Impact of Psychological Factors on Investment Decisions in Nepalese Share Market: A Mediating Role of Financial Literacy
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Jul 29, 2024
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Abstract
The Nepalese stock market is characterized by emerging market dynamics and notable volatility. It is influenced by factors such as regulatory developments, economic conditions, and investor sentiment, shaping its growth trajectory and investor behavior. This study examines the influence of psychological factors on investment decisions within the Nepalese share market, emphasizing the mediating role of financial literacy. To achieve the stated objective, data were collected from the primary source using a structured questionnaire administered through random sampling technique. The respondents comprised 410 individual investors inside the Kathmandu Valley. The SmartPLS 4.0 was used to analyze the structural relationships within the proposed theoretical model. The findings of this study validated the set hypotheses that psychological factors have positive and significant effect on investment decisions among the investors in Nepalese share market. In the context of Nepal, where the share market is characterized by volatility and emerging market dynamics, these psychological biases often lead to suboptimal investment choices. Findings indicate that investors with higher financial literacy levels are better equipped to mitigate the adverse effects of psychological biases, leading to more rational and informed investment decisions. The study highlights the critical need for enhanced financial education programs to empower investors and improve overall market efficiency. By understanding the interplay between psychological factors and financial literacy, policymakers and financial institutions can develop targeted strategies to foster a more stable and resilient investment environment in Nepal.
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How to Cite
Subedi, D., & Bhandari, D. R. (2024). Impact of Psychological Factors on Investment Decisions in Nepalese Share Market: A Mediating Role of Financial Literacy . International Journal of Economics and Management, 2(02), 124–138. https://doi.org/10.54209/iem.v2i02.44
References
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Adil, M., Singh, Y., & Ansari, M. S. (2022). How financial literacy moderate the association between behavior biases and investment decisions? Asian Journal of Accounting Research, 7(1), 17-30.
Akhtar, M., & Malik, M. U. (2023). Personality traits and investor risk behavior: Moderating role of financial literacy. Managerial Finance, 49(5), 884-905.
Aren, S., Zengin, A. N. J. P.-S., & Sciences, B. (2016). Influence of financial literacy and risk perception on choice of investment. Social and Behavioral Science Journal, 23(5), 656-663.
Baker, H. K., Kumar, S., Goyal, N., & Gaur, V. J. M. F. (2019). Financial literacy and demographic variables relate to behavioral biases. Journal of Managerial Finance, 45(1), 124-146.
Barber, B. M., & Odean, T. (2021). Boys will be boys: Gender, overconfidence, and common stock investment. Quarterly Journal of Economics, 116(1), 261-292.
Barberis, N., Jin, L. J., & Wang, B. (2021). Prospect theory and stock market anomalies. Journal of Behavioural Finance,76(5), 2639-2687.
Benartzi, S., & Thaler, R. H. (2001). Naive diversification strategies in defined contribution saving plans. American Economic Review, 91(1), 79-98.
Carpena, F., Cole, S., Shapiro, J., & Zia, B. (2021). Unpacking the causal chain of financial literacy. The Journal of Economic Psychology, 32(2), 688-694.
Dorn, D., & Huberman, G. (2022). Talk and action: What individual investors say and what they do. Review of Finance, 9(4), 437-481.
Federal Reserve Board. (2023). Survey of Consumer Finances.
Fernandes, D., Lynch Jr, J. G., & Netemeyer, R. G. (2024). Financial literacy, financial education, and downstream financial behaviors. Management Science, 60(8), 1861-1883.
Fikriyah, T. M., & Suhartini, D. (2023). Analysis of factors that influence investment decisions with financial literacy as moderating variable. Indonesian Journal of Business Analytics, 3(4), 1363-1376.
Fornell, C., & Larcker, D. F. (1981). Evaluating structural equation models with unobservable variables and measurement error. Journal of Marketing Research, 18(1), 39-50.
Furnham, A., & Cheng, H. (2024). Lay theories of money: The construct of money, attitudes and behaviors. Personality and Individual Differences, 68(3), 227-232.
