Testing the moderating effect of financial literacy on the influence of heuristic-driven biases on irrational investment behaviors

Purpose This paper aims to examine the moderating effect of financial literacy on the relationship between heuristic-driven biases and irrationality in investment decision-making among individual investors in the Indian stock market. Unlike most studies that focus solely on basic financial literacy, this research incorporates investment-related financial literacy as a measure of overall financial literacy among investors. Design/methodology/approach Data collection from a sample of 400 individual investors in the Delhi-NCR region was conducted using a questionnaire and a cross-sectional design. Convenience sampling was used for sample selection. Hypotheses were tested through regression and multi-group analysis using SmartPLS 4.0. Findings The study revealed that heuristic-driven biases positively influence irrationality in investment decision-making, indicating that higher biases correspond to increased irrationality in decisions. However, the moderation effect of financial literacy was not found to be significant between heuristic-driven biases and investment decision-making. This suggests that financial literacy does not assist investors in mitigating the impact of biases on their decision-making, particularly due to their proficiency at the basic level of financial literacy but lack of investment-related financial literacy. Originality/value The present study is pioneering in its focus on the moderating effect of financial literacy between heuristic-driven biases and investment decision-making. Unlike previous research solely assessing the level of financial literacy among investors, this study emphasizes its role in moderating the relationship between heuristic-driven biases and investment decisions. The study uses a financial literacy scale that evaluates not only the basic level of financial literacy but also investment-related financial literacy, adding depth to the analysis.