International Journal of Finance & Economics

Impact of Financial Literacy, Investors' Personality and

Overconfidence Bias on Investment Decisions: An Empirical
Analysis of the Investment Community in Pakistan

Journal: International Journal of Finance and Economics

Manuscript ID IJFE-21-1594

Wiley - Manuscript type: Research Article

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Financial Literacy, Investors' Personality, Overconfidence Bias,

Keywords: Investment Decisions, Risk Tolerance, Investors, Structural Equation
Modeling, Emerging market
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Page 1 of 15 International Journal of Finance & Economics

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Abstract
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11 Inclusive finance makes numerous financial products and services accessible and affordable to
12 the microfinance community, remarkably those absent from the conventional financial system.
13 Financial literacy is a leading factor affecting an individual's ability to access financial services.
14 This research estimates the impact of financial literacy, investors' personality, and
overconfidence bias on investment decisions using risk tolerance as a mediator factor. This study
15
employed Structural Equation Modeling to investigate whether financial literacy and other
16 personality traits affect investment decisions. The results showed that financial literacy,
17 investors' personality, and overconfidence bias are significantly relevant to risk tolerance and
18 investment decisions. As mediation results showed, risk tolerance plays a significant role in
19 financial literacy, investors' personality, overconfidence bias, and investment decisions. The
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20 implications of this study also provide valued recommendations for regulatory institutions to
21 improve financial inclusion in the emerging market context. This study also provides valuable
suggestions for investors and practitioners who are part of Pakistan's financial system related to
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investment activities.
23
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24 Keywords: Financial Literacy, Investors' Personality, Overconfidence Bias, Investment

25 Decisions, Risk Tolerance, Investors, Structural Equation Modeling, Emerging Market
26
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28 1. INTRODUCTION investors must be aware of the risks involved
29 in their financial decisions. Alternatively,
Financial inclusion promotes access to
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30 decisions based on insufficient or ambiguous

financial services and it directly connects with information and imperfect data evaluation tend
31 the growth of the financial system (Hasan et to lead to spurious results (Ullah et al., 2017).
32 al., 2020). The main hurdle of inclusive The investors must choose their investment
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33 finance is financial illiteracy (Kodongo, 2018; hazard centered on the trends that the investors
34 Lyon and Kass-Hanna, 2019; Hasan et al., find. Details may be needed if other clues
35 2020). Investment decision-making is a critical change the decision, or the evidence may be
and sensitive process because personal biases vain (Pak and Mahmood, 2015). The amount
36
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and traits vary in each investor. Although, of evidence comes from the way the decision-
37 decisions made during the lifespan of an maker uses it for investment. A knowledgeable
38 investor act differently over time. decision-maker may ever act as an informant
39 Aeknarajindawat (2020) finds several crucial regardless of the details to come (Worthy et al.
40 choices that influenced investors’ judgment. and Xiao et al., 2018). Expert investors may
41 He argues that the decision-making process make the right investment decision by creating
42 becomes more manageable when most self-confidence or using knowledge or risk
complexities are known to investors, which management suitably (Sivarajan and Bruijn,
43 causes a reduction in financial losses.
44 2021).
45 Corporate analysts, institutional and In the extant literature, several studies
46 retail investors face several challenges such as investigate the factors such as financial
47 market volatility, regulatory inconsistencies, wellbeing, herding behavior, and investment
uncertainty in economic situations, and intention that influenced the investors'
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fullness of choice when making investment investment decisions. Yang et al. (2021),
49 decisions (Nguyen et al., 2016). Rational Masenya & Dickason-Koekemoer (2020) and
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Shusha (2016) examined the financial due to consistent changes in regulatory
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wellbeing and (Yang et al., 2021; policies, which hurt investors' decision-making
11 Papapostolou et al., 2017; Camara, 2017; processes (Chavali and Mohanraj, 2016). Due
12 Haghani & Sarvi, 2019) studied the herd to limited literature on the investment
13 behavior, and (Azizah & Mulyono, 2020; decision-making process regarding financial
14 Shim et al., 2008) assessed the investment literacy, this study contributes to the
15 intention. On the other hand, financial literacy, investment decision-making process and risk
16 investors' personality, and overconfidence bias tolerance literature.
are also essential forces of investment
17 This research makes three
decisions (Anshika et al., 2021; Arianti, 2018;
18 Bayar et al., 2020; Kannadhasan et al., 2016; contributions to fill the theoretical and
19 Nguyen et al., 2016). Therefore, very little empirical gap of the extant literature. First, we
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20 attention has been paid to risk tolerance as a document the quantitative impact of financial
21 mediator factor during the investors’ literacy, investors’ personality and
investment decision-making. overconfidence bias on investment decisions
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using structural equation modeling. Second,
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Pakistan has a population of more than
24 200 million, but penetration in access to
25 financial services is shallow, with only 3% and
26 25% of the population having access to credit
this study provides several paradigms of
financial inclusion that how investors’ can
access financial services and promote financial
literacy. Third, this study also explores various
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27 and bank accounts in the banking sector. Lack avenues for future research on adding value to
28 of awareness of financial products, lower per relevant literature.
capita income and poor financial management
29 This study divides into five sections as
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skills are the critical reasons for the unbanked