Garg, N., Lobo, G. J., & Roychowdhury, P. (2023). Emotions and Financial Decision Making: A Review and Research Agenda. Journal of Behavioral Finance, 24(1), 1-18.
Ghasarma, R., Putri, L., & Adam, M. (2017). Financial literacy: Strategies and concepts in understanding the financial planning with Self-efficacy thoery and Goal-setting theory of motivation approach. International Journal of Economics and Financial Issues, 7(4), 182-188.
Hair, J. F., Anderson, R. E., Tatham, R. L., & Black, W. C. (1995). Multivariate data analysis. Englewood Cliffs, NJ: Prentice-Hall.
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Working Paper No. 25813. National Bureau of Economic Research.
Hirshleifer, D. (2021). Psychological biases and investor behavior. Journal of Economic Perspectives, 35(1), 135-154.
Jiang, J., & Li, H. (2020). A new measure for market efficiency and its application. Finance Research Letters, 34(2), 101-125.
Kahneman, D., & Lovallo, D. (1993). Timid choices and bold forecasts: A cognitive perspective on risk taking. Management Science, 39(1), 17-31.
Kahneman, D., & Tversky, A. (1979). On the interpretation of intuitive probability A reply to Jonathan Cohen. Cognition, 7(4), 409–411.
Kahneman, D., & Tversky, A. (2021). Prospect theory: An analysis of decision under risk. Econometrica, 47(2), 263-291.
Karki, S., & Regmi, R. (2022). Financial Literacy and Its Impact on Investment Decisions: Evidence from the Nepalese Stock Market.
Journal of Investment and Management, 11(2), 134-147.
Khan, S. K., Hassan, N. U., & Islam, J. (2023). Unlocking the investment puzzle: The influence of behavioral biases and moderating role of financial literacy. Journal of Social Research Development, 4(2), 433-444.
Khurshid, S., Khan,K. & Khurshid, S. (2022). Impact of Psychological factors and investment decisions. Asian Journal of Psychological Research, 6 (3), 1-8.
Liang, G., Weber, E. U., Hsee, C. K., & Welch, N. (2022). Risk as feelings. Psychological Bulletin, 127(2), 267-286.
Lusardi, A., & Mitchell, O. S. (2011). Financial literacy and retirement planning in the United States. Journal of Economic Psychology, 32(5), 753-764.
Lusardi, A., & Mitchell, O. S. (2019). Financial literacy and financial education: Review and policy implications. Journal of Pension Economics & Finance, 18(3), 268-293.
Lusardi, A., & Mitchell, O. S. (2020). Financial literacy and retirement planning in the United States. Journal of Pension Economics & Finance, 19(3), 278-291.
Lusardi, A., & Mitchell, O. S. (2024). The economic importance of financial literacy: Theory and evidence. Journal of Economic Literature, 52(1), 5-44.
Malmendier, U., & Nagel, S. (2011). Depression Babies: Do macroeconomic experiences affect risk taking? The Quarterly Journal of Economics, 126(1), 373-416.
Markowitz, H. (1952). Portfolio selection. Journal of Finance, 7(1), 77-91.
McCarthy, D., Mikkola, K., & Thomas, T. (2020). Utilitarianism with and without expected utility. Journal of Mathematical Economics, 87(3), 77-113.
Niroomand, F., Metghalchi, M., Hajilee & M. J. J. (2020). Efficient market hypothesis: a ruinous implication for Portugese stock market. Journal of Economics and Finance, 44 (3), 749-763.
OECD. (2023). Improving financial education and awareness on a global scale. OECD Publishing.
Organization for Economic Cooperation and Development (2023). Financial literacy and investment decisions.
Osagie, V., & Chijuka, I (2021). Psychological factors and investment decisions in the Nigeria capital market. Oradea Journal of Business and Economics, 6(4),33-41.
Schumacker, R. E., & Lomax, R. G. (2010). A Beginner's guide to structural equation modeling (3rd ed.). New York, NY: Routledge.
