Understanding investors’ psychological factors and financial literacy on investment decision making: a conceptual paper

This conceptual paper examines the impact of psychological factors and financial literacy influence on investment decision-making, with Robo-advisors introduced as a moderator. Drawing on Prospect Theory, the study examines how psychological factors influence investors’ decisions, particularly among Generation Z (Gen-Z) investors. The study highlights common psychological factors such as loss aversion, overconfidence and Fear of Missing Out (FOMO), which often lead investors to make irrational or impulsive investment decisions. It posits that while traditional finance theories assume rational decision-making, these psychological distortions often lead to suboptimal investment behaviour. The study also examinesthe influence of financial literacy on investment decisions. It argues that financial literacy enhances investors’ ability to understand risks and evaluate financial information, reducing psychological factors such as overconfidence, herding, or loss aversion, which can distort rational decisions. Additionally, Robo-advisors, as algorithm-driven platforms, offer a potential solution by providing objective, data-driven advice that reduces the emotional and cognitive biases affecting decision-making. To test the conceptual paper's hypotheses, future studies can employ a quantitative, survey-based design targeting Gen-Z investors in Malaysia. Data can be collected through a structured questionnaire using a five-point Likert scale, with relationships among variables analysed using Partial Least Squares Structural Equation Modelling (PLS- SEM). This approach enables simultaneous examination of direct, indirect, and moderating effects between financial literacy, psychological factors, and Robo-advisors on investment decision-making. This paper presents a conceptual framework that integrates Prospect Theory, psychological factors, financial literacy and Robo-advisors to offer a more comprehensive understanding of modern investment decisions, especially in the context of digital Robo-advisors and Gen-Z investors. The framework provides a more comprehensive understanding of how education and digital solutions can work together to promote rational decision-making, ultimately improving investment outcomes in today’s dynamic financial environment.