance is a framework that augments and
substitutes some elements of conventional finance. It portrays
the interaction between investors and management in financial
and capital markets. Investors make illogical investing choices
because decision-making is the art of navigating difficult
circumstances (Andriamahery and Qamruzzaman, 2022).
Therefore, selecting one option from multiple alternatives is
a distinct skill. Behavioral finance does not assert that every
investor suffers from the same illusion, but it does stress the
need to avoid illusions that impact the decision-making process,
especially when making investments (Agha and Saif ur, 2012).
In a study, Zindel et al. (2014) explained that cognitive biases,
heuristics, and illusions play a role in making poor financial
decisions. Cognitive biases are being studied in order to be able
to identify when and where these mistakes might be made in
the decision-making process.
Cognitive illusion results from a person’s sensitivity about
what he already bought and what he could have bought and
does not get as per expectations, therefore feeling bad about
his choices. Learning cognitive theory is essential to apprehend
as it offers investors to understand unimagined outliers in
the rise and fall of stock markets. Antony (2019) revealed
that the cognitive illusions of investors toward the investment
result from human irrationality. Pointing out these biases may
reduce anomalies in the stock market. Rasool and Ullah (2020)
state that cognitive dissonance significantly impacts market
factors. Especially found a significant relationship between
behavior biases, cognitive illusion and financial literacy in
Pakistan individual investors. Ritter (2003) describes cognitive
thinking and market efficacies as pillars of behavioral theories.
Application of Heuristics or thumb rules leads the investor
to take investment decisions effortlessly, but sometimes that
leads to biases, resulting in losses. In uncertain times people
change their choices slowly and stick to their previous
choices due to conservatism biases. Monti and Legrenzi
(2009) regarding finding hindsight affects investors or subjects
confused about their earlier information and new information
provided at the end. Biases in hindsight were observed
high, and ignored errors in estimations show overconfidence.
Hindsight biases subsequently change the thinking of investors
and situate them in the higher risk category. Biais and
Weber (2009) established empirically that hindsight biases
adversely impacted volatility estimates. The study observed 67
Mannheim University students and 85 investment bankers and
discovered that information, overconfidence and experience
have significantly different impacts on performance. Musch
(2003) investigated the depth of analysis and revealed that
investors’ field acquaintance and self-presentation are directly
linked to their meticulous thinking and have dissimilarity in
hindsight biases.
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Cognitive illusions affect the willingness of investors to
accept investment options and their ability to grasp and
assess such choices (Feng and Seasholes, 2005). Cognitive
illusions may have a role in the decision-making processes
of investors, making it simpler for them to put off making
significant financial decisions. As a result, awareness of
and the ability to recognize cognitive illusions contributes
to a more judicious allocation of resources. In the
process of making decisions regarding investments, three
different types of cognitive illusions have been identified:
inefficient representations (in the context of the base rate
fallacy), selected sampling of problems (in the context of
overconfidence and availability), and narrow norms (in
the context of the conjunction fallacy) (Gigerenzer et al.,
2008).
The mental process known as conservatism is one in
which investors rely on their previous perspectives to make
predictions about new information and acquire new ideas.
When it comes to investing, experience is much more valuable
than acquiring new skills for most investors. The choice
based on one’s past experiences did not provide sufficient
consistency; investors’ preferences will be determined by their
stringent conservative bias. The existence of conservatism
demonstrates that financial market participants failed to
assimilate new information by clinging to their previous
forecasts (Alwathainani, 2012). People tend to look for or
interpret information in a way that supports their existing
ideas, known as confirmation bias (Nelson and McKenzie,
2009). Confirmation bias is often seen as a bad thing. For
example, according to Mercier and Sperber (2017), prejudice
prevents individuals from forming well-grounded ideas, limits
their capacity to alter their incorrect views, and causes
them to “become overconfident” when they independently
reason (Mercier and Sperber, 2011). “Epistemological distortion
consisting of unjustifiably preferring supporting evidence for
[one’s] perspective, which may result in the belief being overly
strong or extreme” is what Steel (2018) refers to as bias. To this
end, Peters (2021) states that “confirmation bias results in less
accurate processing of information by the person.”
For investors to make informed decisions, they need to
have easy access to stock data, an in-depth grasp of the
companies they are investing in, and the capacity to forecast
the performance of other businesses. Confirmation bias causes
investors to be more prone to look just at evidence that supports
their prior opinions, which may lead to poor investment
decisions. Confirmation bias may be what causes investment
bubbles (Pouget et al., 2016). People who have had this happen
to them are left with the unshakeable conviction that the
occurrence of a certain event could have been forecasted based
on the available data. Prediction is a piece of cake because past
information easily affects investors. The following speculations
are offered up as a result of pursuing this chain of reasoning:
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H5 : Conservatism, confirmation, and hindsight bias form
cognitive illusions in investment decision-making.
H6 : Cognitive illusions have a significant favorable influence
on behavioral biases.
Herd mentality
Among the more recent subfields of economics, behavioral
finance focuses on financial markets and investors. This method
combines the conventional disciplines of economics and finance
with psychology and the decision-making sciences. Behavioral
finance is comprised of two subfields: macro behavioral finance
and micro behavioral finance. Behavioral finance is an attempt
to explain observed and verified market anomalies. The area of
finance contains these findings and reports. Behavioral finance
investigates how investors create opinions or “mental mistakes”
in financial decisions (Patil and Chavan, 2020). According to
behavioral finance, “herd mentality bias” describes an investor’s
proclivity for emulating the actions of other investors. They rely
more on their emotions and instincts than on their own critical
thinking (Chaudhary, 2013).
The phrase “herd mentality” refers to the phenomena in
which rational investors tend to act irrationally to emulate other
investors’ judgments in deciding how to invest their money.
This occurs when investors are pressured to make investment
decisions (Malik and Elahi, 2014). Herd mentality is an investor’s
tendency to follow the herd’s judgment since the decision made
by most investors is frequently assumed to be accurate forever.
This tendency may lead to poor investment decisions. Herding
investors make their judgments on the purchase and sale of