30 population in Pakistan. The State Bank of Section-II will present the literature review,
31 Pakistan (SBP) regularly conducts surveys and section-III will provide the research methods.
32 launched a national financial inclusion strategy Then section-IV will present the results and
discussion, and the last Section-V will provide
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33 (NFIS) program to weigh the state of financial

34 inclusion. The performance of SBP initiatives the conclusion, limitations, and suggestions for
and demand-side trends to use a range of future research.
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quality payments, savings, credit and
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2. LITERATURE REVIEW
insurance services that meet their needs with
37 dignity and fairness (Ibrahim & Rizvi, 2018). 2.1 Financial Literacy and Risk Tolerance
38 The banking sector of Pakistan consists of 53
39 banks with a 16,076 branch network and has Financial literacy is considered to be an
40 57 million bank accounts holder. essential skill for people to increase their
economic prosperity. Lack of financial
41 information leads to poor financial choices that
The purpose of this study is to
42 investigate the impact of financial literacy, are harmful to individuals and society as a
43 investors' personality and overconfidence bias whole (Kannadhasan et al., 2016). A good
44 on investment decisions while using risk correlation between financial literacy and the
45 tolerance as a mediating factor. Due to higher accumulation of wealth, savings and
46 political and economic instability in the retirement planning is established in several
47 economy, investors required more diligence studies (Dickason and Ferreira, 2018). Kumari
while making investment decisions (Awais et (2020) concludes that financially literate
48 students exhibited a more positive attitude
al., 2016). The SECP and SBP are the central
49 regulators of the financial system in Pakistan towards the financial risk than financially
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illiterate students. Masenya and Dickason- about lifespan and events can raise the over-
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Koekemoer (2020) argue that people with a assessment of the market and under-
11 low level of financial literacy would assessment of potential risks. Alternatively,
12 experience a high level of difficulty in adverse behaviors and thin attention cause
13 understanding financial concepts, and this over the assessment of hazards and lead to the
14 often has complete problems. Bayar et al. loss of gainful investment prospects.
15 (2020) conjecture that people with more H2: Investor's personality positively
16 financial experience could have better- influenced to risk tolerance.
distributed finances. Akims and Jagongo
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(2017) examine that persons with an upper 2.3 Overconfidence Bias and Risk Tolerance
18 level of financial literacy earn high scores on
19 absolute risk and vice versa. According to It is challenging for investors to have balanced
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20 Janor et al. (2016), households with low levels when making investment decisions and
categorized them based on their risk profiles
21 of financial literacy tend to be particularly
vulnerable. Nur Aini & Lutfi (2019) identify a such as risk-taker and risk-averse (Sivarajan
22 and de Bruijn, 2021). Pradikasari and Isbanah
23 significant connection between risk tolerance
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and financial literacy. (2018) incorporate the behavior of Indian

24 investors who invest in several instruments
25 H1: Financial literacy positively affects risk based on (i) from a fundamental point of view,
26 tolerance. (ii) a theory of self-awareness, (iii) a public
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27 opinion, and (iv) an individual's perspective.

2.2 Investors' Personality and Risk Chavali and Mohanraj (2016) investigate the
28 Tolerance behavior of investors in the Indian stock
29 Personality denotes how a distinct individual market and determine that investors set their
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30 interacts, responds, and acts with others and is savings targets, identifying savings factors and
31 frequently shown through quantifiable decision-making resources. The books speak
32 characters. It affects the risk-taking behavior volumes about self-confidence, leading to
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33 in different choices of an individual's life and irrational investment decisions (Aini and Lutfi,
34 societal, betting, and investment decisions 2019). They also discuss the various risk
35 (Dickason and Ferreira, 2018). Extant tolerance levels for investors that can lead to a
literature investigates that, in ambiguous change in investment strategy. Raheja and
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situations, investors' personality guides an Dhiman (2019) find that most research on risk
37 investor’s decision-making attitude. Pak and tolerance is done from a traditional and
38 Mahmood (2015) employ the BFF model to financial side, not from an ethical-financial
39 clarify human attitude, risk-taking tendencies, perspective.
40 and investment decisions in changed
H3: Overconfidence bias positively influenced
41 situations. They find that talkative persons are
risk tolerance.
42 friendly, courteous, sincere, and are not
inevitable by rationality or moralities. They 2.4 Financial Literacy and Investment
43 are further disposed to be directed by external Decisions
44 touchable stimulators and, subsequently, take
45 risks more thoughtlessly than a shy person. Financial literacy is a critical factor in the
46 They are outward and more optimistic about investment decision-making process. Financial
literacy is a procedure for controlling finance
47 life and trials. Ullah et al. (2017) find that
in budgeting, investments, financial savings,
48 investors acquire financial advisory then take
favorable or progressive decisions. Nguyen et financial planning, and any type of insurance
49 (Kanagasabai and Aggarwal, 2020). In
al. (2016) argue that optimistic behaviors
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monetary terms, literate people may control H5: Investors' personality is positively
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their reserves effectively (Chavali and influenced investment decisions.
11 Mohanraj, 2016). It is a degree to which one
12 can understand basic financial concepts and 2.6 Overconfidence Bias and Investment
13 manage one's finances (Akims and Jagongo, Decisions
14 2017). Financial literacy is obligatory for Another aspect of ethical bias that has received
15 investment decisions in financial institutions much attention from analysts in the financial
16 where many young generations wish to have division is overconfidence (Aini and Lutfi,
financial limitations (Akims and Jagongo, 2019). Overconfidence is absurd confidence
17
2017). Moreover, the study indicates that are based on mood motivation, self-examination,
18 wellness insurance, and awareness in and mental talent. Overconfidence makes a
19 investment, budget, and savings are essential person's sense smoother and better informed so
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20 in financial education. The amount of financial that when an individual guesses an incident to
21 information should reflect the reasonable feel, he is sure of, the truth is often less than
22 lifestyle of the people (Gherzi et al., 2014). expected (Aini and Lutfi, 2019). An
23 overconfident person will tend to skip
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H4: Financial literacy positively impacts
24 investment decisions. information gained because they rely too much
on their beliefs, are too self-confident, and rely
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2.5 Investors' Personality and Investment on their ideas and knowledge to ignore other
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Decisions relevant information. The adverse effects of

