Do The Effects of Individual Factors On Financial Risk-Taking Behavior Diversify With Financial Literacy?

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Do the effects of individual factors on financial risk-taking behavior diversify

with financial literacy?
Article in Kybernetes · November 2017

DOI: 10.1108/K-10-2016-0281
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Do the effects of individual factors on financial risk-taking behavior diversify with
financial literacy?
Sibel Dinç Aydemir, Selim Aren,
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behavior diversify with financial literacy?", Kybernetes, Vol. 46 Issue: 10, pp.1706-1734, https://
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K
46,10 Do the effects of individual factors
on financial risk-taking behavior
diversify with financial literacy?
1706 Sibel Dinç Aydemir
Faculty of Business Administration, Gebze Technical University,
Kocaeli, Turkey, and
Selim Aren
_
Faculty of Business Administration, Yıldız Technical University, Istanbul, Turkey
Abstract
Purpose – This study aims to examine the roles of individual factors on risky investment intention as an
indicator of risky financial behavior.
Design/methodology/approach – The data were collected from a survey instrument and composed of
496 individuals’ responses. The authors exploited structural equation modelling and multigroup structural
equation modelling for direct and indirect effects, respectively.
Findings – Results indicate that emotional intelligence and locus of control have a positive impact on
financial risk-taking, while risk aversion in general has the negative one. Although financial literacy does not
have a direct effect on risky financial behavior, it has important role as a moderator variable, interacting with
external locus of control.
Originality/value – The authors expect this study to contribute into behavioral finance literature in two
ways. First, they investigate joint and relative effects of four major factors (i.e. emotional intelligence, locus of
control, risk aversion in general and financial literacy) identified in the literature on financial risk-taking of
individual investors. Each belongs to a different venue in an individual’s psyche and therefore is expected to
influence financial risk-taking through different mechanisms. However, the research arguing their roles on the
financial risky behavior directly is very limited. Investigating their individual effects is likely to provide
unique insights into our understanding of risky financial behavior. Second, the authors also posit and
manifest that the effects of the first three of the aforementioned factors on risk-taking intentions are
moderated by financial literacy. This finding is likely to provide rather valuable insights pertaining to the
emergence of risk-taking behaviors and may shed light on the root reasons behind equivocal findings in
previous research regarding the effect of each factor.
Keywords Emotional intelligence, Financial literacy, Risk aversion, Locus of control,

Financial risk taking
Paper type Research paper
1. Introduction
Although academicians have shifted their lenses according to the current paradigms, they
have always attempted to understand individual financial behavior thoroughly. Financial
intermediaries and policymaking institutions have also paid attention to this issue for both
microeconomic (i.e. managing their demands for products) and macroeconomic (i.e. fostering
Kybernetes savings or investments) reasons.
Vol. 46 No. 10, 2017
pp. 1706-1734
Resorting to the classical finance paradigm, in explaining individual financial behavior,
© Emerald Publishing Limited
0368-492X
many research has emphasized the role of demographic or socioeconomic factors in good
DOI 10.1108/K-10-2016-0281 part (Bajtelsmit and Bernasek, 1996; Powell and Ansic, 1997; Grable and Lytton, 1998;
Dwyer et al., 2002; Hallahan et al., 2004; Grable and Joo, 2004; Roszkowski et al., 2005; Risk-taking
Jianakoplos and Bernasek, 2006; Lutfi, 2010; Selcuk et al., 2010; Adhikari and O’leary, 2011; behaviour
Ansong and Gyensare, 2012; Charness and Gneezy, 2012; Gong and Yang, 2012; Halko et al.,
2012; Kamas and Preston, 2012; Lai and Tam, 2012; Duasa and Yusof, 2013; Larkin et al.,
2013). In view of its assumptions (i.e. everyone is rational, the sum of deviations from
rational behavior is zero and the probabilities are stochastic), this emphasis has become
quite conceivable. However, behavioral finance paradigm has highlighted the psychological
aspects of individual financial behavior. It assumes that everyone is not rational, that the 1707
deviations from rational behavior are systematic not random and that the probabilities are
subjective rather than stochastic. Therefore, the emphasis has shifted into the psychological
or attitudinal motives for financial behavior, attempting to encompass any subjectivity.
