The effect of investors' behavioral biases on individual investment decision, a research on the roles of financial literacy and risk perception

Although classical economic and financial theories suggest that individuals evaluate all information logically and make consistent decisions, these approaches are insufficient to explain irrational financial behaviors. Although the literature examines the functioning of markets and the dynamics of investment decisions and offers simple investment rules, it is observed that these rules cannot be applied consistently. Behavioral finance emphasizes that investors can systematically deviate from rational decision processes due to factors such as emotional reactions, lack of financial literacy, and risk perception. In this context, wrong timing, over-trading, and irrational tendencies are common. The aim of this study is to provide a comprehensive framework to understand these deviations and to enable better analysis of the factors affecting investment decisions. In this study, the effects of individual investors' behavioral finance tendencies on investment decisions were examined; the regulatory and mediating roles of financial literacy and risk perception in these effects were evaluated. The research was conducted by survey method with 841 individual investors aged 19 and over living in Istanbul. According to the analysis results, it was determined that overconfidence, illusion of control, avoidance of regret, herd behavior and self-control tendencies positively affect individual investment decisions. It was found that financial literacy and risk perception play regulatory and mediating roles in the effects between behavioral finance tendencies and individual investment decisions.