27 overconfidence can make a person make a
28 Because of the consequences from tests made
in sequence to assess the investors' personality, worse decision than they should have
29 the investors' personality and investment
(Pradikasari and Isbanah, 2018). Earlier
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30 literature finds that overconfident investors are

portfolio wanted to be generated may be
31 understandable (Yong and Tan, 2017). So, this
32 will reduce the confusion and poor judgment
making many business transactions (Raheja
and Dhiman, 2019). An overconfident person
is often more confident in making investment
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33 for the instructions that specialist investors

who are business advisers will give, just decisions and distributing money to high-risk
34 properties because of the level of self-reliance
35 allowing for the spiritual preference of
investors (Aeknarajindawat, 2020). It is that supports them (Bayar et al., 2020).
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impossible to test investors' various H6: Overconfidence bias positively influenced

37 characteristics within a strategic framework to investment decisions.
38 develop an ideal investor profile without
39 scientific research. The reason is that markets 2.7 Risk Tolerance as a Mediating Factor
40 have distinct features, and the personality traits Risk tolerance is the level of a person's
41 needed for investment attainment differ from
readiness to admit invested risks. It also means
42 individual to individual. In addition, the how one responds and takes action on
achievement of specific persons in different
43 markets has counted among the justifications
investment risk. Aeknarajindawat (2020)
44 argues that the level of risk tolerance can be
(Dickason and Ferreira, 2018b). Personality
45 classified as a risk-seeking person, neutral in
plays a vital role in investment decisions risk, and dangerous. Risk tolerance may help
46 because behavior leads to personality, and a
an individual to cognize the intensity of risk
47 person's behavior towards decisions is a
from investments and support the person to be
48 compulsory item in investment decisions (Pak up to tolerate and adapt the risks involved to
49 and Mahmood, 2015).
meet the investment aims so that the risk that
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the person is eager to agree to take will match worse decision than they should have
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the level of future return (Nguyen et al., 2016). (Pradikasari and Isbanah, 2018).
11 Risk tolerance influences investors' decisions Overconfident financial investors believe that
12 in alternative investment options. A person they can earn higher profits and face minimum
13 with a higher risk tolerance can invest in risks when investing, although this is
14 higher-risk assets, while a low-risk tolerance unreliable and not possible (Raheja and
15 tends to avoid high-risk assets (Sivarajan and Dhiman, 2019).
16 de Bruijn, 2021). According to our H7: Financial literacy, Investors’ Personality
hypothecation, risk tolerance is also a vital
17 and Overconfidence bias positively affect the
mediating relationship between financial investment decision with mediating role of risk
18 literacy and investment decisions. It is also
19 tolerance.
shown in many types of research that financial
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20 literacy directly influenced investment H8: Investors’ Personality positively affects
21 decisions. Empirical evidence shows that the investment decision with mediating role of
22 financial literacy indirectly impacts investment risk tolerance.
23 decisions when risk tolerance is used to
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H9: Overconfidence bias positively affects the
mediate between them (Aini and Lutfi, 2019). investment decision with mediating role of risk
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When an investor knows investment tolerance.
25 procedures through bank accounts, he is
26 known as financial literate; then, he can also 2.8 Theoretical Framework
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27 make investment decisions (Bayar et al.,