More clearly, essential concepts in psychology have been articulated once again in financial
context.
There has been much effort to reveal the influence of emotional intelligence (EI) in
diverse risk-taking settings such as learning, entrepreneurship and health risk-taking
(Kamalian et al., 2011; Yip and Cote, 2013; Joshi, 2013). Yet, the research linking it to
financial risk-taking has been interestingly rare. Further, there exists no study investigating
its effect on risky investment behavior. Along with this study, we would be able to know
how emotional abilities such as perceiving, managing, using emotions are related to risky
financial behavior. Also, emotions and rationale jointly in a decision-making process are
deemed as oxymoron concepts by rationalists particularly. Yet, some studies (Hess and
Bacigalupo, 2011) propose that emotions could foster a decision-making in terms of both the
output and the process as a whole. This study is also expected to provide an evidence for
this topic.
As an enduring personality variable, locus of control (LOC) has been largely discussed by
scholars particularly in entrepreneurship literature. LOC and risk-taking have been deemed
as entrepreneurial traits. There is a great deal of research linking LOC to risky behavior in
entrepreneurial and health risk-taking settings. Moreover, in terms of financial behavior, it
is known that LOC moderates the relationship between financial literacy (FL) and
responsible financial management behavior (Perry and Morris, 2005). Besides, internal LOC
has a positive influence on financial risk tolerance (Grable and Joo, 2000). However, we do
not know about its direct effect on risky investment behavior. If we know this, we would be
able to tap into individuals’ level of self-control and self-responsibility as well as time
preference, financial risk tolerance, etc. in explaining financial risky behavior.
By the researchers, risk-aversion (RA) has been an explanation for the occurrence of
risky behavior. The theories of reasoned action (Ajzen and Fishbein, 1977) and planned
behavior (Ajzen, 1991) refer to attitudes and subjective norms in identifying the likelihood of
behavior occurrence through behavioral intention. Some studies have revealed that the
inherent risk-taking of an individual could diverge from the observed one due to some
factors such as people’s manner of problem structuring and information processing, their
value functions and beliefs (Schoemaker, 1993). Similarly, Weber et al. (2002) have showed
that risk-taking is domain specific. Sitkin and Weingart (1995) have explained that decision
problem framing through risk perception influences risky decision-making. Hence, our
study could enable to know whether people generally avoiding taking risks in their life
would also abstain from financial risk-taking. Or do their general risk-taking and financial
risk-taking diverge from each other?
On the other hand, a great many researchers have argued the role of FL, known as being
financially knowledgeable, on financial behavior. These studies have revealed that FL has a
positive impact on a variety financial behavior (Aren and Aydemir, 2014a). Yet, the other
K possible influential factors on financial behavior have been ignored substantially in a great
46,10 majority of these studies. In addition, previous research has concentrated heavily on its
direct effect. For the first time, to our knowledge, this research considers its indirect effect in
that FL, as a moderator variable, may change the relationships between individual factors
and risky investment behavior. With this study, we would know whether and how
emotional and attitudinal factors interact with the financial knowledge (i.e. a cognitive
1708 factor) in influencing risky investment intention.
