Financial Literacy and Stock Investment Decisions: The Mediating Role of Overconfidence Bias among Retail Investors at the Pakistan Stock Exchange

Abstract

This paper examines how financial literacy influences the decision of retail investors to invest in stocks in the Pakistan Stock Exchange, mediated by overconfidence bias. Quantitative research design was used whereby data was gathered using structured questionnaires on 211 retail investors in Sindh, Pakistan. The evaluation of the measurement model was performed in terms of reliability, convergent validity, and discriminant validity, and the structural model was subjected to the PLS-SEM analysis. The evidence shows that financial literacy has a positive effect on investment choices and the decreased level of overconfidence. In its turn, overconfidence bias has pernicious impact on investment quality, yet it mediates the correlation between financial literacy and investment decisions to a certain extent. The findings emphasize the relevance of financial education as a tool of encouraging rational investing behavior and reducing cognitive bias of retail investors. Some recommendations that are practical and applicable include the inclusion of specific financial literacy and behavioral guidance tools to increase the quality of portfolio diversification and decision-making.