From Confidence to Action: How Financial Self-Efficacy and Risk Tolerance Influence Investment Behaviour

Abstract

Financial self-efficacy, a personal belief in being able to handle personal finances, has been viewed as an important psychological factor influencing investment behaviour, especially among young adults, as they have become exposed to more complex financial environments. The research examined the role of financial self-efficacy in making investments made by people who are aged between 20 and 35. Based on the social cognitive theory and the literature on behavioural finance, the research focused on the issue of the role of self-perceived financial competence on risk tolerance, investment planning, and portfolio diversification. A well-designed questionnaire was distributed among 300 youth investors across urban centres in India, and correlation and regression methods were used to analyse the data. The results confirmed a strong positive correlation between financial self-efficacy and sensible investment behaviour: those with stronger self-efficacy were pictured to be more confident in their judgement, having widely diversified portfolios and possessing the ability of more calculated financial risks. These findings indicate a need to consider the inclusion of self-efficacy-building elements in financial-education programs and provide insightful guidelines to policymakers, financial advisors, and educators looking to increase financial access as well as financial well-being over time.