Financial Literacy as a Moderator of Behavioral Biases in Investment Decisions

Abstract

This study examines how four behavioral biases overconfidence, herding, loss aversion, and mental accounting affect investment decisions among stock investors in Indonesia. Primary data were collected through questionnaires from individual stock investors, yielding 506 responses, of which 400 valid responses were analyzed. Data analysis employed Partial Least Squares Structural Equation Modeling (PLS-SEM) using SmartPLS 4. The results indicate that overconfidence, herding, loss aversion, and mental accounting have significant positive effects on investment decisions, with mental accounting showing the strongest influence. Financial literacy significantly moderates the relationships between overconfidence, loss aversion, mental accounting, and investment decisions. However, financial literacy does not significantly moderate the relationship between herding and investment decisions. These findings suggest that investment decisions are influenced not only by behavioral biases but also by investors’ financial literacy, highlighting the importance of financial knowledge in understanding and managing behavioral tendencies in investment decision-making.