This paper might be recognized as a novel study in four ways. First, this study proposes
a relatively integrative model incorporating both emotional and attitudinal factors and also
objective financial knowledge (i.e. cognitive factor) in understanding individual risky
financial behavior. Due to the classical finance’s heavily emphasis on demographic, socio-
economic or risk-related factors in explaining financial behavior, extant literature has
deficiency of inclusive and comprehensive research models. Our model aims to approach
financial risky behavior of individuals more thoroughly. Second, it observes the relation of
emotional intelligence to financial risk-taking behavior for the first time. This could enable
to know how emotional abilities get involved in the financial decision making. Third, it
questions the indirect or moderating effect of FL as well as its direct effect. As far as we are
concerned, there is no study examining its indirect effect. As an individual’s financial
knowledge can change in time, we may use this probable indirect effect in managing his/her
financial behavior. Fourth, experimental and regression studies overwhelmingly take place
in the behavioral finance domain. This study uses SEM and multigroup SEM in examining
direct and indirect effects respectively. SEM has some advantages over regression models
for two reasons. First, it enables to examine all relationships in the model simultaneoulsy,
not partially. More importantly, it presents more strong and accurate coefficients by
accounting for measurement errors. These models, however, rarely exist in the behavioral
finance.
In terms of findings, our study may contribute to the literature in four ways. First, we
show emotional intelligence’s positive effect on risky investment intention. Similar to other
risk-taking settings, it is found to be related to financial risk-taking. When it comes to risky
financial behavior, relatively ignored factors by classical finance seem to be in charge. As
for the academic dispute about emotion–rationale, our study yields result in support of
emotional abilities. Besides, knowing that individuals’ abilities of perceiving, managing and
using emotions are positively related to risky investment intention could facilitiate
understanding why some people may easily undertake risky investment without any
financial knowledge or investment experience. Additionally, financial consultants would
know who should be persuaded for risky investment alternatives and who should be
directed to more secure ones. Apart from this, overconfidence bias articulated in the
literature may be originated from emotional abilities, in addition to past favorable
performance or amount of information. Second, we first provide evidence that FL moderates
the relationship between an individual factor and risky financial behavior. More specifically,
the positive relationship between external locus of control and risky investment intention
weakens when the FL is higher. Specific financial knowledge seems to make the decision
process more complicated. Financial institutions should remember it while elaborating their
currently and probable customers. Third, in explaining the study results, we tap into
behavioral finance axioms such as bounded rationality, limited information processing,
illusion of control and commission bias, and hence we serve for this literature as a whole.
Fourth, this study asks a new question whether subjective financial knowledge could be
significant factor in predicting risky investment intention. More clearly, by contrast with the
previous research, we couldn’t find FL as a significant factor in predicting financial
behavior. Our research model incorporates emotional and attitudinal factors as well as FL. Risk-taking
Thus, in our model, FL’s relative effect could have remained weaker when compared to other behaviour
significant individual factors. Or, subjective financial knowledge rather than the objective
one could be significant when it comes to financial risk-taking. Therefore, a “financial
ability” scale involving both objective financial knowledge and also subjective one (i.e.
familiarity with financial markets, investment experience) could be developed. Thus, this
kind of scale could enable financial behavior to be explained well.
The paper proceeds in the following way. First, we summarily propound extant 1709
literature, grounding our research hypotheses. Second, we define our data set, variables and
present all analyses. Finally, we discuss our findings theoretically and practically. We also
emphasize the research limitations and suggestions for future studies.
2. Literature review
Risky investment is used to define financial instruments other than the investments with
certain nominal return such as bank deposit and bond. With this kind of investment, an
investor does not know how much to earn and also it is possible for an investor to lose the
invested money. Therefore, risky investment intention is a concept to describe how much
individuals intend to invest in any risky investment alternative.
Schoemaker (1993) has stated that the intrinsic risk raking attitude of people could be
different from their observed risk-taking behavior. While some researchers from
neurofinance perspective (Kuhnen and Knutson, 2005; Kuhnen and Chia, 2009) have
proposed that risk-taking attitude may have genetic roots, some scholars from emotional
finance perspective have defined risky behavior through changing states of mind (McCarty,
2000). Tapping into behavioral finance, Sitkin and Weingart (1995) have examined the link
between problem framing and risky investment decision.
In one hand, Byrne (2005) has related risk aversion behavior to experience. On the other
hand, Wang et al. (2011) have manifested that people perceive the instruments that they
know more about, which they find familiar and more understandable as less risky.