The fundamental purpose of this study is to
28 2020).
examine the impact of financial literacy,
29 Extant literature argues that investment investors' personality, and overconfidence bias
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30 decisions directly influence the Investors'
31 personality and find a positive association
32 when risk tolerance is used as a mediator.
Perveen et al. (2020) claimed that personality
on investment decisions using risk tolerance as
mediating factor. This study followed two
theories; decision theory and risk theory
(Waheed et al., 2020). The decision theory Commented [A1]:
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traits positively affect investment decisions argues that how rational investors behave Commented [A2R2]:
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and anxiety negatively impacts investors' under uncertainty and adoption of rational Commented [A3R2]:
35 behavior. Overconfident investors tend to skip choices for the efficient management of
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information when they have gained based on investments. Risk theory dealt with risk
37 their personal beliefs and self-confidence and management and analytical processes that
38 rely on their ideas and knowledge to ignore measure the potential volatility to predict
39 other relevant information. The adverse effects better what risk to avoid, mitigate or pursue.
40 of overconfidence can make a person make a
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43  Financial
44 Literacy Risk Tolerance
45  Investors’
46 Personality
47  Overconfidence
48 Bias
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50 Control Variables Investment Decisions
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Age
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53 Gender
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Education
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18 Figure 1: The theoretical model
19 3. RESEARCH METHODOLOGY The questionnaire was developed after
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20 a thorough review of the literature, scales and
21 3.1 Research Procedures and Sample reports. The components of this study are
22 description presented in Figure 1. The financial literacy,
23 investors’ personality, overconfidence bias and
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The sample of this research consists of 901
24 participants from the major metropolitan and investment decision components were
industrially developed cities of Punjab, measured through every four items and
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Pakistan. Punjab is the largest populated and followed by (Kanagasabai and Aggarwal,
26 2020), (Dickason and Ferreira, 2018), (Aini
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most industrialized province of the country,

27 and Lutfi, 2019) and (Haseeb W. et al., 2020)
having a higher literacy rate and a significant
28 contributor to economic growth. This study respectively. The risk tolerance component
29 excludes 16 responses due to inappropriate was measured through five items and adapted
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30 information. The entire data collection was
31 made through the random sampling process. In
order to collect pertinent responses, we
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selected the respondents of 18 years’ age or
from (Hermansson and Jonsson, 2021). The
questionnaire was designed to investigate the
impact of financial literacy, investors'
personality and overconfidence bias on
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33 investment decisions using risk tolerance as a

above, having a bank account and must have
34 mediating factor. All components were
an earning source. We have collected data of
35 respondents’ age, academic qualifications, measured using the Likert Scale of "strongly
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gender and level of income from the investors disagree” = 1 to “strongly agree” = 5. The
37 and workers who have invested in any asset survey was conducted by distributing google
38 class. forms link to collect the data. The operational
definitions and measurement methods of each
39
variable are presented in Table 1.
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Table 1. Variables Measurement & Definitions
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44 Variables Definitions & Measurement Techniques
Control Variable
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46 Age The age of the respondents is divided into five groups as G1 if respondent’s age
is less than 20 years, G2 if respondent’s age is from 21 to 30 years, G3 if
47 respondent’s age is between 31-40, G4 for 41-50 and G5 for above 50 years.
48 Gender Gender of the respondents (Male=1, Female=2, Prefer not to say=3)
49 Education The academic qualification of respondents (Primary=1, Matric=2, Graduation=3,
Post Graduate=4, Doctorate=5, Prefer not to say=6)
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Income The level of income range of respondents per year in PKR (Below 500,000=1,
10 500,001-1,000,000=2, 1,000,001-2,000,000=3, Above 2,000,000=5)
11 Other Variables
12 Financial Literacy Knowledge of the financial instruments (Rooij, 2012) was measured by using a
5-points Likert scale (1=Strongly Disagree, 2=Disagree, 3=Neutral, 4=Agree,
13 5=Strongly Agree)
14 Investors' Personality Personality refers to the way a person communicates, responds, and behaves (Pak
15 & Mahmood, 2015), which is measured by using a 5-points Likert scale
16 (1=Strongly Disagree, 2=Disagree, 3=Neutral, 4=Agree, 5=Strongly Agree)

17 Overconfidence Bias An unnecessary belief in one's rational thinking, judgment, and perceptive
powers (Mishra and Metilda, 2015) is measured by using a 5-points Likert scale
18 (1=Strongly Disagree, 2=Disagree, 3=Neutral, 4=Agree, 5=Strongly Agree)
19 Risk Tolerance The level of uncertainty is that an investor can tolerate reaping huge profits
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20 (Raheja and Dhiman, 2019), which is measured by using a 5-points Likert scale
(1=Strongly Disagree, 2=Disagree, 3=Neutral, 4=Agree, 5=Strongly Agree)
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Investment Decisions A decision made by investors or senior executives regarding the amount of
22 money that will be spent on investment opportunities (Perveen et al., 2020) is
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measured by using a 5-points Likert scale (1=Strongly Disagree, 2=Disagree,
24 3=Neutral, 4=Agree, 5=Strongly Agree)
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3.2 Econometrics Techniques 𝐹𝑖𝑛𝑎𝑛𝑐𝑖𝑎𝑙 𝐿𝑖𝑡𝑒𝑟𝑎𝑐𝑦𝑖,