stocks based on the actions of the majority of other investors in
the market (Loxton et al., 2020). According to the research, herd
mentality existed in the market both when it was going up and
when it was going down. In addition, the herding effect causes
considerable increases in both the volume and the volatility of
the market. When making decisions about their investments,
investors spend much effort doing an in-depth analysis of
the information offered by the general public. Investors often
reject their expertise when making judgments, regardless of
how correct it may be, and instead blindly follow the herd,
even though the herd may be in the wrong. Their information
processing will always follow the herd, and when it does, it will
be pleased by mistake made by the herd as a whole rather than
by mistake made by an individual member of the herd (Ahmad
and Mahmood, 2020).
The bandwagon effect may impact the mental condition
of market participants like traders and investors. The feeling
investors get when they discover that their choice is consistent
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with others is known as the “bandwagon effect,” a term derived
from “jump on the bandwagon.” However, the outcome of
jumping on the bandwagon is often the motivation for these
behaviors. When investors see a company’s share price rise,
they worry that they will lose out on the rewards. As a result,
rather than focusing on the company’s fundamentals, they
begin purchasing shares because they think everyone else is
doing the same thing (Pertiwi et al., 2019). There is often a
personal connection between the investor and the company.
They often make decisions based on the behaviors of various
social groupings and communities. The social environment has
affected the behavior of investors in terms of the choices they
make about investments. Even a single exposure to infectious
ideas is sufficient for an investor to demonstrate irrational
behavior and make judgments consistent with that conduct.
The social group greatly influenced the stock market’s volatility
(Mittal, 2010). During the verification procedure, the following
assumptions were utilized:
H7 : Information processing, bandwagon effect, and social
groups collectively form herd mentality in investment
decision making.
H8 : Herd mentality has a significant favorable influence on
behavioral biases.
H9 : Behavioral biases have a significant favorable influence
on the investment decisions of the individual investor.
Financial literacy
The act of decision-making is a convoluted and involved
procedure, yet it plays an essential role in studying behavioral
finance. The behavior of investors is determined by various
variables in addition to the volatility of the market and the
potential for profit maximization (Kim and Nofsinger, 2008;
Puaschunder, 2021). The level of financial literacy (FL) of
an individual is one of the most significant characteristics
that can be traced back through history and used to evaluate
the process of making investment decisions (Becchetti et al.,
2013; Lusardi and Tufano, 2015). In recent years, there has
been a surge in interest in financial literacy across many
people, especially in developed countries. These groupings
include governments, bankers, employers, community interest
groups, financial markets, and other organizations (Nurmelia
et al., 2022). The development of new financial products, the
rising complexity of financial markets, and evolving political,
demographic, and economic factors are just a few reasons
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10.3389/fpsyg.2022.977444
why improving people’s capacity to understand and manage
their own money is more vital than ever (Ahmed et al.,
2021). Financial literacy is understanding how money functions
globally, how investors might earn money, and administer
investments to maximize profits (Giesler and Veresiu, 2014).
Observing a person’s perspective, knowledge, and behaviors
about several investment vehicles and other monetary factors
may be used to determine their degree of financial literacy.
Financially knowledgeable investors can better avoid being
misled by financial advisers and make informed investment
decisions. A well-informed investor can plan for expenses
and know their monthly income. In addition, every stock
market investor must comprehensively understand savings,
consumption, borrowing, and investing. Competencies facilitate
the selection of high-quality stocks for speculative and long-
term investments (Ganapathi, 2014).
In the case of UAE investors, the study of Hassan Al-Tamimi
and Anood Bin Kalli (2009) exploded the nexus of financial
literacy and investment decision and established that Income,
education, and occupational engagement are proven to have an
impact on financial literacy. Individuals with greater incomes
tend to have more education, and those who work in the
financial sector (banking, investments, etc.) tend to have a more
advanced understanding of personal finance. However, people
of all ages show signs of financial ignorance. Furthermore, male
and female respondents saw a statistically significant difference
in financial literacy. Personal financial literacy was investigated
by Chen and Volpe (1998) among 924 students from 13 US
universities. They also examined how age, country, ethnicity,
income, job experience, major, and class rank affected people’s
ability to understand and manage their finances. The survey
found that the levels of financial literacy varied substantially
across categories of major, class standing, and years of job
experience. Their financial knowledge mostly determines the
degree of an investor’s financial competence. A prudent investor
takes the time to plan, acquire, and implement information.
In addition, it helps investors seek and act on expert advice
at ideal periods, leading to higher profits (Hastings et al.,
2013). The capacity to do so is what we refer to when we
discuss the financial opportunity. The entry of individuals into
the capital market is aided by policies such as the mandated
dematerialization of stocks and the need that all people to
have a bank account. Individuals are encouraged to engage in
the stock market for the possibility of financial benefit. The
success of financial markets and the application of financial
knowledge have relied significantly on financial opportunities.
These hypotheses are presented in the following manner
(Natasya et al., 2022a).
The study’s goal was to establish the extent to which different
behavioral biases and financial literacy levels are associated
with individual investors’ investment decisions. The study
contributes to a better understanding of the many shapes that
behavioral biases may take, as well as the potential impact of
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such biases on investment decisions (Adil et al., 2022a; Harjito,
2022). In a similar vein, research is conducted to determine
how one’s level of financial literacy influences their choice of
investments. Each investor’s strategy for making investment
decisions is one of a kind since each person develops their own
set of investing tenets or copies the strategies of other investors.
It encourages irrational conduct regarding investment decisions
and quantifies the financial literacy trade-off in the context of
such a phenomenon (Din et al., 2021).
H10 : Financial literacy has a significant favorable influence
on the investment decisions of the individual investor.
Methodology
Sample and data
This important research analyzes how behavioral biases
and financial literacy influence the investment decisions of
individual investors. The goal of this study is to gather
