How financial literacy and demographic variables relate to behavioral biases

Purpose The purpose of this paper is to examine how financial literacy and demographic variables (gender, age, income level, education, occupation, marital status and investment experience) related to behavioral biases. Design/methodology/approach The study uses one-way analysis of variance (ANOVA), factor analysis and multiple regression analysis to examine survey data from more than 500 individual investors in India. Findings The results reveal the presence of different behavioral biases including overconfidence and self-attribution, the disposition effect, anchoring bias, representativeness, mental accounting, emotional biases and herding among Indian investors. Hence, the findings support the view that individual investors do not always act rationally. The results also show that financial literacy has a negative association with the disposition effect and herding bias, a positive relation with mental accounting bias, but no significant relation with overconfidence and emotional biases. Age, occupation and investment experience are the most important demographic variables that relate to the behavioral biases of individual investors in the sample. Regarding gender, males are more overconfident than are females about their knowledge of the stock market.