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𝐼𝑛𝑣𝑒𝑠𝑡𝑜𝑟 𝑃𝑒𝑟𝑠𝑜𝑛𝑎𝑙𝑖𝑡𝑦𝑖,
28 Structural equation modeling (SEM) is
employed to investigate the associations 𝑎𝑛𝑑 𝑂𝑣𝑒𝑟𝑐𝑜𝑛𝑓𝑖𝑑𝑒𝑛𝑐𝑒 𝐵𝑖𝑎𝑠𝑖 are independent
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between variables. This method is a mixture of variables. While 𝐴𝑔𝑒𝑖,𝐺𝑒𝑛𝑑𝑒𝑟𝑖,𝐸𝑑𝑢𝑐𝑎𝑡𝑖𝑜𝑛𝑖

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multiple regression analysis and confirmatory and 𝐼𝑛𝑐𝑜𝑚𝑒𝑖 are the control variables. ∈ 𝑖 is
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factor analysis (CFA), used to determine an error term. The operational and
32 whether the covariates are significantly related measurement definitions are presented in
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33 to their factors or not. Partial least squares Table 1.

34 (PLS) structural equation modeling has widely
35 appeared in two ways as (1) goodness of Decision-making theory is a theory of
measures and (2) examining the research how rational investors should behave under
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model (Perveen et al., 2020). In order to risk and uncertainty. Decision-making

37 indicates the adoption and application of
38 investigate the impact of financial literacy,
investors’ personality and overconfidence bias rational choices for investment management in
39 on investment decision using risk tolerance as an efficient manner. In order to pursue
40 mediating factor, we employ the following hypotheses H4, H5 and H6, to investigate the
41 multiple regression equations. First, we impact of financial literacy, investors’
42 employ Anshika et al., (2021) methodology to personality and overconfidence bias on
test the H1, H2 & H3 as; investment decision-making, we follow the
43
Anshika et al. (2021) methodology by using
44 the following equation:
𝑅𝑖𝑠𝑘 𝑇𝑜𝑙𝑒𝑟𝑎𝑛𝑐𝑒𝑖
45 = 𝛽0 + 𝛽1 ∗ 𝐹𝑖𝑛𝑎𝑛𝑐𝑖𝑎𝑙 𝐿𝑖𝑡𝑒𝑟𝑎𝑐𝑦( 𝑖 + 𝐼𝑛𝑣𝑒𝑠𝑡𝑚𝑒𝑛𝑡
𝛽2 ∗ 𝐼𝑛𝑣𝑒𝑠𝑡𝑜𝑟 𝑃𝑒𝑟𝑠𝑜𝑛𝑎𝑙𝑖𝑡𝑦𝑖 + 𝛽3 ∗
46 𝑂𝑣𝑒𝑟𝑐𝑜𝑛𝑓𝑖𝑑𝑒𝑛𝑐𝑒 𝐵𝑖𝑎𝑠𝑖 + 𝛽4 ∗ 𝐴𝑔𝑒 𝐷𝑒𝑐𝑖𝑠𝑖𝑜𝑛 𝑖
1 𝑖 + 𝛽5 ∗ 𝐺𝑒𝑛𝑑𝑒𝑟 = 𝑖 + 𝛽6 ∗ 𝐸𝑑𝑢𝑐𝑎𝑡𝑖𝑜𝑛𝑖 + 𝛽7
𝛽0 + 𝛽1 ∗ 𝐹𝑖𝑛𝑎𝑛𝑐𝑖𝑎𝑙 𝐿𝑖𝑡𝑒𝑟𝑎𝑐𝑦(𝑖 + 𝛽2 ∗ 𝐼𝑛𝑣𝑒𝑠𝑡𝑜𝑟 𝑃𝑒𝑟𝑠𝑜𝑛𝑎𝑙𝑖𝑡𝑦𝑖 + 𝛽3 ∗
47 ∗ 𝐼𝑛𝑐𝑜𝑚𝑒𝑖 + ∈ 𝑖 ) 2 + 𝛽 ∗ 𝐺𝑒𝑛𝑑𝑒𝑟 + 𝛽 ∗ 𝐸𝑑𝑢𝑐𝑎𝑡𝑖𝑜𝑛 + 𝛽
𝑂𝑣𝑒𝑟𝑐𝑜𝑛𝑓𝑖𝑑𝑒𝑛𝑐𝑒 𝐵𝑖𝑎𝑠𝑖 + 𝛽4 ∗ 𝐴𝑔𝑒 𝑖 5 𝑖 6 𝑖 7
48 ∗ 𝐼𝑛𝑐𝑜𝑚𝑒𝑖 + ∈ 𝑖 )
49 Where i denotes the number of respondents,
50 𝑅𝑖𝑠𝑘 𝑇𝑜𝑙𝑒𝑟𝑎𝑛𝑐𝑒𝑖 is a dependent variable and
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Where in equation (2), 𝐼𝑛𝑣𝑒𝑠𝑡𝑚𝑒𝑛𝑡 𝐷𝑒𝑐𝑖𝑠𝑖𝑜𝑛𝑖 4.1 Summary of Respondents' Profile
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is a dependent variable. The operational After collecting and analyzing the
11
definition is presented in Table 1. used to respondents’ information, Table 2 presents the
12 check the direct impact of independent detailed sample distribution of respondents’
13 variables on a dependent variable (investment profiles. We divided the age and education of
14 decisions). i indicates the number of respondents into five groups while income into
15 respondents of the study. four groups. More than 87% of respondent
16
In order to analyze the risk tolerance investors’ age are between 31 and 50 years,
17 mediating role in the financial literacy, and they have access to financial services
18 investors' personality, overconfidence bias and offered by banks, mutual funds, insurance
19 investment decisions, we employ the companies and brokerage houses. Near 86% of
Skagerlund et al., (2018) methodology to test respondents are male and 14% female. More
Fo
20
21 the hypotheses of H7, H8 and H9 by using the than 85% of respondents had a graduation
following equation: education level or higher and indicated that
22 most investors having investments in various
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𝐼𝑛𝑣𝑒𝑠𝑡𝑚𝑒𝑛𝑡 𝐷𝑒𝑐𝑖𝑠𝑖𝑜𝑛𝑖 = 𝛽0 + 𝛽1 ∗ 𝐹𝑖𝑛𝑎𝑛𝑐𝑖𝑎𝑙 financial