information from individual investors. Individual investors
were acknowledged at the offices of financial advisors, portfolio
managers, and stock trading terminals. The study used a
personal interview approach by distributing a questionnaire to
investors. The questionnaire survey was conducted to enhance
data precision and reduce interviewer bias since respondents
were permitted to use their democratic rights while answering
the questions. From September 2021 to January 2022, the
method for gathering data was completed. The first sample
consisted of 450 randomly selected individual investors from
Northern Indian states. The terms and terminology used in
the study were explained, and the suspicious replies were
addressed in front of the participants, facilitating the collection
of questionnaire responses with no omissions.
Sample selection is mostly based on investors’ experience
and location, with a preference given to those with at least
2 years’ worth of trading experience and a Northern state
residence (Delhi, Haryana, Punjab, Uttar Pradesh, or Rajasthan).
The study utilized an experimental research methodology,
and the sample was chosen using a basic random sampling
procedure. The questionnaire was designed on a 5-point Likert
scale, with a score of 5 indicating strong agreement and a
score of 1 indicating strong disagreement, to ensure as much
consistency as possible among the replies as possible. Investors
were also assured that their responses to the questionnaire
would be kept confidential. Additionally, 50 local investors were
used as a pilot group to assess the poll’s content and face validity
before the main survey was conducted. Experts, academics, and
investment advisers in the financial sector were consulted over
the choice of terminology, the interpretation of terms, and the
selection of metrics for the financial sector. Because of this,
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individual investors could complete the questionnaire with the
help of clarification in questions and applicable directions.
Measurement definition
Financial literacy
For investors to make intelligent, risk-free, and productive
judgments, they need the knowledge and a grasp of a wide
array of financial concepts and facts. Students will gain an
understanding of economics and the many ways in which
economic factors may play a role in individual decision-
making via the completion of this course (Worthington, 2006).
Financial literacy may be approached from three perspectives:
competence, expertise, and access. In order to achieve a level
of financial stability, one must have a comprehensive grasp of a
broad variety of financial instruments. To make sound choices,
one must have a level of financial literacy that includes both the
application and successful communication of one’s knowledge
(Andriamahery and Qamruzzaman, 2022). When we talk about
financial opportunities, we are referring to circumstances in
which an astute investor has the potential to earn a return on
the investment that they have made.
Behavioral biases
Everyday investing decisions are impacted by various
factors, including inclination, motivation, excitement, and
social contact, in addition to the available cash, time horizon,
and financial objectives (Muhammad and Abdullah, 2009).
Investors’ behavioral biases stem from their inexperience and
overconfidence in decision-making skills. Behavioral biases,
such as the influence of the herd mentality, heuristics, cognitive
illusions, and framing thinking, may affect decision-making.
Individual investors have fewer alternatives for evaluating stock
performance due to a lack of knowledge, apathy, and time. The
framing effect describes the way individual investors’ minds
work. Irrational beliefs or assumptions that persist over time
are examples of cognitive illusions. Herd mentality investors are
more likely to follow the herd than to consider their beliefs and
evidence. Behavioral biases that may contribute to irrationality
in financial decision-making include heuristic bias, the framing
effect, cognitive illusions, and herd mentality. Behavioral biases
may contribute to market inefficiencies by allowing people to
avoid or minimize the importance of intrinsic value (Babajide
and Adetiloye, 2012).
Investment decisions
Investors base their selections on their stock market
expertise and experience. Behavioral finance studies people’s
real behaviors and how they process financial information
to make informed judgments. Due to its substantial effect
on their decisions, investors are starting to accord behavioral
finance greater importance. Using hypothetical investment
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possibilities assists investors in selecting superior stocks (Kumar
and Goyal, 2016). The predicted profit based on one’s financial
expertise and investment preferences reveals one’s motive.
Behavioral finance can enhance decision-making and reduce
the frequency of costly errors when applied to investment. In
the face of the complexity and unpredictability that normally
characterizes investing decisions, financial literacy and cognitive
estimations may aid individuals in selecting suitable stocks.
This viewpoint suggests that investors should rely on their
intuition rather than the data-driven tactics backed by the
financial establishment. Behavioral finance is a distinct academic
field since it supplements conventional financial research
with results from cognitive psychology when establishing
investment policy (Dhruv et al., 2021). The degree of financial
knowledge, personality type, and investing philosophy of
investors may influence their investment selections (Sukanya
and Thimmarayappa, 2015).
Statistical techniques
The study administered Structural Equation Modeling
(SEM) to concurrently assess and examine how the process of
investors’ decision-making was associated with financial literacy
and behavioral biases. An amazing statistical tool for studying
and measuring relationships between variables is the structural
equation model (SEM). On the other hand, latent variables are
often not directly observable and must be inferred from other
variables. On the other hand, more aspects may be evaluated
by empirical observation and measurement. Confirmatory
modeling is where structural equation modeling shines, which
is used more often in theoretical testing than in actual product
development. The measurement model clarifies the relationship
between the latent variables and their component indicators,
whereas the structural equation model (SEM) conveys the
causal relationships between the latent variables. The study has
developed a conceptual model to describe investment evaluation
and support investing behavior, allowing for predicting the
impact of financial literacy and behavioral biases on investment
decisions in the stock market (Antony and Joseph, 2017).
The study applied multivariate analysis, such as
confirmatory factor analysis and structural equation modeling,
using AMOS 22.0 software to scrutinize the research objectives.
In SEM, the relationship between theoretical constructs is
designated by the path or regression coefficients between the
factors presented. Using SEM, data analysis was conducted
in two phases. Overall measurement quality was evaluated
by confirmatory factor analysis, and concurrently reliability
and validity of the instrument had also been measured.
Subsequently, structural equation modeling was applied to
determine if the model fitted the results of the proposed
theoretical models. The study also applied CFI, NFI, TLI, PNFI,
PCFI, RFI, IFI, CMIN/DF, and RMSEA to measure the model’s
fit. Further, independent association between the different
variables had also been investigated.

