THE IMPACT OF FINANCIAL LITERACY ON INVESTMENT DECISION MAKING: A STUDY ON THE OWNERS AND MANAGERS OF RETAIL BASED SMES IN PESHAWAR

Abstract

This study investigates the relationship between financial literacy and investment decision-making among retail small and medium enterprise owners and managers in Peshawar, Pakistan. With the increasing complexity of financial markets and the critical role of SMEs in the local economy, understanding the behavioral and cognitive elements influencing financial choices is imperative. Using a structured, person-administered questionnaire, data was collected from 102 respondents across various retail sectors. The study adopts a quantitative exploratory approach and employs regression analysis to test a series of hypotheses focused on financial literacy, behavioral and cognitive biases including overconfidence, herding, anchoring, loss aversion, mental accounting, and familiarity bias and demographic influences such as age, gender, education, income, experience, and training. Findings indicate a significant positive relationship between financial literacy and investment decision-making quality. Several behavioral biases, notably overconfidence, herding, anchoring, mental accounting, and familiarity bias, were also found to significantly affect investment decisions. However, demographic factors showed mixed associations, with education and income levels emerging as more influential than gender or position. The results align with previous literature reinforcing the role of cognitive and contextual elements in financial behavior. This research contributes to the growing body of behavioral finance literature in developing economies and provides actionable insights for policymakers, SME support institutions, and financial educators seeking to enhance decision-making competence among small business operators.