( 𝐿𝑖𝑡𝑒𝑟𝑎𝑐𝑦 𝑖 +instruments are highly
𝛽2 ∗ 𝐼𝑛𝑣𝑒𝑠𝑡𝑜𝑟 qualified.
𝑃𝑒𝑟𝑠𝑜𝑛𝑎𝑙𝑖𝑡𝑦 𝑖+ 𝛽The3
24 ∗ 𝑂𝑣𝑒𝑟𝑐𝑜𝑛𝑓𝑖𝑑𝑒𝑛𝑐𝑒 𝐵𝑖𝑎𝑠𝑖 + 𝛽4 ∗3𝑅𝑖𝑠𝑘 majority
𝑇𝑜𝑙𝑒𝑟𝑎𝑛𝑐𝑒of investors had 𝑖an
𝑖 + 𝛽5 ∗ 𝐴𝑔𝑒 +𝛽income between
6 ∗ 𝐺𝑒𝑛𝑑𝑒𝑟 𝑖
25 + 𝛽7 ∗ 𝐸𝑑𝑢𝑐𝑎𝑡𝑖𝑜𝑛𝑖 + 𝛽8 ∗ 𝐼𝑛𝑐𝑜𝑚𝑒 ) 𝑖 +PKR∈𝑖 500,000 and 2,000,000.
26
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27 4. DATA, RESULTS & DISCUSSION

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29 Table 2. Summary of Respondents' Profile used in this study
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Variables Category Frequency Percentage
31 Below 20 years 16 1.8
32 21 to 30 years 98 10.9
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33 Age 31 to 40 years 620 68.8

41 to 50 years 145 16.1
34 Above 50 years 22 2.4
35 Female 127 14.1
Gender
36 Male 774 85.9
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Primary 4 .4
37 Secondary 98 10.9
38 Education
Graduation 400 44.4
39 Post Graduate 362 40.2
Doctorate 34 3.8
40 Prefer not to say 3 .3
41 0 to 500,000 (Below USD=3,165) 48 5.3
42 500,001 to 1,000,000 (USD=3,165 to USD=6,329) 528 58.6
Income (Yearly) 1,000,001 to 2,000,000 (USD=3,165 to USD=12,658) 237 26.3
43 Above 2,000,000 (Above USD=12,658) 41 4.5
44 Prefer not to say 47 5.2
45 Source: Calculation from collected data by author

46 4.2 Structural Equation Modeling (SEM) structural model assessment steps. A two-step
47 process of PLS-SEM path model assessment
The present research employed the Smart PLS
48 application to estimate the SEM technique was followed by (Henseler et al., 2009).
49 using measurement model assessment and 4.2.1 Assessment of Measurement Model
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First, the PLS-SEM was employed to evaluate composite reliability estimates (Hameed et al.,
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the assessment of the measurement model 2020). The convergent validity of each item
11 followed by (Henseler et al., 2009). The was calculated using the AVE (Hameed et al.,
12 reliability of each item was assessed by 2020). In this research, composite reliability,
13 observing the outer-loadings of each item factor loadings, AVE, and discriminant
14 (Hair et al., 2014). The internal consistency validity were tested using (Hair et al., 2014)
15 was measured using Cronbach's alpha and methodology.
16
17
18
19 Table 3 Results of Internal Consistency, Composite Reliability, and AVE tests
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20 Variable Cronbach’s Alpha CR AVE N
21 Financial Literacy 0.931 0.881 0.749 901
22 Investors’ Personality 0.889 0.721 0.694 901
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Overconfidence Bias 0.776 0.753 0.737 901
24 Investment Decision 0.763 0.899 0.718 901
25 Risk Tolerance 0.813 0.728 0.708 901
26 On the other hand, to achieve the slightest As stated in Table 3, AVE and composite
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27 range of convergent validity, factor loading
28 should not be lesser than 0.5 (Hair et al.,
2014). In existing research, the factor loading
29
of each item is more significant than 0.5, as
reliability are greater than 0.5 and 0.7,
accordingly. The discriminant validity is tested
using (Fornell & Larcker, 1981) methodology.
Correlations among variables are matched
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30 presented in Table 3. Moreover, composite with the AVE square root (Gartner et al.). It is
31 reliability and AVE should correspond to presented in Table 4.
32 greater than 0.7 and 0.5 (Hameed et al., 2020).
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33 Table 4 Results of Discriminant Validity using FLC method

