1.1 Financial Literacy and Risk Tolerance
Financial literacy is considered to be an essential skill for people to increase their economic prosperity. Lack of financial information leads to poor financial choices that are harmful to individuals and society as a whole (Kannadhasan et al., 2016). A good correlation between financial literacy and the accumulation of wealth, savings and retirement planning is established in several studies (Dickason and Ferreira, 2018). Kumari (2020) concludes that financially literate students showed a more positive attitude towards the financial risk than financially illiterate students. Masenya and Dickason-Koekemoer (2020) argue that people with a low level of financial literacy would experience a high level of difficulty in understanding financial concepts, and this often has complete problems. Bayar et al. (2020) conjecture that people with more financial experience could have better-distributed finances. Akims and Jagongo (2017) examine that persons with an upper level of financial literacy earn high scores on absolute risk and vice versa. According to Janor et al. (2016), households with low levels of financial literacy tend to be particularly vulnerable. Nur Aini & Lutfi (2019) identify a significant connection between risk tolerance and financial literacy.
H1: Financial literacy positively affects risk tolerance.
1.2 Investors' Personality and Risk Tolerance
Personality denotes how a distinct individual interacts, responds, and acts with others and is frequently shown through quantifiable characters. It affects the risk-taking behavior in different choices of an individual's life and societal, betting, and investment decisions (Dickason and Ferreira, 2018). Extant literature investigates that, in ambiguous situations, investors' personality guides an investor’s decision-making attitude. Pak and Mahmood (2015) employ the BFF model to clarify human attitude, risk-taking tendencies, and investment decisions in changed situations. They find that talkative persons are friendly, courteous, sincere, and are not inevitable by rationality or moralities. They are further disposed to be directed by external touchable stimulators and, subsequently, take risks more thoughtlessly than a shy person. They are outward and more optimistic about life and trials. Ullah et al. (2017) find that investors acquire financial advisory then take favorable or progressive decisions. Nguyen et al. (2016) argue that optimistic behaviors about lifespan and events can raise the over-assessment of the market and under-assessment of potential risks. Alternatively, adverse behaviors and thin attention cause over the assessment of hazards and lead to the loss of gainful investment prospects.
H2: Investor's personality positively influenced to risk tolerance.
1.3 Overconfidence Bias and Risk Tolerance
It is challenging for investors to have balanced when making investment decisions and categorized them based on their risk profiles such as risk-taker and risk-averse (Sivarajan and de Bruijn, 2021). Pradikasari and Isbanah (2018) incorporate the behavior of Indian investors who invest in several instruments based on (i) from a fundamental point of view, (ii) a theory of self-awareness, (iii) a public opinion, and (iv) an individual's perspective. Chavali and Mohanraj (2016) investigate the behavior of investors in the Indian stock market and determine that investors set their savings targets, identifying savings factors and decision-making resources. The books speak volumes about self-confidence, leading to irrational investment decisions (Aini and Lutfi, 2019). They also discuss the various risk tolerance levels for investors that can lead to a change in investment strategy. Raheja and Dhiman (2019) find that most research on risk tolerance is done from a traditional and financial side, not from an ethical-financial perspective.
H3: Overconfidence bias positively influenced risk tolerance.
1.4 Financial Literacy and Investment Decisions
Financial literacy is a critical factor in the investment decision-making process. Financial literacy is a procedure for controlling finance in budgeting, investments, financial savings, financial planning, and any type of insurance (Kanagasabai and Aggarwal, 2020). In monetary terms, literate people may control their reserves effectively (Chavali and Mohanraj, 2016). It is a degree to which one can understand basic financial concepts and manage one's finances (Akims and Jagongo, 2017). Financial literacy is obligatory for investment decisions in financial institutions where many young generations wish to have financial limitations (Akims and Jagongo, 2017). Moreover, the study indicates that are wellness insurance, and awareness in investment, budget, and savings are essential in financial education. The amount of financial information should reflect the reasonable lifestyle of the people (Gherzi et al. 2014).
H4: Financial literacy positively impacts investment decisions.
