A Study on the Role of Financial Literacy in Mitigating Behavioral Biases

Abstract

Abstract - In India's rapidly evolving digital economy, young adults face unprecedented exposure to financial products—yet remain highly susceptible to behavioral biases that impair rational decision-making. This study examines the role of financial literacy in mitigating five key behavioral biases: overconfidence, loss aversion, present bias, anchoring, and herding. Using a cross-sectional survey of 55 Indian respondents aged 18–30, the study employs a structured financial literacy test and bias indicators on a Likert scale. Statistical analyses including correlation, regression, and moderation were used to evaluate relationships between literacy and biases, with demographic variables as moderators. Results reveal a strong negative association between financial literacy and all five biases, with the most pronounced effect on overconfidence and present bias. Income and education significantly moderate these relationships, amplifying the bias- reducing effects of financial literacy in lower-income and less- educated groups. These findings support behavioral finance theory and suggest that financial literacy not only improves knowledge but acts as a behavioral safeguard in emerging markets. The study contributes practical insights for educators, fintech designers, and policymakers aiming to foster more rational, inclusive financial participation among Indian youth. Keywords Financial Literacy; Behavioral Biases; Overconfidence; Herding; India; Emerging Markets; Financial Behavior; Young Adults