THE EFFECT OF FINANCIAL LITERACY AND COGNITIVE BIAS ON GREEN INVESTMENT DECISIONS

Abstract

This study examines the influence of financial literacy and cognitive bias on green investment decisions among individual investors in Indonesia. The rapid growth of sustainable finance instruments, including green bonds, ESG-based mutual funds, and environmentally oriented stocks, has attracted considerable academic and practitioner interest. However, individual investors' decision-making in this domain remains underexplored, particularly regarding the interplay between financial knowledge and psychological factors. Using a quantitative approach with survey-based data collection from 120 respondents selected through purposive sampling, this research employed Structural Equation Modeling – Partial Least Squares (SEM-PLS) as the analytical method. The findings reveal that financial literacy has a significant positive effect on green investment decisions, indicating that investors with higher financial knowledge are more inclined to allocate funds toward sustainable financial instruments. Conversely, cognitive bias—encompassing overconfidence bias, herding behavior, and loss aversion—exerts a significant negative effect on green investment decision-making. These results suggest that psychological distortions substantially impair rational evaluation of green investment alternatives. This study contributes empirical evidence to the growing literature on behavioral finance and sustainable investment, offering practical implications for financial educators, investment advisors, and policymakers in promoting informed and rational participation in green capital markets.