IDEAS home Printed from https://ideas.repec.org/a/adx/journl/v5y2023i1p106-113.html
   My bibliography  Save this article

Do Personality Traits and Cultural Norms Influence Investment Decisions? The Role of Financial Literacy and Investor Overconfidence

Author

Listed:
  • Muhammad Arsalan Hashmi
  • M Abdullah
  • Tariq Jalees
  • Ume Amen
  • Muhammad Arsalan

Abstract

Behavioral finance assumes that investors are irrational and several psychological factors, behavioral biases, and personality traits influence their investment decisions. Therefore, this study intends to examine how behavioral factors, such as personality traits and cultural norms, affect Pakistani investors’ decisions while considering the moderating effect of financial literacy and the mediating role of investor overconfidence. The study used PLS-SEM for statistical analysis on a final useable sample of 396 observations obtained from surveying investors based in Karachi, Lahore, and Islamabad. Our results indicate that overconfidence, extroversion, introversion, individualism and collectivism positively affect investment decisions. Further, we found that overconfidence reduces herding bias while financial literacy moderates the relationship. The empirical results also show that overconfidence mediates the association between (i) financial literacy and herding bias and (ii) financial literacy and investment decisions. Hence, we argue that investors should enhance their financial literacy to improve their investment capabilities and skills that are imperative for unique and independent investment decisions. Investors should also become financially literate for outperforming the market and not imitate other investors. Similarly, we urge policymakers to regulate and protect investors' interests by encouraging them to enhance their financial literacy.

Suggested Citation

  • Muhammad Arsalan Hashmi & M Abdullah & Tariq Jalees & Ume Amen & Muhammad Arsalan, 2023. "Do Personality Traits and Cultural Norms Influence Investment Decisions? The Role of Financial Literacy and Investor Overconfidence," Journal of Economic Impact, Science Impact Publishers, vol. 5(1), pages 106-113.
  • Handle: RePEc:adx:journl:v:5:y:2023:i:1:p:106-113
    DOI: 10.52223/jei5012313
    as

    Download full text from publisher

    File URL: https://doi.org/10.52223/jei5012313
    Download Restriction: no

    File URL: https://libkey.io/10.52223/jei5012313?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    References listed on IDEAS