TABLE 1 Socio-economic background. Estimation and interpretation

S. No Socio-economic Variables Frequency (%)
background The socio-economic background of individual investors is
examined by using percentage analysis. The results are furnished
1. Gender Male 84 in Table 1.
Female 16 There are a total of 84% male investors and just 16% female
2. Age Less than 30 years 21 investors, as shown in Table 1. 21% are under the age of 30,
30–50 years 44 44% are between the ages of 30 and 50, and 35% are above
More than 50 years 35 the age of 50. These numbers are based on their ages. 33%
3. Educational qualification School education 33 have completed all their primary and secondary schoolings,
UG/Diploma 42 42% have obtained their undergraduate degree or certificate,
PG/Professional 25 and 25% have finished their graduate or professional education.
4. Monthly income Less than 50,000 46 This information is based on their educational credentials.
50,000–1,00,000 36 Among individuals who participated in the study, 46% had
More than 18 a monthly income of fewer than 50,000 rupees, 36% had a
1,00,000 monthly income ranging from 50,000 to one million rupees,
5. Experience in Less than 2 years 34 and 18% had a monthly income of more than one million
investments
rupees. 34% of investors have fewer than 2 years of experience,
3–10 years 43
43% have between 3 and 10 years of experience, and 23% have
More than 10 years 23
more than 10 years of experience in investing. According to
6. Occupation Business/Profession 52
their occupation, 52% are active in business or professions,
Employed 31
31%are working in private or government organizations, and
Agriculture/Others 17
17% are agriculturalists, retirees, homemakers, or comparable
Survey data. vocations.

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FIGURE 1
Measurement model.
Measurement model
SEM offers a method for identifying the impact of an
external component on investment decisions by laying out
a path for the rapid examination of the whole model that
seeks multiple hypothetical linkages. There are two components
to the analysis: first, a measurement model with a latent
construct is looked at, and then a structural equation model
is looked at, which considers all constructs and their potential
connections. With the theories mentioned above in mind, I
use 15 independent variables to develop five latent constructs:
heuristic bias, framing effect, cognitive illusions, herd mentality,
and financial literacy. A measurement model was developed to
evaluate the reliability and validity of the latent variables. The
results may be seen in Figure 1.
Table 2 demonstrates that the latent construct captures
factor loadings between 0.789 and 0.929, providing good
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support for the concept’s validity. The calculated AVE values
for heuristic bias, the framing effect, cognitive illusions, herd
mentality, and financial literacy are all more than the commonly
accepted cutoff value of 0.50. These items are presented in the
order shown. Compared to the latent variables, the composite
reliability coefficient values are more than 0.60. This guarantees
that the model’s internal reliability is very high. Furthermore,
The Cronbach’s alpha values for all the components are shown
in Table 2, which are larger than the minimum threshold value
of 0.70, falling between 0.83 and 0.92. Furthermore, the inter-
factor correlation is low (between 0.781 and 0.919), indicating
that multi-collinearity is not a major concern.
As shown in Table 3, all prerequisites for successfully
validating a first-order measurement model have been properly
fulfilled in actual practice. According to the results of the
measurement model, the value of chi-square is 361.994, with
p = 0.000, CFI = 0.903, and RMSEA = 0.067. Additionally,
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TABLE 2 Confirmatory factor analysis results of measurement model.

