Heuristic biases and investment decisions: multiple mediation mechanisms of risk tolerance and financial literacy—a survey at the Tanzania stock market

Pendo Shukrani Kasoga

Journal of Money and Business, 2021, vol. 1, issue 2, 102-116

Abstract: Purpose - The purpose of this research is to examine the effect of heuristic biases on investment decisions through multiple mediation mechanisms of risk tolerance and financial literacy in the Tanzanian stock market. Design/methodology/approach - A sample of 316 individual investors in the Tanzanian stock market was obtained through questionnaires. The data were analyzed using structural equation modeling (SEM). Findings - The findings show that financial literacy mediates insignificantly the effects of overconfidence, availability, anchoring and representativeness heuristics on investment decisions. Further, financial literacy does not influence the effect of risk tolerance and investment decisions. Risk tolerance is confirmed as a positive mediator of overconfidence, availability, anchoring and representativeness heuristics in investment decisions. Also, the study shows that overconfidence exerts a stronger influence on investment decisions, followed by availability, representativeness, risk tolerance, anchoring and financial literacy. Research limitations/implications - The study deals with real investors. Therefore, it uses fewer items to measure the constructs in order to avoid respondent bias. Further research could examine the effects of heuristic biases on investment decisions by adding or modifying the items of particular constructs and studying institutional investors. Practical implications - The findings can help individual investors to analyze and evaluate their behavior toward stock selection. Securities institutions can use this research to understand investors' behavior, evaluate future market trends and provide advice to the investors. Originality/value - Previous studies have examined the impact of heuristics on the investment decisions of individual investors. The unique empirical analysis developed in this paper is that it examines the multiple mediation mechanisms of risk tolerance and financial literacy with respect to heuristic biases and investment decisions in the Tanzanian stock market.

Keywords: Behavioral finance; Risk tolerance; Financial literacy; Heuristics biases; Investment decision; Individual investor (search for similar items in EconPapers)
Date: 2021
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Persistent link: https://EconPapers.repec.org/RePEc:eme:jmbpps:jmb-10-2021-0037

DOI: 10.1108/JMB-10-2021-0037

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