Impact of Cognitive Biases on Individual Stock Returns: The Moderating Role of Financial Literacy

Abstract

Background: Cognitive biases including overconfidence, loss aversion, and herding behavior can lead to suboptimal investing decisions and worse stock returns, contrary to traditional finance theory.

Objective: To research how cognitive biases affect stock returns and how financial knowledge moderates this effect. The study tries to demonstrate how cognitive biases and financial literacy affect investment outcomes.

Method: 447 Delhi-NCR investors were surveyed using a standardized questionnaire. We examined the direct and indirect effects of cognitive biases (loss aversion, mental accounting, and herding behavior) and financial literacy (risk diversification, investing techniques, and financial products) on stock returns using SPSS and AMOS.

Results: reveal that cognitive biases strongly influence stock returns. Mental accounting, loss aversion, and herding affect investment performance. Higher financial literacy reduced the unfavourable effects of cognitive biases on stock performance. The model has strong fit indices, indicating strong results.

Novelty: This study sheds light on how financial literacy mitigates cognitive biases on stock returns in emerging markets like Delhi-NCR. Combining cognitive biases and financial literacy into one model builds on previous findings