The Impact of Financial Literacy on Cognitive Biases of Individual Investors

Abstract

Introduction – Markowitz (1952) argues that individuals act rationally in their financial decisions. In contrast, Kahneman and Tversky (1979) claim that the psychological characteristics of people significantly affect financial decisions. In making these decisions, factors such as age, gender, and educational status may have an impact.

Purpose – The purpose of this study is to determine whether financial literacy has an impact on individuals’ cognitive biases related to financial investments.

Methodology – A sample of 444 individuals were surveyed.

Findings – In the results of study (1) it was determined that financial literacy leads to differences in cognitive biases; and (2) cognitive biases of individuals who do not receive finance education are different from individuals who receive finance education and professionals in the business world. The findings indicate that the increase in the level of financial literacy of individuals will reduce the cognitive biases and heuristics, and therefore will have a positive effect on the investor behavior in financial markets.

Citation

Özen, E. and Ersoy, G. (2019), "The Impact of Financial Literacy on Cognitive Biases of Individual Investors", Grima, S., Özen, E., Boz, H., Spiteri, J. and Thalassinos, E. (Ed.) Contemporary Issues in Behavioral Finance (Contemporary Studies in Economic and Financial Analysis, Vol. 101), Emerald Publishing Limited, Leeds, pp. 77-95. https://doi.org/10.1108/S1569-375920190000101007