Does Financial Literacy Influence Investment Decisions Among Retail Investors? The Moderating Role of Behavioral Biases

Abstract

ABSTRACT Financial literacy plays an important role in shaping investment decisions (ID) among retail investors (RIs). However, limited empirical research has explored how behavioral biases (BB) influence this relationship, particularly in emerging‐market contexts such as Ghana. Our study examined the effect of financial literacy (FL) on ID and assessed the moderating role of BB in these relationships. Income level (IL), investment experience (IE), and risk tolerance (RT) were included as control variables. Guided by Prospect Theory (PT), Rational Choice Theory (RCT), and Traditional Finance Theory (TFT), this study employed a quantitative, cross‐sectional, explanatory research design to collect and analyze data. Data were collected from 538 RIs in Accra and Kumasi using structured questionnaires. Structural equation modeling (SEM) with SmartPLS 4 and bootstrapping was used to analyze the direct effect of FL on ID and the moderating role of BB, controlling for IL, IE, and RT. The findings revealed that FL positively and significantly influenced ID, while BB also significantly affected ID. Control variables (IL, IE, and RT) contributed to variations in ID. BB significantly moderated the relationship between FL and ID, such that the positive effect of FL on ID was stronger when BB were accounted for. Our study provides empirical evidence from Ghana demonstrating how investor knowledge and behavioral tendencies interact to shape investment choices, advancing the application of PT, RCT, and TFT in emerging‐market contexts.