Methodological Approaches to Investigating Financial Literacy and Behavioral Bias in Investment Decisions

Abstract

The rise in complexity of the financial markets has expanded the significance of the process of comprehending the investor behavior especially concerning the issues of financial literacy and behavioral biases. This paper examines the methodological frameworks and attempts to study the complex interconnection between financial literacy and behavioral biases and their effect on shaping investment choices. Financial literacy, which is the knowledge of an individual in relation to his/her financial abilities to cope and apply different financial capabilities or knowledge on different issues like personal financial management, budgeting, and investing are well known important factors that define good financial behaviour. Yet, there is evidence that even educated people, with decent financial literacy, are vulnerable against cognitive and emotional biases, like overconfidence, anchoring, herding, and loss aversion.