Shefrin, H. M. (2016). Behavioralizing Finance. Journal of Behavioral Finance, 17(4), 289-297.
Shiller, R. J. (2015). Irrational exuberance. Princeton University Press.
Shim, S., Serido, J., & Tang, C. (2019). The ant and the grasshopper revisited: The present psychological benefits of saving and future oriented financial behaviors. Journal of Economic Psychology, 30(2), 218-226.
Takeda, K., Takemura, T., & Kozu, T. (2013). Investment literacy and individual investor biases. Survey Evidence in the Japanese Stock Market, 7(2), 31-42.
U.S. Treasury Department. (2022). National strategy for financial literacy 2022.
Van, R, Lusardi, A., & Alessie, R. (2011). Financial literacy and stock market participation. Journal of Financial Economics, 101(2), 449-472.
Adil, M., Singh, Y., & Ansari, M. S. (2022). How financial literacy moderate the association between behavior biases and investment decisions? Asian Journal of Accounting Research, 7(1), 17-30.
Akhtar, M., & Malik, M. U. (2023). Personality traits and investor risk behavior: Moderating role of financial literacy. Managerial Finance, 49(5), 884-905.
Aren, S., Zengin, A. N. J. P.-S., & Sciences, B. (2016). Influence of financial literacy and risk perception on choice of investment. Social and Behavioral Science Journal, 23(5), 656-663.
Baker, H. K., Kumar, S., Goyal, N., & Gaur, V. J. M. F. (2019). Financial literacy and demographic variables relate to behavioral biases. Journal of Managerial Finance, 45(1), 124-146.
Barber, B. M., & Odean, T. (2021). Boys will be boys: Gender, overconfidence, and common stock investment. Quarterly Journal of Economics, 116(1), 261-292.
Barberis, N., Jin, L. J., & Wang, B. (2021). Prospect theory and stock market anomalies. Journal of Behavioural Finance,76(5), 2639-2687.
Benartzi, S., & Thaler, R. H. (2001). Naive diversification strategies in defined contribution saving plans. American Economic Review, 91(1), 79-98.
Carpena, F., Cole, S., Shapiro, J., & Zia, B. (2021). Unpacking the causal chain of financial literacy. The Journal of Economic Psychology, 32(2), 688-694.
Dorn, D., & Huberman, G. (2022). Talk and action: What individual investors say and what they do. Review of Finance, 9(4), 437-481.
Federal Reserve Board. (2023). Survey of Consumer Finances.
Fernandes, D., Lynch Jr, J. G., & Netemeyer, R. G. (2024). Financial literacy, financial education, and downstream financial behaviors. Management Science, 60(8), 1861-1883.
Fikriyah, T. M., & Suhartini, D. (2023). Analysis of factors that influence investment decisions with financial literacy as moderating variable. Indonesian Journal of Business Analytics, 3(4), 1363-1376.
Fornell, C., & Larcker, D. F. (1981). Evaluating structural equation models with unobservable variables and measurement error. Journal of Marketing Research, 18(1), 39-50.
Furnham, A., & Cheng, H. (2024). Lay theories of money: The construct of money, attitudes and behaviors. Personality and Individual Differences, 68(3), 227-232.
Garg, N., Lobo, G. J., & Roychowdhury, P. (2023). Emotions and Financial Decision Making: A Review and Research Agenda. Journal of Behavioral Finance, 24(1), 1-18.
Ghasarma, R., Putri, L., & Adam, M. (2017). Financial literacy: Strategies and concepts in understanding the financial planning with Self-efficacy thoery and Goal-setting theory of motivation approach. International Journal of Economics and Financial Issues, 7(4), 182-188.
Hair, J. F., Anderson, R. E., Tatham, R. L., & Black, W. C. (1995). Multivariate data analysis. Englewood Cliffs, NJ: Prentice-Hall.
Hastings, J. S., & Mitchell, O. S. (2019). Financial literacy and impatience shape retirement wealth and investment behaviors. NBER
Working Paper No. 25813. National Bureau of Economic Research.