    as
    1. van Rooij, Maarten & Lusardi, Annamaria & Alessie, Rob, 2011. "Financial literacy and stock market participation," Journal of Financial Economics, Elsevier, vol. 101(2), pages 449-472, August.
    2. repec:bla:jfinan:v:53:y:1998:i:6:p:1887-1934 is not listed on IDEAS
    3. Maria Andersson & Martin Hedesström & Tommy Gärling, 2014. "A Social-Psychological Perspective on Herding in Stock Markets," Journal of Behavioral Finance, Taylor & Francis Journals, vol. 15(3), pages 226-234, July.
    4. Monika Czerwonka, 2019. "Cultural, cognitive and personality traits in risk-taking behaviour: evidence from Poland and the United States of America," Economic Research-Ekonomska Istraživanja, Taylor & Francis Journals, vol. 32(1), pages 894-908, January.
    5. Fama, Eugene F, 1970. "Efficient Capital Markets: A Review of Theory and Empirical Work," Journal of Finance, American Finance Association, vol. 25(2), pages 383-417, May.
    6. Nelson Maina Waweru & Evelyne Munyoki & Enrico Uliana, 2008. "The effects of behavioural factors in investment decision-making: a survey of institutional investors operating at the Nairobi Stock Exchange," International Journal of Business and Emerging Markets, Inderscience Enterprises Ltd, vol. 1(1), pages 24-41.
    7. Vanessa Martins Valcanover & Igor Bernardi Sonza & Wesley Vieira da Silva, 2020. "Behavioral Finance Experiments: A Recent Systematic Literature Review," SAGE Open, , vol. 10(4), pages 21582440209, November.
    8. Dimitrios Kourtidis & Željko Ševi? & Prodromos Chatzoglou, 2011. "Investors' trading activity, a behavioural perspective: professionals vs. individuals," International Journal of Behavioural Accounting and Finance, Inderscience Enterprises Ltd, vol. 2(3/4), pages 346-366.
    9. Terrance Odean., 1996. "Volume, Volatility, Price and Profit When All Trader Are Above Average," Research Program in Finance Working Papers RPF-266, University of California at Berkeley.
    10. Misbah Sadiq & Hareem Amna, 2019. "Impact of Personality Traits on Risk Tolerance and Investors' Decision Making," International Journal of Applied Behavioral Economics (IJABE), IGI Global, vol. 8(1), pages 1-20, January.
    11. Andreas Oehler & Stefan Wendt & Florian Wedlich & Matthias Horn, 2018. "Investors' Personality Influences Investment Decisions: Experimental Evidence on Extraversion and Neuroticism," Journal of Behavioral Finance, Taylor & Francis Journals, vol. 19(1), pages 30-48, January.
    12. Lusardi, Annamaria & Mitchell, Olivia S., 2011. "Financial literacy around the world: an overview," Journal of Pension Economics and Finance, Cambridge University Press, vol. 10(4), pages 497-508, October.
    13. Gambetti, Elisa & Giusberti, Fiorella, 2019. "Personality, decision-making styles and investments," Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics), Elsevier, vol. 80(C), pages 14-24.
    14. Beatriz Fernández & Teresa Garcia‐Merino & Rosa Mayoral & Valle Santos & Eleuterio Vallelado, 2011. "Herding, information uncertainty and investors' cognitive profile," Qualitative Research in Financial Markets, Emerald Group Publishing Limited, vol. 3(1), pages 7-33, April.
    15. John R. Nofsinger & Richard W. Sias, 1999. "Herding and Feedback Trading by Institutional and Individual Investors," Journal of Finance, American Finance Association, vol. 54(6), pages 2263-2295, December.
    16. Gerasimos G. Rompotis, 2018. "Herding Behavior among Exchange-Traded Funds," Journal of Behavioral Finance, Taylor & Francis Journals, vol. 19(4), pages 483-497, October.
    17. Karen Moustafa Leonard & Michael Slaubaugh & Hwei Cheng Wang, 2010. "Cultural effects on accounting practices and investment decisions," International Journal of Accounting and Finance, Inderscience Enterprises Ltd, vol. 2(2), pages 156-170.
    18. Maqsood Ahmad & Syed Zulfiqar Ali Shah, 2020. "Overconfidence heuristic-driven bias in investment decision-making and performance: mediating effects of risk perception and moderating effects of financial literacy," Journal of Economic and Administrative Sciences, Emerald Group Publishing Limited, vol. 38(1), pages 60-90, December.
    19. Shefrin, Hersh & Statman, Meir, 2000. "Behavioral Portfolio Theory," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 35(2), pages 127-151, June.
    20. Kourtidis, Dimitrios & Šević, Željko & Chatzoglou, Prodromos, 2011. "Investors’ trading activity: A behavioural perspective and empirical results," Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics), Elsevier, vol. 40(5), pages 548-557.
    21. Harry Markowitz, 1952. "The Utility of Wealth," Journal of Political Economy, University of Chicago Press, vol. 60(2), pages 151-151.
    22. Satish Kumar & Nisha Goyal, 2016. "Evidence on rationality and behavioural biases in investment decision making," Qualitative Research in Financial Markets, Emerald Group Publishing Limited, vol. 8(4), pages 270-287, November.
    23. Mouna, Amari & Anis, Jarboui, 2017. "Financial literacy in Tunisia: Its determinants and its implications on investment behavior," Research in International Business and Finance, Elsevier, vol. 39(PA), pages 568-577.