34
35 Variables 1 2 3 4 5 6 7 8 9
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Age 1.000
37 Gender 0.077 1.000 0.015 -0.019 0.014
38 Education -0.037 1.000 0.059 -0.011
39 Income 0.051 -0.039 -0.040 1.000 -0.068 -0.062
Financial literacy 0.159 0.591
40
Investment Decisions 0.151 0.544 0.639
41
Investors’ personality 0.072 -0.036 0.049 -0.011 0.524 0.654 0.628
42 overconfidence bias 0.116 -0.032 0.004 -0.061 0.543 0.691 0.684 0.661
43 Risk tolerance 0.073 -0.021 0.079 -0.055 0.586 0.538 0.526 0.533 0.563
44 Note. 1,2,3,4,5,6,7,8, and 9 are used for age, gender, education, income, financial literacy, investment decisions,
45 investors' personality, overconfidence bias, and risk tolerance.
46 4.2.2. Assessment of Structural Model method, first, to investigate the direct
47 The structural model assessment was tested association among each variable and the
48 indirect impact of the mediating role of risk
using Smart PLS3 comparable with (Hair et
49 tolerance have been examined. Second, the
al., 2014; Henseler et al., 2009). In this
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size effect (f2) and predictive relevance (Q2)
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were examined to evaluate the model quality.
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Table 5 Measurement Model Assessment Direct Effects and Decisions
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15 Hypothesis Relationships Coeff. S.E t stat Decisions
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H1 Financial Literacy -> Investment Decisions 0.128*** 0.047 2.746 Accepted
17 H2 Financial Literacy -> Risk Tolerance 0.378*** 0.051 7.414 Accepted
18 H3 Investors’ Personality -> Investment Decisions 0.269*** 0.052 5.155 Accepted
19 H4 Investors’ Personality -> Risk Tolerance 0.195*** 0.054 3.619 Accepted
Fo
20 H5 Overconfidence Bias -> Investment Decisions 0.371*** 0.055 6.706 Accepted
21 H6 Overconfidence Bias -> Risk Tolerance 0.195*** 0.061 3.190 Accepted
22 *, ** & *** indicates the level of significance at 10%, 5% & 1% respectively
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24 The findings of assessments of the investors’ personality significantly impact the

25 measurement model are presented in Table 5. investment decision-making process and is
The findings indicate that financial literacy has influenced by risk tolerance at 1% significant
26
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a positive and significant impact on investors’ level. Similarly, overconfidence bias findings
27 decision-making and risk tolerance. These also supported the proposed hypotheses of H5
28 relationships are statistically significant at 1% and H6.
29 and H1 & H2 are not rejected. The findings of
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Table 6 Indirect Effects and Decisions Using Structural Model Assessment
32
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33 Hypothesis Relationships Coeff. S.E t stat Decisions

34 H7 Overconfidence Bias>Risk Tolerance>Investment Decision 0.024** 0.011 2.15 Mediation
35 H8 Investors’ Personality>Risk Tolerance>Investment Decision 0.024** 0.011 2.17 Mediation
36
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H9 Financial Literacy>Risk Tolerance>Investment Decision 0.047** 0.018 2.55 Mediation

37 *, ** & *** indicates the level of significance at 10%, 5% & 1% respectively
38
39 By following the methodology of Hair et al. between overconfidence bias and investment
40 (2014), while investigating the mediating decision-making at 5% level. Similarly, the
impact, the bootstrapping using smart PLS- risk tolerance significantly mediates the
41 SEM measure is used to test the indirect relationships of investors' personality -
42 impact of risk tolerance (Preacher and investment decisions and financial literacy –
43 Hayes,2004, 2008). As shown in Table 6, the investment decisions at 5% level. These
44 results of H7 indicate that risk tolerance findings do not reject the H8 & H9.
45 positively and significantly mediates the role
46 Table 7 Variance Explain in Latent Constructs
47
Latent Variable Variance (R2)
48
Investment Decisions 56.9%
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The value of R2 is moderate and reported in According to Chin, (2014), if the value of R2 is
11 Table 7. The findings indicate that all the 0.19, 0.33 and 0.60 that represents a weaker,
12 constructs explicate 56.9% variance in the moderator and extensive respectively.
13 predicted variable of investment decisions.
14 Table 8 Total cross-validated redundancies
15
Variables SSO SSE Q² (=1-SSE/SSO)
16 Investment Decisions 2000.000 1554.363 0.223
17 Risk tolerance 2500.000 2184.780 0.126
18
19 By examining the model's predictive relevance used to assess the quality and power of the
Fo
20 (Q2), the blindfolding method is employed research model to forecast the significance of
21 through Smart PLS3. Predictive relevance is variance dependent on it. These results are
used to measure the quality of the model. reported in Table 8. Chin (2014) argues that
22
According to Hair et al., (2014), the value of the Q2 value must be greater than zero and the
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Q2 is required to evaluate the parameter findings of this study are consistent with the
24 estimates. Cross-validated redundancies are literature.
25
26 Table 9 The Results of Size Effect
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27 Variable Names f2 Effect Size