Latent variables Variables Factor loadings Cronbach’s alpha CR AVE

Heuristic bias Anchoring bias 0.929 0.921 0.921 0.764

Overconfidence 0.908
Representativeness 0.887
Framing effect Mental accounting 0.879 0.889 0.885 0.725
Endowment effect 0.873
Regret aversion 0.895
Cognitive illusions Conservatism 0.912 0.874 0.861 0.693
Confirmation 0.884
Hindsight bias 0.796
Herd mentality Information processing 0.928 0.853 0.852 0.687
Bandwagon effect 0.923
Social groups 0.789
Financial literacy Financial competency 0.903 0.832 0.864 0.691
Financial proficiency 0.911
Financial opportunity 0.826

Survey data. AVE, Average Variance Extracted; CR, Composite Reliability.

TABLE 3 CFA results of model fit.
Chi-square Df P CMIN/df CFI
361.994 126 0.000 2.873 0.903
Survey data.
the value of CFI is 0.903. In addition, the findings indicate
that CFI = 0.903 and RMSEA = 0.067 respectively. As a direct
result, the scores obtained from the goodness of fit test suggest
a model almost perfectly suited to its data. After determining
the reliability and validity of each component, the next step is to
analyze the model as a whole.
Structural equation modeling
Because the suggested measurement model accords with the
available data, the study hypotheses may be evaluated. Figure 2
shows a possible connection between the various elements of
the model. Eleven hypotheses relating to the concept have been
kept due to their path significance at the p 0.05 level. Therefore,
the research aimed to establish a direct and positive connection
between the alternative possibilities.
The model results are shown in Figure 2, demonstrating that
every hypothetical route meets a significance level of p 0.05. The
study analyzed the models shown in the graph and created flow
charts for the models that make judgments about equity share
investments. In structural equation modeling, determining
whether or not the model fits the data using the chi-square
measurement is often difficult since this measurement is very
sensitive to the sample size. Because of these limitations, many
distinct fit indices, each representing an independent sample
size, have been produced. As a result, Tables 4, 5 illustrate the
RMSEA degree to which the various hypotheses are supported by the
data and the particular connections between them.
0.067
The results of the goodness-of-fit test for the SEM are shown
in Table 5; the different indices show that it provides an excellent
match with the data. As a consequence of this, the calculated
value of such indices as CFI (0.903), NFI (0.912), TLI (0.919),
PNFI (0.921), PCFI (0.922), RFI (0.913), and IFI (0.904) is
more than the threshold value of 0.9. In addition, the values
of RMSEA, which come in at 0.067, are much below the cutoff
value of 0.08; this model provides an excellent match with the
data. Since there is consistency in all of the proposed values,
SEM has made great progress in its goodness of fit indices, as
shown in the previous sentence. The conclusion substantiates
the dependability of the statistical analysis’s findings.
Coefficient values for anchoring bias (0.795), overconfidence
(0.572), and representativeness (0.773) due to heuristic bias are
shown in Table 6. Heuristic bias is positively and significantly
related to each of its three predictors. Therefore, we accept
the null hypothesis (H0) and conclude that individual investors
are subject to heuristic biases while making stock investing
choices. For behavioral biases, the coefficient for heuristic
bias is 0.434, suggesting a direct and positive relationship
and lending credence to hypothesis (H2), suggesting that
heuristic bias is a valid construct. As a consequence, the
outcomes are consistent. However, a special rule of thumb
in investing decision-making is established via the heuristic
biases of anchoring, overconfidence, and representativeness.
Coefficients of 0.684 for the mental accounting effect, 0.649
for the endowment effect, and 0.815 for regret aversion are
associated with the framing effect. An eager contribution
is made to forming a framing effect in stock investing

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FIGURE 2
Structural equation modeling.

choices, and the construct framing effect is positively and TABLE 4 Goodness of fit test.

