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The Investment Puzzle: Unveiling Behavioral Finance, Risk Perception, and Financial Literacy

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Listed:
  • Almansour Bashar Yaser

    (Muscat University, Faculty of Business and Management, Muscat, Oman)

  • Almansour Ammar Yaser

    (Oman College of Management and Technology, Department of Administrative and Financial Sciences, Barka, Oman)

  • Elkrghli Sabri

    (University of Benghazi, Benghazi, Libya)

  • Shojaei Seyed Amirhossein

    (Muscat University, Faculty of Business and Management, Muscat, Oman)

Abstract

Contemporary financial theory upholds the market efficiency hypothesis, asserting that stock prices inherently embody all available information. In contrast, behavioral finance theory challenges this premise by proposing that psychological and emotional factors can wield influence over stock prices. This study delves into the repercussions of behavioral finance factors on investment decisions within the Saudi equity markets, utilizing risk perception and financial literacy as mediating variables. An online questionnaire was disseminated to 350 individual investors, yielding 315 completed responses deemed suitable for analysis. Employing Structural Equation Modeling (SEM), the collected data underwent rigorous scrutiny. The findings reveal that herding, the disposition effect, blue-chip bias, and overconfidence significantly and positively impact both risk perception and financial literacy. Furthermore, all four behavioral finance factors exhibit a substantial positive indirect effect on investment decision-making through the intermediaries of risk perception and financial literacy. It is imperative to acknowledge the study’s specific focus on these factors while recognizing the potential influence of other elements on risk perception, financial literacy, and investment decision-making. The research underscores the critical importance of incorporating an individual’s perception of risk into investment decisions, as it markedly shapes their proclivity for risk-taking and, consequently, the performance of their investment portfolio. The findings highlight the necessity for investors to recognize and address their behavioral biases. Additionally, the study advocates for advisors and policymakers to formulate strategies aimed at mitigating the impact of these biases. The comprehensive exploration of behavioral finance factors and their implications for investment decisions yields valuable insights for individual investors and stakeholders in financial advisory and policymaking roles.

Suggested Citation

  • Almansour Bashar Yaser & Almansour Ammar Yaser & Elkrghli Sabri & Shojaei Seyed Amirhossein, 2025. "The Investment Puzzle: Unveiling Behavioral Finance, Risk Perception, and Financial Literacy," Economics, Sciendo, vol. 13(1), pages 131-151.
  • Handle: RePEc:vrs:econom:v:13:y:2025:i:1:p:131-151:n:1003
    DOI: 10.2478/eoik-2025-0003
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    More about this item

    Keywords

    behavior finance; risk perception; financial literacy; investment decisions;
    All these keywords.

    JEL classification:

    • G40 - Financial Economics - - Behavioral Finance - - - General
    • G41 - Financial Economics - - Behavioral Finance - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making in Financial Markets
    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making

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