Investor financial literacy, decision-making behavior, and stock price volatility

What is it about?

To explore the impact of financial literacy on investors’ decision-making, we designed a cross-contrast behavioral game experiment to examine this issue. We try to find out whether the improvement of financial literacy can enable investors to overcome psychological deviations, thereby improving the rationality of decision-making. The main research conclusions of this paper are as follows: First, financial literacy education can effectively improve the subject’s decision-making rationality. Whether from a static or dynamic perspective, financial literacy helps investors overcome the "Framework Effect" and "Heuristic Bias", and significantly improved the rationality of investors' decision-making. Second, interference information that has nothing to do with stock prices in the market aggravates the volatility of stock prices, and the general improvement of investors’ financial literacy can reduce the impact of irrelevant information on stock prices, thereby reducing the volatility of stock returns, improving the effectiveness of stock pricing. Third, the existence of technical traders in the financial market is one of the causes of the momentum effect. Changes in market information inhibit the momentum effect.

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Photo by Headway on Unsplash

Photo by Headway on Unsplash

Why is it important?

The main conclusions of this paper have important reference significance for both investors and regulators. Investors should try to improve their financial literacy and ability to make rational decisions and consider fundamental information, market information, and the power of the game among investor groups. Regulators should attach importance to the education of national financial literacy and create a rational market atmosphere.

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