significantly associated with its antecedents. The result is that S. No. Goodness-of-Fit Statistics
we must accept (H3). For behavioral biases, the framing
effect has a coefficient value of -0.450; however, it is possible 1. Comparative fit index (CFI) – (>0.90) 0.903

to accept the alternative hypothesis (H4). When making 2. Normed-fit index (NFI) – (>0.90) 0.912

choices, people use a combination of factors, including 3. Tucker-Lewis index (TLI) – (>0.90) 0.919

mental accounting, endowment, and regret aversion, leading 4. Parsimonious normed fit index (PNFI) – (>0.90) 0.921

to comparable results when framed similarly to Ritter’s (2003) 5. Parsimony comparative fit index (PCFI) – (>0.90) 0.922

research. 6. Relative fit index (RFI) – (>0.90) 0.913

The confirmation bias coefficient for cognitive illusions 7. Incremental fit index (IFI) – (>0.90) 0.904

is 0.311, the hindsight bias coefficient is 0.669, and the 8. Mean square error of approximation (RMSEA) – 0.067
(<0.08)
conservatism bias coefficient is 0.506. Evidence supports that
cognitive illusions are strongly related to their contexts (H5). Survey data.
The correlation between cognitive illusions and prejudices in
conduct is negative (-0.274), yet we still support the hypothesis
(H6) about the relationship between cognitive illusions and the financial markets is bolstered by investors’ conservatism,
behavioral biases. The results are consistent with Qawi (2010); confirmation, and hindsight biases. With a coefficient value
however, the investors’ adherence to established standards in of 0.582 for information processing, 0.601 for the bandwagon

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TABLE 5 Testing of hypothesis.

Hypotheses Un. Coef. Std. Coef. t-value Decision

Beta S.E.

H1 Anchoring→ Heuristic bias 1.000 0.082 0.795 4.498 Accept

Overconfidence→ Heuristic bias 0.732 0.086 0.572 3.642 Accept
Representativeness→ Heuristic bias 1.022 0.089 0.773 5.203 Accept
H2 Heuristic bias→ Behavioral biases 0.511 0.328 0.434 5.328 Accept
H3 Mental accounting→ Framing effect 1.000 0.096 0.684 4.213 Accept
Endowment effect→ Framing effect 0.890 0.102 0.649 3.248 Accept
Regret aversion→ Framing effect 1.138 0.111 0.815 4.236 Accept
H4 Framing effect→ Behavioral biases −0.608 0.411 −0.450 2.985 Accept
H5 Conservatism→ Cognitive illusions 1.000 0.225 0.506 4.452 Accept
Confirmation→ Cognitive illusions 0.777 0.231 0.311 2.299 Accept
Hind sight Cognitive illusions 1.750 0.392 0.669 4.878 Accept
H6 Cognitive illusions→ Behavioral biases −0.684 0.497 −0.274 3.625 Accept
H7 Information processing→ Herd mentality 1.000 0.171 0.582 3.544 Accept
Bandwagon effect→ Herd mentality 1.043 0.184 0.601 3.365 Accept
Social groups→ Herd mentality 1.085 0.193 0.581 5.163 Accept
H8 Herd mentality Behavioral biases −0.456 0.339 −0.256 3.025 Accept
H9 Behavioral biases→ Investment decisions 0.036 0.058 0.039 4.106 Accept
H10 Financial competency→ Financial literacy 0.044 0.058 0.048 3.524 Accept
Financial proficiency→ Financial literacy −0.107 0.062 −0.108 3.651 Accept
Financial opportunity→ Financial literacy 0.005 0.061 0.005 3.574 Accept
H11 Financial literacy→ Investment decisions 0.051 0.064 0.051 4.245 Accept

Survey data. Un. Coef, Un-standardized Coefficient; Std. Coef, Standardized Coefficient; S.E, Standard Error.

effect, and 0.581 for social groupings, it can be concluded
that herd mentality is significantly related to its predictors
(H7). Therefore, it is possible to accept hypothesis (H8),
which states that herd mentality is associated with a negative
coefficient of -0.256 for behavioral biases. Hwang and Salmon
(2004) observation that people are more likely to make wise
investment choices when they see their peers making them is
consistent with the findings of herd mentality. Together, the
coefficient value of 0.039 for behavioral biases in stock investing
choices points to the acceptance of the related hypothesis
(H9).
The value of the coefficient for financial literacy is 0.48
when it comes to financial competence, -0.108 when it comes
to financial proficiency, and 0.005 when it comes to financial
opportunity. Although this hypothesis (H10) is accepted, it
should be noted that the conceptions of financial literacy directly
influence the level of sufficient financial knowledge required
when making investment choices. The finding supports the
accepted hypothesis that financial literacy has a coefficient value
of 0.051 for investment decisions and has a favorable impact
on investment decisions (H11). The results are consistent
with those of Xia et al. (2014), who found that increased
financial literacy may improve the quality of decision-making.
The research results substantiated the hypothesis that both
the aspects of financial literacy and the behavioral biases
directly impact the investment choices that individuals make.
The test of estimates of independent variables, completed and
provided in Table 6, has been carried out to investigate the
relationship between the stock market’s various independent
components.
The disparities between heuristic bias and framing effect
are shown in Table 6 at 84%. It proves that there is a unique
behavioral bias in investing choices due to both heuristic bias
and the framing effect. This information also reveals that
investors use heuristics or frameworks while making investment
decisions. The degree to which people are susceptible to
heuristic bias regarding cognitive illusions varies by 19%.
Heuristic bias and cognitive illusions are important factors when
investing in the stock. Heuristics bias may mitigate the herd
mentality of investors by as much as 29%. Heuristics frequently
leads investors to make decisions based on a rule of thumb
rather than the consensus of the financial community. Investors
seem to be led in one of two ways, depending on whether they
are subject to the framing effect or cognitive illusions. When
choosing stocks, the framing effect keeps the herd mentality in
check, which limits it to 34%. It has been estimated that cognitive
illusions prevent investors from following herd behavior when
choosing assets by 60%.