Similarly, Vlaev et al. (2009) and Diacon (2004) expressed that financial knowledge has an
influence on risky investment behavior.
In general, the link between risk-taking and risky behavior has a long history by the
virtue of aforementioned researchers and the others’ (Weber and Milliman, 1997; Keil et al.,
2000; Cooper and Faseruk, 2011). Yet, the extant research body has deficiency of the
research which highlights the psychological or emotional roots behind the risky behavior,
particularly risky financial behavior and which presents a thorough comprehension of it.
Accordingly, this study emphasizes the role of such behavioral and attitudinal factors (e.g.
emotional intelligence, risk aversion attitude in general and LOC) on the risky investment
behavior. Additionally, this study argues the main effect of financial literacy as a significant
factor in the finance literature, and further, it questions its indirect effect as a moderator
variable for the first time.
2.1 Emotional intelligence – risky investment intention

Salovey and Mayer (1990) define EIas “the ability to monitor one’s own and others’ feelings
and emotions, to discriminate among them and to use this information to guide one’s
thinking and actions”. Unlike other EI models (Bar-On, 1997; Goleman, 1995), this model
(Salovey and Mayer, 1990) approach the concept as a series of emotional abilities. In this
context, EI is argued in four dimensions, all of which are perceiving emotions, managing
one’s self and others’ emotions and using them in the actions. EI has been enormously
emphasized in several domains (see Aren and Aydemir, 2014a for a review).
K Although emotion and rationale have been deemed as oxymoron concepts in decision-
46,10 making context, recent research has asserted that emotions could enhance both the output
and all processes in decision problems (Hess and Bacigalupo, 2011). As an integral part of
rational processes, the decision-making would progress well with higher EI (Humphrey
et al., 2007).
Especially in uncertain conditions, risk-taking is indispensible for decision makers. In
1710 this circumstance, what would happen is predicted through the likelihood of probable
outcomes. Therefore, anxiety may arise. These negative effects may cause poor decision-
making, thereby directing people’s efforts to divide between making a choice and managing
their moods skilfully (Chapman, 2006). This study also addresses that recognizing and
apprehending our emotions would influence risky choice behavior by reducing avoidable
mistakes. Consequently, emotional abilities are thought to have importance on risky
decision-making. Indeed, the research in other risk settings, such as leadership (Dulewicz
and Higgs, 2003; Leban and Zulauf, 2004; Rosete and Ciarrochi, 2005; Polychroniou, 2009;
Batool, 2013), entrepreneurship (Kamalian et al., 2011; Foo, 2011), learning (Humphrey et al.,
2007; Gunduz, 2013) and organizational change (Vakola et al., 2004), has revealed EI as a
significant factor on risk-taking. Recently, it is observed that many studies in economic and
financial domain have included this important variable into their research models (Trinidad
et al., 2004; Kidwell et al., 2008; Sjöberg and Engelberg, 2009; Ameriks et al., 2009; Dohmen
et al., 2010; Bell, 2011; Hess and Bacigalupo, 2011; Yip and Cote, 2013). Yet, no study
examining EI on risky financial behavior directly exists.
Demaree et al. (2008) have emphasized that emotional reactions could have an influence
on risk-taking behavior. Moreover, Olson (2006) has stated that emotions mainly ignored by
the classical finance paradigm could have an impact on financial behavior. Besides,
Satterfield (1998) has addressed that individuals’ cognitive and affective states could relate
to their risk-taking behaviors. More importantly, Ameriks et al. (2009) have manifested that
higher financial performance is linked to higher emotional intelligence.
Thus, we expect that EI could exert an effect on risky investment intention, by means of
enhancing the individual’s confidence and hence facilitating the challenges of a risky
decision emotionally. More precisely, emotionally intelligent people could deal with negative
affects arising from risky decisions well. Perceiving and managing their emotions skilfully,
individuals may undertake risky investments easily. They may feel more optimistic and
confident. These optimist and confident individuals are more likely to invest in risky
alternatives as their emotions could shape their risk perceptions about risky investment
alternatives (Foo, 2011).
