Empirical Analysis of Cognitive Biases in Shaping Retail Investment Decisions Under the Moderation of Financial Literacy in the Indian Equity Market

This study focuses on the effect of cognitive biases on retail investors' investment decision-making process in the Indian equity market and deliberates on understanding the role of financial literacy as a moderating effect. The hallmarks were investigated and six biases were studied: overconfidence, anchoring and adjustment, herding, disposition effect, risk aversion, and representativeness, on primary data sifted from 302 retail investors. In this research, a cross-sectional use research design, reliability analysis, Pearson correlation, moderation analysis, and multiple regression were applied in the analysis of the data. Both anchoring bias and herding bias were significantly affecting investment decision-making (β = 0.274, p < 0.001 and β = 0.252, p < 0.001, respectively) and the overconfidence bias was also found to have a positive direct effect on investment decision-making (β = 0.138, p = 0.025), while disposition bias, risk aversion, and representativeness bias were not having a significant direct effect. Overconfidence, herding effect, and anchoring effect have significant elements to financial literacy. The study finds that a retail investor's investment decision in the equity market is influenced by cognitive bias in the market and financial literacy plays a significant role in buffering the effect to a certain extent; this study also helps to explain the behavioral factor affecting decision making of retail investors in equity market in India.