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TABLE 6 Estimates of independent factors. Cognitive biases are a valuable tool for the speculative trader
Variables Variables Estimate S.E. C.R. R2 P as heuristic bias in making decisions that involve the risk
of either profit or loss. Investors rely on such heuristic
Heuristics Framing 0.630 0.089 7.103 0.845 *** information to a far higher degree than would be justified
bias effect by an assessment of the price variations of a single stock.
Heuristics Cognitive 0.075 0.041 1.842 0.186 0.065 Instead, investors rely on price fluctuations of other stocks.
bias illusions
The favorable effect of heuristic bias on behavioral biases in
Heuristics Herd −0.162 0.056 −2.918 −0.287 0.004
investing decisions is limited, as is the number of investment
bias mentality
ideas that can be put into reality. The mental accounting
Framing Cognitive 0.007 0.034 0.201 0.019 0.840
effect illusions of investors, the endowment effect, and regret aversion are
Framing Herd −0.165 0.051 −3.258 −0.335 0.001 all factors that contribute to the framing effect, which is
effect mentality a primary contributor to irrational conduct on the part
Cognitive Herd −0.161 0.043 −3.749 −0.604 *** of investors. When investors consider whether or not to
illusions mentality buy a firm, the tactics they use and their gut sentiments
Survey data. The symbol *** denotes a significant level at 1%. have a role in the final decision, known as the framing
effect. When deciding on whether or not to purchase a
company, investors are more inclined to rely on their gut
Discussion feelings than on logic because of an effect called the framing
effect. The assumption supports the theory that biases in
This research investigates financial literacy and behavioral behavior may be significantly impacted by how a problem is
biases’ role in the illogical behaviors people sometimes engage framed.
in while making decisions. A large amount of behavioral In the financial markets, emotional decision-making is
bias is included in investors’ investment judgments. Financial common due largely to cognitive biases. Investment in a
literacy enables one to rationalize such illogical conduct and business is fraught with cognitive illusions due to factors such
arrive at a conclusion that is more likely to bring about as conservativeness, confirmation bias, and hindsight bias.
the intended increase in profit. In light of this fact, the Our study findings are in line with Thanki et al. (2022).
research extends the application of behavioral economics to Cognitive illusions lead investors astray from rational decision-
the process of decision-making about investments among making when valuing assets. In order to create new mental
individual investors (Moreira Costa et al., 2021). Eleven tricks, it is common practice to revisit older ones. Cognitive
hypotheses were presented in the research, five of which illusions have a considerable impact on bias in action. The
dealt with the antecedents of heuristics bias, framing effect, emergence of herd mentality in financial markets is facilitated by
cognitive illusions, herd mentality, and financial literacy. The information processing, the bandwagon effect, and the impact
other six hypotheses dealt with other topics. The effects of of social groups. Nevertheless, because everyone may quickly
financial literacy and behavioral biases on investment choices access the same pieces of data, the herd mentality could be
were the subject of two hypotheses, while four hypotheses encouraged by a bandwagon effect. People can better analyze
investigated the effect that it had on various types of behavioral the benefits of several alternatives and agree on a plan of
biases. action when they get together. Financial choice biases may
The study’s findings demonstrated that three cognitive emerge when individual investors are too affected by the herd
biases—anchoring, representativeness, and overconfidence— mentality of the investment community. In order to invest
directly contribute to bad investment decisions based on wisely and manage one’s finances responsibly, one must have
incorrect perceptions about past success. The study finding a firm grasp of both fundamentals. When consumers develop
is supported by the existing literature such as Jain et al. their financial literacy, they access a wider range of investment
(2020), KARTINI and NAHDA (2021), and Adil et al. (2022b). options. Improving stock market results via education about
According to the findings of Fedorova et al. (2015), an finance. The stock market is a good illustration of a financial
investor’s knowledge and decisions regarding investment and chance.
savings can be improved when they reach retirement age. Therefore, investors may better judge stock buy/sell timing,
It also appears that demographic factors such as gender, portfolio risk, and projected return with a firm knowledge of
age, and income are associated with the investor’s behavior. financial fundamentals. Understanding the financial markets
According to Ateş et al. (2016), there is a significant connection and gaining the information, talent, and opportunity that come
between the different behavioral biases factors and the degree with it may boost an investor’s likelihood of making profitable
of financial literacy. According to the findings, having a investment selections. Behavioral biases include heuristic bias,
strong knowledge of finances has a detrimental impact on the framing effect, cognitive illusions, and herd mentality.
three factors: framing, overconfidence, and loss aversion. It lends credence to the notion that investors depend on

