Impact of Overconfidence Bias on Investment Decision: Examining Mediating Role of Fundamental Anomalies and the Moderating Influence of Financial Literacy

Abstract

This study examines how judgments about investing in mutual funds are impacted by overconfidence bias while accounting for the mediating influence of fundamental abnormalities and how financial literacy acts as a moderator.   PLS-SEM, or partial least squares structural equation modeling, was used to evaluate a conceptual model derived from behavioral finance theory, using data gathered from 384 mutual fund investors.  The findings demonstrate that overconfidence bias favourably impacts the perception of fundamental abnormalities but adversely affects investment choices.  The correlation between overconfidence and investing choices seems to be partly mediated by basic abnormalities, suggesting that cognitive distortions serve as a conduit via which investor conduct is shaped by biassed judgement.  The correlation between overconfidence bias and basic abnormalities is significantly affected by financial literacy, with higher literacy levels reducing the strength of this correlation.  The results highlight the need of establishing investor education programs to alleviate behavioural shortcomings, as well as the synergistic impact of cognitive bias and informational awareness on investing behaviour.  By integrating mediation and moderation procedures into a coherent framework for understanding mutual fund decision-making, this research contributes to the behavioral finance discipline.