Role Of Financial Literacy As A Mediating Factor Between Behavioural Biases And Investment Decision-Making In India

Investment decision-making among retail individual investors in India is shaped by a complex interplay of cognitive limitations, emotional responses, and financial knowledge. Extant literature has explored behavioural biases and financial literacy as separate determinants of investment outcomes, yet their structural relationship — particularly the mediating role of financial literacy — remains underexamined, especially beyond South Indian states. This study addresses a critical gap in Indian behavioural finance literature by examining financial literacy as a mediating mechanism rather than a direct predictor. The present study addresses this gap by empirically investigating financial literacy as a mediating variable between behavioural biases and investment decision-making among 208 individual investors drawn from multiple regions across India. Data were collected through a structured questionnaire and analysed using Confirmatory Factor Analysis (CFA) and Structural Equation Modelling (SEM) via SPSS AMOS. Reliability was assessed through Cronbach’s alpha (range: 0.761–0.849) and composite reliability, while convergent validity was confirmed through Average Variance Extracted (AVE > 0.50). Results confirm that behavioural biases (heuristic bias, framing effect, cognitive illusions, and herd mentality) exert a significant positive effect on financial literacy (β = 0.604, p < .001) and on investment decision-making (β = 0.494, p < .001). Financial literacy was found to significantly influence investment decisions (β = 0.565, p < .001). Mediation analysis using bootstrapping confirmed that financial literacy partially mediates the relationship between behavioural biases and investment decision-making, with an indirect effect of 0.341 (95% CI: 0.201–0.483). These findings contribute to behavioural finance theory and carry practical implications for financial educators, policymakers, and investment advisors across India. The findings contribute to behavioural finance theory by validating a dual-path cognitive mechanism and offer practical implications for financial education and policy design