The Influence of Overconfidence on Trading Frequency: The Mediating Role of Risk Perception and the Moderating Role of Financial Literacy

Abstract

One of the most widespread and damaging behavioral biases in financial decision-making is overconfidence, but the effects of this bias on the trading behavior are understudied. This paper will explore the role of overconfidence on the frequency of trade among Pakistani retail investors, where risk perception will be one of the mediating variables, and financial literacy will be one of the moderating variables. Primary data was gathered on 350 retail investors, who actively trade at the Pakistan Stock Exchange using digital trading platforms, like CDC Access, Finja, and Sadapay in Karachi, Lahore, and Islamabad, by using a quantitative cross-sectional research design. The analysis of data was done through SPSS and PROCESS Macro (Model 7) to analyze moderated mediation. The results demonstrate that overconfidence contributes a lot to trading frequency. This relationship is partly mediated by the risk perception, whereby more confident investors tend to perceive the less risky financial risks, and this in turn causes them to trade more often. Moreover, financial literacy has a significant moderating effect, with higher financial literacy resulting in a weaker mediation. These results have significant implications for financial regulators, brokerage firms, and investor education programs in emerging markets. Keywords: Overconfidence, Trading Frequency, Risk Perception, Financial Literacy, Moderated Mediation, Pakistan Stock Exchange, Retail Investors.