Role of Self-reflection in Mitigating Overconfidence Bias in Individual Investors: The Moderating Effect of Financial Literacy.

Abstract

This study addresses the limited knowledge of cognitive and psychological mechanisms that mitigate overconfidence bias in individual investors by exploring the roles of self-reflection and financial literacy in this phenomenon. By integrating literature on cognitive psychology and behavioral finance, it hypothesizes that overconfidence bias in investors is minimized when they engage in self-reflection on their past stock trading experiences, facilitated through an intuitive logical thought process, and their financial literacy moderates this self-reflection effect. The partial least square structural equation modeling technique was applied to analyze the survey data collected from 253 individual investors at the Colombo Stock Exchange of Sri Lanka. The findings reveal that self-reflection reduces overconfidence bias, which is moderated by financial literacy. Accordingly, the findings imply that higher financial literacy enables more effective self-reflection in recognizing and correcting overconfidence bias. The study offers new insights into the literature on the overconfidence-mitigation process and suggests applying the findings when developing awareness and training programs for individual investors, which can enhance the stock market efficiency and support the country’s sustainable economic development.