How financial literacy and demographic variables relate to behavioral biases

Abstract

Purpose: The purpose of this paper is to examine how financial literacy and demographic variables (gender, age, income level, education, occupation, marital status and investment experience) related to behavioral biases. Design/methodology/approach: The study uses one-way analysis of variance (ANOVA), factor analysis and multiple regression analysis to examine survey data from more than 500 individual investors in India. Findings: The results reveal the presence of different behavioral biases including overconfidence and self-attribution, the disposition effect, anchoring bias, representativeness, mental accounting, emotional biases and herding among Indian investors. Hence, the findings support the view that individual investors do not always act rationally. The results also show that financial literacy has a negative association with the disposition effect and herding bias, a positive relation with mental accounting bias, but no significant relation with overconfidence and emotional biases. Age, occupation and investment experience are the most important demographic variables that relate to the behavioral biases of individual investors in the sample. Regarding gender, males are more overconfident than are females about their knowledge of the stock market. Research limitations/implications: The study does not test for causality, only association between the variables. Thus, the findings in this study should not be interpreted as suggesting causality. The study may have implications for financial educators in promoting the financial awareness programs for individuals. Financial advisors can potentially become more effective by understanding their clients’ decision-making processes. Originality/value: Despite an extensive literature on behavioral finance, limited academic research attempts to unravel the relation of how financial literacy and demographic variates relate to behavioral biases. This study contributes to this literature by trying to fill this gap.