Behavioral Biases and Investment Decisions: The Moderating Role of Financial Literacy among Retail Investors in the Digital Era

Abstract

Background: Digital investment services have expanded retail participation in Indonesia's capital market, but easier market access does not necessarily produce more rational investor behavior. Psychological tendencies continue to shape individual choices, and prior evidence remains inconsistent regarding whether financial literacy can restrain those tendencies. Objective: This research examines the relationship between an aggregate behavioral-bias construct and investment decisions, the direct role of financial literacy, and the extent to which financial literacy changes the behavioral-bias relationship among retail investors in a digital investment setting. Methods: A quantitative explanatory design was applied to 300 retail investors who used digital investment platforms. The proposed direct and interaction relationships were estimated using Partial Least Squares Structural Equation Modeling (PLS-SEM). Results: Behavioral biases were positively associated with investment decisions, while financial literacy also showed a positive direct relationship. The interaction coefficient was negative and significant, indicating that higher financial literacy reduces the strength of the association between behavioral biases and investment decisions. Conclusion: Financial knowledge supports more informed investment judgment and can moderate behavioral influence, although it does not remove psychological tendencies entirely. Investor education should therefore integrate financial competence with awareness of common behavioral biases.