1.5 Investors' Personality and Investment Decisions
Because of the consequences from tests made in sequence to assess the investors' personality, the investors' personality and investment portfolio wanted to be generated may be understandable (Yong and Tan, 2017). So, this will reduce the confusion and poor judgment for the instructions that specialist investors who are business advisers will give, just allowing for the spiritual preference of investors (Aeknarajindawat 2020). Without scientific research, it is impossible to test investors' various characteristics within a strategic framework to develop an ideal investor profile. The reason is that markets have distinct features, and the personality traits needed for investment attainment differ from individual to individual. In addition, the achievement of specific persons in different markets has counted among the justifications (Dickason and Ferreira, 2018b). Personality plays a vital role in investment decisions because behavior leads to personality, and a person's behavior towards decisions is a compulsory item in investment decisions (Pak and Mahmood, 2015).
H5: Investors' personality is positively influenced by investment decisions.
1.6 Overconfidence Bias and Investment Decisions
Another aspect of ethical bias that has received much attention from analysts in the financial division is overconfidence (Aini and Lutfi, 2019). Overconfidence is absurd confidence based on mood motivation, self-examination, and mental talent. Overconfidence makes a person's sense smoother and better informed so that when an individual guesses an incident to feel he is sure of, the truth is often less than expected (Aini and Lutfi, 2019). An overconfident person will tend to skip information gained because they rely too much on their beliefs, are too self-confident, and rely on their ideas and knowledge to ignore other relevant information. The adverse effects of overconfidence can make a person make a worse decision than they should have (Pradikasari and Isbanah, 2018). Earlier literature finds that overconfident investors are making many business transactions (Raheja and Dhiman, 2019). An overconfident person is often more confident in making investment decisions and distributing money to high-risk properties because of the level of self-reliance that supports them (Bayar et al. 2020).
H6: Overconfidence bias positively influenced investment decisions.
1.7 Risk Tolerance as a Mediating Factor
Risk tolerance is the level of a person's readiness to admit invested risks. It also means how one responds and takes action on investment risk. Aeknarajindawat (2020) argues that the level of risk tolerance can be classified as a risk-seeking person, neutral in risk, and dangerous. Risk tolerance may help an individual to cognize the intensity of risk from investments and support the person to be up to tolerate and adapt the risks involved to meet the investment aims so that the risk that the person is eager to agree to take will match the level of future return (Nguyen et al., 2016). Risk tolerance influences investors' decisions in alternative investment options. A person with a higher risk tolerance can invest in higher-risk assets, while a low-risk tolerance tends to avoid high-risk assets (Sivarajan and de Bruijn, 2021). According to our hypothecation, risk tolerance is also a vital mediating relationship between financial literacy and investment decisions. It is also shown in many types of research that financial literacy directly influenced investment decisions. Empirical evidence shows that financial literacy indirectly impacts investment decisions when risk tolerance is used to mediate between them (Aini and Lutfi, 2019). When an investor knows investment procedures through bank accounts, he is known as financial literate; then, he can also make investment decisions (Bayar et al. 2020).
Extant literature argues that investment decisions directly influence the Investors' personality and find a positive association when risk tolerance is used as a mediator. Perveen et al. (2020) claimed that personality traits positively affect investment decisions and anxiety negatively impacts investors' behavior. Overconfident investors tend to skip information when they have gained based on their personal beliefs and self-confidence and rely on their ideas and knowledge to ignore other relevant information. The adverse effects of overconfidence can make a person make a worse decision than they should have (Pradikasari and Isbanah, 2018). Overconfident financial investors believe that they can earn higher profits and face minimum risks when investing, although this is unreliable and not possible (Raheja and Dhiman, 2019).
H7: Financial literacy, Investors’ Personality and Overconfidence bias positively affect the investment decision with mediating role of risk tolerance.
H8: Investors’ Personality positively affects the investment decision with mediating role of risk tolerance.
H9: Overconfidence bias positively affects investment decisions with the mediating role of risk tolerance.
1.8 Theoretical Framework
The fundamental purpose of this study is to examine the impact of financial literacy, investors' personality, and overconfidence bias on investment decisions using risk tolerance as mediating factor. This study followed two theories; decision and risk theories (Waheed et al., 2020). The decision theory argues how rational investors behave under uncertainty and adopt rational choices for efficient management of investments. Risk theory deals with risk management and analytical processes that measure the potential volatility to predict risk-avoiding, mitigation better or pursue.