Financial Literacy and Its Effect on Investment Decisions: A Review of Recent Literature

Khaleda

doi:10.25163/business.3110268

Business and social sciences | Online ISSN 3067-8919

REVIEWS (Open Access)

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Financial Literacy and Its Effect on Investment Decisions: A Review of Recent Literature

Khaleda Nasrin¹*

+ Author Affiliations

Business & Social Sciences 3 (1) 1-10 https://doi.org/10.25163/business.3110268

Submitted: 05 March 2025 Revised: 14 May 2025 Published: 16 May 2025

Abstract

In an era of rapidly evolving financial markets and widespread access to investment platforms, financial literacy has become a critical determinant of informed investment decision-making. This review synthesizes recent literature to explore the relationship between financial literacy and investor behavior, focusing on how individuals' understanding of key financial concepts influences their risk tolerance, portfolio diversification, and long-term financial planning. Empirical evidence consistently shows that higher financial literacy correlates with sound financial habits, such as disciplined saving, prudent risk assessment, and proactive retirement planning. In contrast, low financial literacy often leads to impulsive decisions, susceptibility to behavioral biases, and vulnerability to misinformation—particularly in digital finance environments. The review also examines how demographic variables such as age, education, income, and gender shape the financial literacy-investment nexus. It further highlights the emerging role of fintech tools and targeted education programs in addressing knowledge gaps. Despite growing awareness of its importance, global financial literacy remains insufficient, especially in developing regions, underscoring the need for inclusive, behaviorally informed education strategies. This paper offers a comprehensive overview of recent findings, identifies persistent challenges, and proposes directions for future research and policy. By emphasizing the societal benefits of financial literacy—ranging from individual financial well-being to broader economic stability—it argues that enhancing financial education is not just a personal necessity but a public priority in today’s complex financial landscape.

Keywords: Financial Literacy, Investment Decisions, Behavioral Finance, Risk Assessment, Financial Education.

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