The effect of financial literacy on investment decisions through risk tolerance and overconfidence
Keywords:
Financial Literacy, Risk Tolerance, Overconfidence, Investment DecisionsAbstract
Investment decision is the process of allocating funds into specific investment instruments to generate future returns. Despite the rapid growth of Gen Z participation in Indonesia's capital market—with investors aged 30 or below accounting for 54.12% of all registered accounts—the quality of their investment decisions remains suboptimal, partly due to psychological biases. This study examines the effect of financial literacy on investment decisions through risk tolerance and overconfidence as mediating variables among 170 Gen Z investors affiliated with the Indonesia Stock Exchange (IDX) Investment Gallery at universities in Denpasar, Bali, in 2026. Proportional stratified random sampling was employed, and data were analyzed using PLS-SEM via SmartPLS 4. Results demonstrate that financial literacy positively influences risk tolerance and investment decisions, while exerting a significant negative effect on overconfidence. Risk tolerance positively affects investment decisions, whereas overconfidence negatively affects investment decisions. Both risk tolerance and overconfidence partially mediate the financial literacy–investment decision relationship. The model explains 65% of variance in investment decisions. Findings extend Prospect Theory and Financial Behavior Theory to a Gen Z context, highlighting that among novice investors, financial knowledge reduces—rather than amplifies—overconfidence, leading to more rational investment behaviour. Practical implications for IDX Investment Galleries and financial regulators are discussed.
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