Do Behavioral Biases Influence Investment Decisions? Evidence from Individual Investors in Nepal

Abstract

This study examines how behavioral biases and financial literacy affect investment decision-making among individual investors. It focuses on overconfidence bias and herding behavior, while also assessing the role of financial literacy. Using regression analysis, the study evaluates how these factors influence the quality of investors’ decisions. The findings reveal that both overconfidence bias and herding behavior have a significant negative impact, indicating that investors who overestimate their abilities or follow others tend to make suboptimal choices. These results align with behavioral finance theory, which highlights the strong influence of psychological biases on financial behavior. In contrast, financial literacy shows a positive but statistically insignificant relationship with investment decision-making. This suggests that although financial knowledge may support better decisions, it does not fully offset the adverse effects of behavioral biases. Overall, the study emphasizes the importance of addressing psychological influences in investor behavior and suggests that improving financial literacy alone may not be sufficient to ensure rational investment decisions.