Designing a Model of Investor Behavioral Biases with Emphasis on the Role of Financial Literacy

Alireza  Khamesi; Abdullah Nazari; Hamidreza  Jafari; Farhad  Hanifi

Authors

Alireza Khamesi Department of Management, Ab.C., Islamic Azad University, Abhar, Iran Author https://orcid.org/0009-0002-8628-8502
Abdullah Nazari Department of Management, Ab.C., Islamic Azad University, Abhar, Iran https://orcid.org/0009-0005-4692-7113
Hamidreza Jafari Department of Engineering, Ab.C., Islamic Azad University, Abhar, Iran Author https://orcid.org/0000-0002-2959-5138
Farhad Hanifi Department of Management, CT.C., Islamic Azad University, Tehran, Iran Author https://orcid.org/0009-0001-6223-1344

Keywords:

Financial Literacy; Behavioral Biases; Investor Behavior; Investment Decision-Making; Overconfidence; Herding Behavior; Structural Equation Modeling.

Abstract

This study aimed to design and empirically test a structural model of investor behavioral biases with particular emphasis on the effect of financial literacy among individual investors in Tehran. This quantitative, cross-sectional, descriptive-correlational study was conducted on 384 individual investors in Tehran selected through purposive and convenience sampling. Data were collected using a structured questionnaire assessing financial literacy and eleven behavioral biases, including overconfidence, representativeness, anchoring, availability bias, confirmation bias, loss aversion, regret aversion, disposition effect, mental accounting, herding behavior, and status quo bias. The measurement properties of the constructs were evaluated using confirmatory factor analysis, Cronbach’s alpha, composite reliability, average variance extracted, and variance inflation factors. Pearson correlation analysis was used to examine bivariate relationships, and structural equation modeling was performed in AMOS to test the hypothesized effects of financial literacy on investor behavioral biases. Model fit was evaluated using χ²/df, RMSEA, CFI, TLI, IFI, GFI, AGFI, and SRMR. Financial literacy was significantly and negatively associated with all behavioral biases (p < 0.01). In the structural model, financial literacy significantly reduced overconfidence (β = -0.47), herding behavior (β = -0.44), confirmation bias (β = -0.43), anchoring (β = -0.39), disposition effect (β = -0.36), representativeness (β = -0.34), status quo bias (β = -0.32), availability bias (β = -0.31), loss aversion (β = -0.28), regret aversion (β = -0.26), and mental accounting (β = -0.23), with all paths significant at p < 0.001. The model showed acceptable fit (χ²/df = 2.43, RMSEA = 0.061, CFI = 0.938, TLI = 0.929, IFI = 0.940, GFI = 0.914, AGFI = 0.901, SRMR = 0.052). Financial literacy plays a significant protective role against a broad range of investor behavioral biases, with stronger effects on cognitively and socially driven biases than on emotionally rooted tendencies. Strengthening financial literacy may therefore improve the quality of investment decision-making and reduce systematic behavioral errors among individual investors.

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