What explains the investment decision-making behaviour? The role of financial literacy and financial risk tolerance

Abstract

Investment decision-making behaviour has a significant role in the financial growth of individual investors. This study investigates the impact of financial literacy on investment decision-making behaviour by taking mediating role of financial risk tolerance. The study employed quantitative research design and multi-stage random and convenience sampling. A survey questionnaire was used to collect data from 384 registered individual investors of Pakistan Stock Exchange (PSX). Structural equation modelling (SEM) was used to test the relationships between the constructs. Results showed positive and significant impact of financial literacy on investment decision-making behaviour and financial risk tolerance among individual equity investors. Similarly, financial risk tolerance mediated the relationship between financial literacy and investment decision-making behaviour. The study suggests measures to policy makers for improving financial literacy among individual investors. It also proposes significant functional insights for stockbrokers, investment advisors, and financial managers through examining the investment decision-making behaviour of individual equity investors. This study serves as a guideline for academia to further develop/improve the financial literacy of future investors.