INDIVIDUAL INVESTMENT BEHAVIOR AND TRADE RETURNS: MODERATING ROLE OF FINANCIAL LITERACY

Abstract

The main aim of present research is to investigates the existence of behavioral biases i.e. disposition
effect, herding and overconfidence in investment decision of investors and its subsequent impact on
the trade returns of individual investors with moderating role of financial literacy. The efficient
market hypothesis and other traditional finance theories assumes the stock market investors as
rational while the behavioral finance paradigm refute this notion and asserts that all investors are not
rational in their investment decision and are prone to behavioral biases. Further the literature reveals
that financial literacy reduces the impact of behavioral biases on investment decision and enhance the
rationality of investors. these notions are based on the heuristics and prospect theory. In this regards
the literature has been reviewed where mixed results have been seen on the impact of behavioral
biases on investment decision and trade returns of investors while there is very low work on the
moderating role of financial literacy between these behavioral biases and trade returns of investors.
the methodology consists of objectivist ontological stance and positivist epistemological approach,
quantitative research design, deductive approach and explanatory and exploratory type of research.
The data has been collected with 5-point likert scale which has been adopted from various scholars of
the field. The population includes investors of if Khyber Pakhtunkhwa (KPK) while includes 600
individual investors from various brokerage firms in Peshawar. The results reveal that investors
incorporate the disposition effect, herding and overconfidence in their investment decision has strong
impact on the investment returns of investors. further financial literacy plays a strong moderating role
among disposition effect, herding, overconfidence and trade returns of the investors. it is
recommended on the basis of results that for smooth and efficient operation of stock market the
government should enhance the financial literacy of investors.