28 Financial literacy 0.022 small effect
29 Investors' Personality 0.081 small effect
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30 Overconfidence Bias 0.151 moderate effect

Risk Tolerance 0.020 small effect
31
32
Table 9 shows the findings of the size effect moderate effect on investment decisions, while
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33 that can be used to assess the power of each overconfidence bias has a higher effect on the
34 explanatory variable in the dependent variable. investment decision-making process. These
35 The value of f2 indicates that other than findings are consistent with Hameed et al.
36
iew

overconfidence bias, all variables have a (2020).

37
38 Table 10 Control variables relation with the dependent variable
39 Control variable Relationship with Dependent variable Coefficient S.E t stat
40 Age -> Investment Decisions 0.054* 0.029 1.868
41 Education -> Investment Decisions -0.042 0.031 1.385
42 Gender -> Investment Decisions 0.037 0.031 1.194
43 Income -> Investment Decisions -0.025 0.032 0.799
44 *, ** & *** indicates the level of significance at 10%, 5% & 1% respectively
45 Table 10 illustrates that the control variable of have insignificant associations with the
46 age has a positive and statistically significant investment decision-making process.
47 relationship with investment decisions at the
48 10% level. Findings indicate that mature 4.3 Results Summary and Discussion
49 investors can produce more rational decisions.
50 Education, gender and income of respondents
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This research shows that financial literacy, findings of this study show that financial
10
investors' personality, and overconfidence bias literacy, investors' personality, and
11 have positive and significant relationships with overconfidence bias are significant
12 the investment decision-making process. determinants in making sound investment
13 Results also indicate that risk tolerance tailors decisions by controlling risk factors. Results
14 the relationships when used as mediating indicate that investors who are more literate
15 factor. The association of independent about financial instruments and their
16 variables like financial literacy, investors' characteristics can greatly interest investments
personality, and overconfidence bias with and savings-related activities. Furthermore, the
17
investment decisions has resulted positive and results indicate that investors' personality
18 significant with t-values 2.746, 5.155, and increase the level of investment decisions by
19 6.706 and risk tolerance 7.414, 3.619, and controlling risk. Besides, overconfident
Fo
20 3.190, respectively. Beta values with investors invest in precarious investments to
21 investment decisions are 0.128, 0.269, and earn more profit by taking a high risk. On the
22 0.371 and with risk tolerance are 0.378, 0.195, other hand, control variables gender, education
23 and 0.195, respectively. The t-values and beta and income have an insignificant impact on
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values show that if investors are more investment decisions.

24
financially literate, have a good personality,
25 and are more confident, and they can produce It is an exciting study for the
26 more prudent decisions in their investments. succeeding researchers to measure the impact
ee

27 Overconfidence bias is found as the main of financial literacy, investors’ personality and
28 supporter in investment decisions, while overconfidence bias during the investment
29 financial literacy is found the main contributor decision-making process. This study helps
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30 in risk tolerance association. Other than investors understand the importance of

overconfidence bias, the findings of all other
31
variables are not in line with Arianti (2018).
32 However, the overconfidence bias finding is
financial literacy and investors’ personality
characteristics during rational decisions. In
addition, this study guides investors on how
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33 consistent with (Aini and Lutfi, 2019). It they can avoid their overconfidence bias while
34 means that with the increase of overconfidence evaluating different alternatives. This research
35 bias, investors make better investment uses a research questionnaire to collect the
36 decisions. Furthermore, investors' personality primary data; researchers may use other
iew

37 has a positive and significant impact on techniques to collect data like doing
investment decisions, and the results of the interviews, observations, and experiments.
38
current study are consistent with the prior This study only focused on investors with
39 study of (Pak and Mahmood, 2015). bank account holders and business experience
40 investors living in Punjab. Future researches
41 5. SUMMARY AND CONCLUSION may use the data from different countries to
42 The primary goal of this study was to
contrast the findings. Researchers can also add
43 the secondary data of market sentiments and
investigate the impact of financial literacy,
44 economic conditions to better understand the
investors' personality, and overconfidence bias
various investment scenarios.
45 on the investment decision-making process
46 with mediating effect of risk tolerance. This ACKNOWLEDGEMENTS
47 study employed a random sampling technique
48 to collect the data from industrially developed The authors are Dr. Abdul Rasheed, Mr.
cities of Punjab through distributing a Shahid Hussain Randhawa and Dr. Adnan
49 questionnaire via a google form link. The Maqbool from Khwaja Fareed University of
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Engineering & Information Technology. The received no specific grant from any funding
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authors declared no potential conflicts of agency in the public, commercial or not for
11 interests with respect to the authorship and/or profit sectors and we have no financial or
12 publication of this article. This research political interest in the financial sector.
13
14
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