Hirshleifer, D. (2021). Psychological biases and investor behavior. Journal of Economic Perspectives, 35(1), 135-154.
Jiang, J., & Li, H. (2020). A new measure for market efficiency and its application. Finance Research Letters, 34(2), 101-125.
Kahneman, D., & Lovallo, D. (1993). Timid choices and bold forecasts: A cognitive perspective on risk taking. Management Science, 39(1), 17-31.
Kahneman, D., & Tversky, A. (1979). On the interpretation of intuitive probability A reply to Jonathan Cohen. Cognition, 7(4), 409–411.
Kahneman, D., & Tversky, A. (2021). Prospect theory: An analysis of decision under risk. Econometrica, 47(2), 263-291.
Karki, S., & Regmi, R. (2022). Financial Literacy and Its Impact on Investment Decisions: Evidence from the Nepalese Stock Market.
Journal of Investment and Management, 11(2), 134-147.
Khan, S. K., Hassan, N. U., & Islam, J. (2023). Unlocking the investment puzzle: The influence of behavioral biases and moderating role of financial literacy. Journal of Social Research Development, 4(2), 433-444.
Khurshid, S., Khan,K. & Khurshid, S. (2022). Impact of Psychological factors and investment decisions. Asian Journal of Psychological Research, 6 (3), 1-8.
Liang, G., Weber, E. U., Hsee, C. K., & Welch, N. (2022). Risk as feelings. Psychological Bulletin, 127(2), 267-286.
Lusardi, A., & Mitchell, O. S. (2011). Financial literacy and retirement planning in the United States. Journal of Economic Psychology, 32(5), 753-764.
Lusardi, A., & Mitchell, O. S. (2019). Financial literacy and financial education: Review and policy implications. Journal of Pension Economics & Finance, 18(3), 268-293.
Lusardi, A., & Mitchell, O. S. (2020). Financial literacy and retirement planning in the United States. Journal of Pension Economics & Finance, 19(3), 278-291.
Lusardi, A., & Mitchell, O. S. (2024). The economic importance of financial literacy: Theory and evidence. Journal of Economic Literature, 52(1), 5-44.
Malmendier, U., & Nagel, S. (2011). Depression Babies: Do macroeconomic experiences affect risk taking? The Quarterly Journal of Economics, 126(1), 373-416.
Markowitz, H. (1952). Portfolio selection. Journal of Finance, 7(1), 77-91.
McCarthy, D., Mikkola, K., & Thomas, T. (2020). Utilitarianism with and without expected utility. Journal of Mathematical Economics, 87(3), 77-113.
Niroomand, F., Metghalchi, M., Hajilee & M. J. J. (2020). Efficient market hypothesis: a ruinous implication for Portugese stock market. Journal of Economics and Finance, 44 (3), 749-763.
OECD. (2023). Improving financial education and awareness on a global scale. OECD Publishing.
Organization for Economic Cooperation and Development (2023). Financial literacy and investment decisions.
Osagie, V., & Chijuka, I (2021). Psychological factors and investment decisions in the Nigeria capital market. Oradea Journal of Business and Economics, 6(4),33-41.
Schumacker, R. E., & Lomax, R. G. (2010). A Beginner's guide to structural equation modeling (3rd ed.). New York, NY: Routledge.
Shefrin, H. M. (2016). Behavioralizing Finance. Journal of Behavioral Finance, 17(4), 289-297.
Shiller, R. J. (2015). Irrational exuberance. Princeton University Press.
Shim, S., Serido, J., & Tang, C. (2019). The ant and the grasshopper revisited: The present psychological benefits of saving and future oriented financial behaviors. Journal of Economic Psychology, 30(2), 218-226.
Takeda, K., Takemura, T., & Kozu, T. (2013). Investment literacy and individual investor biases. Survey Evidence in the Japanese Stock Market, 7(2), 31-42.
U.S. Treasury Department. (2022). National strategy for financial literacy 2022.
Van, R, Lusardi, A., & Alessie, R. (2011). Financial literacy and stock market participation. Journal of Financial Economics, 101(2), 449-472.
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