Investigating the Moderating Roles of Basic and Advanced Financial Literacy between Behavioural Biases and Stock Buying Decisions

Abstract

This empirical research investigates whether investors in Pakistan Stock Exchange are influenced by a set of behavioural biases while making stock buying decisions. Subsequently, this study evaluates as to what extent active stock investors are financially literate at basic and advanced level and test whether basic and advanced financial literacy moderate the effects of behavioural biases on stock buying decisions. Five-point Likert scale has been used to measure the reflective constructs of behavioural biases and stock buying decisions. Sample size of 326 respondents from Karachi and Hyderabad cities in Pakistan has been used, employing convenience sampling, to analyze the data using descriptive statistics and Partial Least Square Structural Equation Modeling. Out of seven biases tested, Anchoring and Adjustment bias is found to have negative significant effect on stock buying decisions while Herd Mentality bias and Availability bias are found to have significant positive effect on stock buying decisions. Active stock investors were found to have high level of basic financial literacy whereas advanced financial literacy was present at a moderate level. Basic financial literacy moderates the association between herd mentality bias and stock buying decisions while advanced financial literacy moderates the relationship between mental accounting bias and stock buying decisions.