The Impact of Financial Literacy, Risk Tolerance, and Innovation Adoption on Investment Decisions: Evidence from Retail Investors

Abstract

This study investigates the impact of financial literacy, risk tolerance, and innovation adoption on investment decisions among retail investors in Pakistan. Drawing on behavioral finance and innovation diffusion theories, the research employs a quantitative approach using a structured survey administered to 400 retail investors. Structural Equation Modeling (SEM) with SmartPLS was applied to analyze the relationships between constructs. The findings reveal that financial literacy has a significant positive effect on investment decisions, both directly and indirectly through innovation adoption. Risk tolerance not only influences innovation adoption but also moderates the relationship between financial literacy and investment decisions, indicating that risk preferences shape how knowledge translates into action. Innovation adoption emerged as a key mediator, suggesting that technologically engaged investors are more likely to make informed investment choices. The study highlights the importance of integrating financial education with digital literacy and understanding investor psychology. Practical implications emphasize the need for targeted financial literacy programs, risk-based investment advisory services, and fintech-driven investor empowerment strategies. The study contributes to existing literature by offering a comprehensive, behaviorally grounded framework for understanding individual investment behavior in emerging markets. These insights are crucial for policymakers, financial educators, and practitioners aiming to enhance financial inclusion and market participation in Pakistan.