Dynamics of Investors’ Financial Literacy, Risk Perceptions and Emotions: Evidence from the Tehran Stock Exchange

Financial literacy is believed to play an important role in understanding investors’ behavior both in advanced and emerging stock markets. While previous studies have shown a positive association between improved financial literacy levels and the quality and performance of investors’ decisions, the dynamics of this process has not been adequately examined. This study develops an empirical model explaining the decision-making process that integrates the impact of investors’ financial literacy, emotions, and risk perceptions on investment decisions focusing on the financial markets of the Islamic Republic of Iran, mainly represented by the Tehran Stock Exchange (TSE). In particular, a three-dimensional process is used to provide a more robust measure of financial literacy represented by financial attitude, financial behavior and financial knowledge covering both basic and advanced financial knowledge levels. Using a large data set on investment behavior at the TSE in 2016, we find, unlike previous studies, no evidence on the impact of financial literacy on investors’ risk perception in Iran. On the other hand, financial literacy, risk perception and emotions collectively and significantly affect investors’ decisions at the TSE. We further find some evidence of gender specific effects.