Is financial literacy enough to explain investment decisions? Understanding the role of psychological characteristics

Behavioral sciences have largely demonstrated that psychological, emotional, and motivational factors influence financial behaviors. However, psychological characteristics have been quite overlooked concerning investment decision-making, as research focused mainly on financial knowledge and skills. In this framework, the present study aimed to explore the role of specific socio-demographic and psychological factors in predicting financial market participation. Analyzing cross-sectional data on a representative sample of 1,110 individuals, the impact of socio-demographic characters, financial literacy, financial self-efficacy, financial risk attitude, and impulsivity on the decision to participate in financial markets was investigated. Findings from a multinomial logistic regression model showed that besides financial literacy, psychological characteristics (i.e., risk tolerance, financial self-efficacy, and impulsivity) significantly affect the probability of investing. From one side, these results confirm the relevant role that financial literacy plays for a proper investment decision-making. On the other side, the present study reveals that decision-making processes is affected by investors’ psychological characteristics as well. Thus, considering psychological factors, such as risk attitudes and individual differences is essential to better understand investment decisions.