Investor Behavior in Capital Markets: The Role of Financial Literacy and Behavioral Biases in Retail Investors' Inclination toward Sustainable Finance Products in Emerging Economies
This study disentangles the behavioral mechanisms that shape retail investors' inclination to allocate capital toward sustainable finance products green bonds and ESG rated mutual funds within emerging capital markets. Integrating the Theory of Planned Behavior with behavioral finance perspectives on cognitive bias, we theorize that objective financial literacy promotes sustainable allocation while cognitive biases herding and overconfidence impede it, and that risk perception mediates the literacy pathway. Drawing on a sample of 612 active retail investors across emerging market exchanges, we employ Covariance-Based Structural Equation Modeling (CB-SEM) with Confirmatory Factor Analysis (CFA) to estimate the direct and mediated paths. The findings indicate that objective financial literacy is positively associated with sustainable allocation intention (β = 0.371, p < .001), whereas herding bias (β =-.268, p < .001) and overconfidence bias (β =-.224, p < .001) are negatively associated with it. Risk perception significantly predicts allocation intention (β = 0.312, p < .001) and significantly mediates the financial literacy pathway (indirect β = 0.142, 95% CI [0.094, 0.196]). The measurement and structural models exhibit excellent fit. The study advances behavioral finance theorizing in the under researched emerging market and sustainable finance context and offers actionable guidance for regulators, asset managers, and investor education programs.