Can risk perception moderate the relationship between financial literacy and investment decision: An empirical study among the Nepal insurance industry?

This research is to investigate the role of risk perception that could be played in the relationship between financial literacy and investment decision-making among both individual and institutional investors in Nepal's insurance sector. By leveraging the insights of Prospect Theory as well as Bounded Rationality Theory, this study uncovers the profound impact of psychological biases, cognitive constraints, and personal perceptions on financial behavior, even among those equipped with financial knowledge. Through a meticulously conducted cross-sectional survey and convenience sampling, data were collected from Three hundred forty eight participants across various Nepali cities. The findings are unequivocal: there is a significant positive correlation between financial literacy and investment decisions. Crucially, moderation analysis reveals that risk perception dramatically influences the strength of this relationship. The implications are clear: while financial literacy undeniably enhances individuals' ability to make informed investment decisions, its effectiveness is contingent upon their perception of financial risk. Investors with substantial financial knowledge may still exhibit cautious or risk-averse behavior if their risk perception is heightened. Conversely, a balanced risk perception, when coupled with financial literacy, significantly boosts confidence and decision-making quality. These findings are of paramount importance for financial educators, advisors, and policymakers striving to enhance investment behavior and capital formation in developing economies like Nepal. It is imperative that financial education programs be strategically designed to integrate both knowledge-building and risk-management strategies, thereby fostering more confident and rational investment behavior.