Financial Literacy and Cognitive Biases in Investment Decision-Making: An Analysis of Their Influence on Investor Behaviour

Abstract

Investment decisions are influenced by both financial knowledge and psychological factors, yet the relationship between financial literacy and cognitive biases remains insufficiently understood. This study examines how financial literacy and cognitive biases collectively influence investment decision-making through a qualitative synthesis of literature from finance, behavioural economics and psychology. The analysis indicates that higher financial literacy improves analytical reasoning, financial judgement and investment decision quality, but does not eliminate cognitive biases arising from inherent psychological processes. Instead, investment behaviour is shaped by the interaction between financial knowledge and behavioural influences. By integrating financial and psychological perspectives, this study provides a broader understanding of investor behaviour and highlights the importance of combining financial education with behavioural awareness to promote more rational investment decision-making.