Purpose

- Financial literacy is a crucial element of financial decision making, exerts significant influence on the behavior of individual investors, while making budgetary, house financing, stock investing and retirement planning decisions. So, the purpose of this research was to determine the relationship between financial literacy and behavioral biases of individual investors in Pakistan.

Design/methodology/approach

- In this research paper, a sample of 300 observations was obtained through questionnaires from individual investors residing in Lahore and invested in Pakistan Stock Exchange. The data obtained, was passed through Cronbach’s Alpha and Exploratory Factor Analysis (EFA). The hypothesis developed for the research was tested by Pearson’s Chi-square and Ordinal Regression Analysis.

Findings

- The hypothesis testing of the research concluded that there is a negative association between financial literacy and behavioral biases of individual investors. So, it means; with an increase in the level of financial literacy, the likelihood of investors facing behavioural biases reduces. It has also appeared that male respondents have more financial literacy than female respondents.

Originality/value

- Previous studies in the field of finance, identified different factors causing the financial behavior of individual investors of Pakistan, and also focused on the level of financial literacy in Pakistan, but these studies have not emphasized the crucial relationship between financial literacy and behavioral biases of individual investors. Thus, the unique empirical analysis developed in this paper has accentuated the financial literacy as a factor that mitigates behavioural biases of an individual investor.