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Weixiang et al.
heuristics rather than frames, illusions, or herd mentality.
When it comes to individual investors, however, the heuristic
bias has a disproportionately negative effect on intelligence.
As a result, investors rely heavily on the rule of thumb as a
guiding principle for making important decisions. To some
extent, investors form their expectations based on their market
knowledge. Trusting and implementing previously known plans
might be less of a mental strain for investors than developing
novel ways of choosing equities. People sometimes fall prey
to herd mentality rather than using their critical thinking
abilities in the face of repeated losses or traumatic situations.
It has been shown that behavioral biases significantly impact
economic choices.
Investing decisions are heavily influenced by people’s
lack of knowledge about finance and their susceptibility
to various forms of prejudice. Behavioral biases may
give some foundational ideas that might help investors
make better investment choices, and investors may benefit
from financial literacy coaching to comprehend the
investing environment better. The significant independent
connection between the variables indicates that heuristic
bias substantially affects both the framing effect and
cognitive illusions when making judgments. However, this
has negative effects on the “herd mentality.” Cognitive
illusions are bolstered by the framing effect, whereas
the herd mentality is diminished. Investors should
guard against the herd mentality that might arise from
succumbing to cognitive illusions in the stock market.
Individual investors’ irrational conduct in the stock market
is not surprising, given market participants’ high level of
financial knowledge.
Investment decision-making is how investors weigh both
logical and emotional factors. While it is true that investors
do not always make the most logical decisions, standard
financial theories assume that they do. Nevertheless, modern
financial theories propose that one’s gut rather than one’s
head should be the deciding factor when making financial
decisions. Our study finding of financial literacy increases
the accuracy in prediction for investment is supported by
the existing literature (Arianti, 2018; Alaaraj and Bakri, 2020;
Raut, 2020; Dinantara et al., 2022). For example, the study
of Adil et al. (2022a) documented that A more informed
understanding of personal finance may facilitate a rise in the
proportion of individuals who choose to participate in the
stock market. Investors often make decisions on the spur
of the moment. A person’s decision-making process may be
affected by four main behavioral biases: heuristic bias, the
framing effect, cognitive illusions, and herd mentality. However,
financial knowledge and behavioral biases are two elements that
may significantly impact investment decisions. We investigate
the association between financial literacy and behavioral biases
in stock investing using observable and latent variables in
structural equation modeling (Hassan Al-Tamimi and Anood
Frontiers in Psychology
10.3389/fpsyg.2022.977444
Bin Kalli, 2009). When it comes to decision-making, actions
linked with investing in stock shares often demonstrate heuristic
bias, the framing effect, cognitive illusions, and herd mentality.
This is done to determine a decision’s most significant and
pertinent aspects. Due to their behavioral inclinations, equity
investors’ deliberate mental activity might be deemed to include
biases. A variety of cognitive biases may have a detrimental
impact on the portfolios of persons who invest in the stock
market. Individual stock investing decisions are impacted by
widespread behavioral biases and a lack of financial expertise.
To attain the desired result of making intelligent investment
decisions, it will be necessary to test the hypothesis. Using
confirmatory factor analysis as part of the analytical process for
constructing a measurement model ensures that the data are
appropriately represented. In evaluating the data’s quality, the
data’s consistency is investigated first, followed by an evaluation
of the data’s convergent validity. Each component used to assess
the quality of a latent construct must have shown internal
consistency in the past.
Conclusion and research
implications
Investors’ decision-making is a complex and complicated
process governed by several behavioral facts, including
understanding financial information, attitude to assessment,
and the capacity to capitalize correctly. The motivation of
the study is to evaluate the effects of financial literacy and
the behavioral basis on investment decisions. As a sample
for research data collection, the study considered 475 small
investors, and with the application of SEM, the expected
hypothesis has been evaluated and investigated.
In terms of the hypothesis assessment, the study
documented that financial literacy has positively connected
to the investment decision, suggesting that investors’
understanding of financial information is appropriately
guided toward appropriate investment decisions. Further,
the findings point to the following avenues for study
and advancement in the field. The process of assigning
value to an asset in the context of a purchasing decision
is a challenging one for individual investors. Given that
nobody can know which way stock prices will go in the
future, successful traders must develop their methods
or study those already proven effective. Rule of thumb,
personal calculation, and past experiences have all been
used by successful investors to construct their methods. By
making the most educated choices feasible, investors may
maximize their returns.
Successful investing in the stock market requires knowledge
of the ever-changing market and the ability to generate viable
investment ideas. If investors have access to the correct data,
15 frontiersin.org
Weixiang et al.
stock market education might be more beneficial. Those who
put their money into the stock market often have an irrational
mindset since they have not been taught otherwise. While
illogical wagers may provide short-term gains, they would
ultimately prove costly. Academics, legislators, and experts need
to provide more opportunities for training and growth so that
investors may make better decisions.
Data availability statement
The raw data supporting the conclusions of this article will
be made available by the authors, without undue reservation.
Author contributions
MQ: methodology, interpretation, first draft, and final draft.
RK: introduction and data curation. SW: literature survey and
methodology of the study. WR: literature survey, data curation,
and final draft. All authors contributed to the article and
approved the submitted version.
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