    24. Lambert, Jérôme & Bessière, Véronique & N’Goala, Gilles, 2012. "Does expertise influence the impact of overconfidence on judgment, valuation and investment decision?," Journal of Economic Psychology, Elsevier, vol. 33(6), pages 1115-1128.
    25. Chuang, Wen-I & Lee, Bong-Soo, 2006. "An empirical evaluation of the overconfidence hypothesis," Journal of Banking & Finance, Elsevier, vol. 30(9), pages 2489-2515, September.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Yogita Singh & Mohd. Adil & S. M. Imamul Haque, 2023. "Personality traits and behaviour biases: the moderating role of risk-tolerance," Quality & Quantity: International Journal of Methodology, Springer, vol. 57(4), pages 3549-3573, August.
    2. Salem, Razan, 2019. "Examining the investment behavior of Arab women in the stock market," Journal of Behavioral and Experimental Finance, Elsevier, vol. 22(C), pages 151-160.
    3. Phan, Thuy Chung & Rieger, Marc Oliver & Wang, Mei, 2018. "What leads to overtrading and under-diversification? Survey evidence from retail investors in an emerging market," Journal of Behavioral and Experimental Finance, Elsevier, vol. 19(C), pages 39-55.
    4. Zamri Ahmad & Haslindar Ibrahim & Jasman Tuyon, 2017. "Behavior of fund managers in Malaysian investment management industry," Qualitative Research in Financial Markets, Emerald Group Publishing Limited, vol. 9(3), pages 205-239, August.
    5. Sangita Choudhary & Mohit Yadav & Anugamini Priya Srivastava, 2024. "Cognitive Biases Among Millennial Indian Investors: Do Personality and Demographic Factors Matter?," FIIB Business Review, , vol. 13(1), pages 106-117, January.
    6. Zamri Ahmad & Haslindar Ibrahim & Jasman Tuyon, 2017. "Institutional investor behavioral biases: syntheses of theory and evidence," Management Research Review, Emerald Group Publishing Limited, vol. 40(5), pages 578-603, May.
    7. Liu, Hongqi & Peng, Cameron & Xiong, Wei A. & Xiong, Wei, 2022. "Taming the bias zoo," Journal of Financial Economics, Elsevier, vol. 143(2), pages 716-741.
    8. Suresh G., 2024. "Impact of Financial Literacy and Behavioural Biases on Investment Decision-making," FIIB Business Review, , vol. 13(1), pages 72-86, January.
    9. Liu, Hongqi & Peng, Cameron & Wei, Xiong & Wei, Xiong, 2022. "Taming the bias zoo," LSE Research Online Documents on Economics 109301, London School of Economics and Political Science, LSE Library.
    10. Saggese, Pietro & Belmonte, Alessandro & Dimitri, Nicola & Facchini, Angelo & Böhme, Rainer, 2023. "Arbitrageurs in the Bitcoin ecosystem: Evidence from user-level trading patterns in the Mt. Gox exchange platform," Journal of Economic Behavior & Organization, Elsevier, vol. 213(C), pages 251-270.
    11. Puput Tri Komalasari & Marwan Asri & Bernardinus M. Purwanto & Bowo Setiyono, 2022. "Herding behaviour in the capital market: What do we know and what is next?," Management Review Quarterly, Springer, vol. 72(3), pages 745-787, September.
    12. Manhwa Wu & Paoyu Huang & Yensen Ni, 2017. "Investing strategies as continuous rising (falling) share prices released," Journal of Economics and Finance, Springer;Academy of Economics and Finance, vol. 41(4), pages 763-773, October.
    13. Ni, Yensen & Wu, Manhwa & Day, Min-Yuh & Huang, Paoyu, 2020. "Do sharp movements in oil prices matter for stock markets?," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 539(C).
    14. Beata Świecka & Paweł Terefenko & Tomasz Wiśniewski & Jingjian Xiao, 2021. "Consumer Financial Knowledge and Cashless Payment Behavior for Sustainable Development in Poland," Sustainability, MDPI, vol. 13(11), pages 1-18, June.
    15. Bastian Schulz, 2023. "Behavioral Finance and how its Behavioral Biases Affect German Investors," ACTA VSFS, University of Finance and Administration, vol. 17(1), pages 39-59.
    16. Daniel, Kent & Hirshleifer, David & Teoh, Siew Hong, 2002. "Investor psychology in capital markets: evidence and policy implications," Journal of Monetary Economics, Elsevier, vol. 49(1), pages 139-209, January.
    17. Miklánek, Tomáš & Zajíček, Miroslav, 2020. "Personal traits and trading in an experimental asset market," Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics), Elsevier, vol. 86(C).
    18. Schneider, Julian & Oehler, Andreas, 2021. "Competition for visibility: When do (FX) signal providers employ lotteries?," International Review of Financial Analysis, Elsevier, vol. 78(C).
    19. Ni, Yensen & Cheng, Yirung & Huang, Paoyu & Day, Min-Yuh, 2018. "Trading strategies in terms of continuous rising (falling) prices or continuous bullish (bearish) candlesticks emitted," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 501(C), pages 188-204.
    20. Silvia Mariela Méndez-Prado & Vanessa Rodriguez & Kevin Peralta-Rizzo & Patricia Everaert & Martin Valcke, 2023. "An Assessment Tool to Identify the Financial Literacy Level of Financial Education Programs Participants’ Executed by Ecuadorian Financial Institutions," Sustainability, MDPI, vol. 15(2), pages 1-24, January.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:adx:journl:v:5:y:2023:i:1:p:106-113. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Iqbal Javed (email available below). General contact details of provider: https://www.scienceimpactpub.com/journals/index.php .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.