From Behavior to Performance: Exploring the Link Between Individual Financial Literacy, Risk Perception, and Investment Decisions

Abstract

This study examines the relationship between individual financial behavior, risk perception, and investment decisions, focusing on the mediating role of financial literacy. Using a quantitative approach, data were collected from 217 investors in companies listed on the Tehran Stock Exchange. Structural Equation Modeling (SEM) was employed to analyze the direct and indirect effects of financial behaviour, overconfidence, and risk perception on investment decisions, with financial literacy as a mediating variable. The findings reveal that individual financial behaviour, overconfidence, and risk perception significantly influence direct and indirect investment decisions. Financial literacy partially mediates these relationships, highlighting its importance in bridging psychological factors and investment outcomes. The study emphasizes the need for enhancing financial literacy to mitigate the adverse effects of behavioural biases, such as overconfidence and risk misperception, thereby promoting more informed and effective investment decisions. The research contributes to the theoretical understanding of behavioural finance by elucidating the psychological mechanisms underlying investment decisions. It also offers practical insights for financial advisors, wealth managers, and policymakers, emphasizing the need for educational programs and interventions to improve financial literacy and decision-making. Recommendations for future research include exploring additional behavioural financial factors, cultural differences, and the impact of different investment types on risk perception and decision-making. By addressing these gaps, future studies can further advance the understanding of financial behaviour and its implications for investment performance.