2.2 Risk-aversion in general – risky-investment intention

RA in general can be recognized as an attitude reflecting to which degree an individual
avoids taking risks generally in his/her life. It is well known that attitudes and subjective
norms shape the likelihood of risky behavior occurrence according to the theories of
reasoned action (Ajzen and Fishbein, 1977) and planned behavior (Ajzen, 1991). McCarty
(2000) has proposed two kinds of risk-taking: intrinsic risk-taking and observed risk-taking
behavior. The first is considered as a personality trait, while the latter is seen as a changing
state of mind in accordance with the changing conditions. However, Peterson (2007) has
referred to a weak relation of genetic characteristics to risk-taking. On the other hand, a
great many study has argued the link between people’s mind states and their risk-taking
behavior (Tuckett and Taffler, 2008; Tuckett, 2009; Taffler and Tuckett, 2010; Eshraghi and
Taffler, 2012; Sahi, 2012). These studies have proposed that with the changing states of
mind people’s observed risk-taking behavior may be different from their risk-taking attitude Risk-taking
in general. behaviour
Although many studies have suggested generally that an individual avoiding risks
would also refrain from any risky behavior (Weber and Milliman, 1997; Sjöberg, 1998;
Grable and Lytton, 1998; Weber et al., 2002; Roszkowski et al., 2005; Siegrist et al., 2005;
Selcuk et al., 2010), many research has proposed that the actual link between risk-taking
attitude-risky behavior may be different. For example, Schoemaker (1993) has stated that
people’s inherent risk-taking could diversify from their actual risk-taking due to their 1711
different problem structuring, information processing ways. Similarly, Weber et al. (2002)
have indicated that risk-taking is in effect domain specific. People are not consistently risk
seekers/avoidants. Besides, Sitkin and Weingart (1995) have proposed that problem framing
outcome history may influence risky decision through risk perceptions. Therefore, we
include risk-taking in general into our research model. Resorting to two strands of research
body, we posit that people avoiding taking risk in general would also abstain from financial
risk-taking. However, we anticipate that FL would diversify this relationship.
2.3 Locus of control – risky investment intention

Ajzen (2002) has stated that people perceive gains, losses differently due to the factors
beyond their actions or controls. Actually, Rotter (1966) has first proposed that the effect of
reinforcement on a behavior could show divergence between individuals regarding degree
to which an individual discerns that this reward stems from his/her behavior. Accordingly,
if people perceive any reinforcement/reward as a result of their actions, those are said to
have internal LOC. Yet, if they discern any reinforcement/reward as a result of
uncontrollable/outside forces such as luck and destiny, those are said to have external LOC.
Starting from this, in predicting the nature of learning processes, this variable is
hypothesized to be significant and to show consistent differences between individuals.
Accordingly, internal–external LOC as a personality trait variable has been used in many
studies.
Particularly in entrepreneurship literature, researchers have linked internal LOC and
risk-taking to entrepreneurial traits (Chelariu et al., 2008; Al-Habib, 2012; Schjoedt and
Shaver, 2012; Jain and Ali, 2013). Similarly, some studies (Crisp and Barber, 1995; Carpentier
et al., 2014) have detected a significant relationship between LOC-risky behavior. Many
studies examining the link between LOC and financial decisions exist in the literature. Baron
(1968) has mentioned the positive relation between external locus of control and conservative
risk-taking behavior. Duxbury et al. (1996) have detected that informal investors in Canada
have higher internal LOC scores. In explaining the risk tolerance, in addition to the financial
knowledge and gender, Grable and Joo (2000) have revealed LOC as a significant predictor of
financial risk tolerance. Perry and Morris (2005) have showed that LOC has both direct and
indirect effects on responsible financial behavior. Additionally, Brounen et al. (2016) have
referred to the positive relation between LOC and willingness to save and have considered
financial literacy, behavioral and psychological factors as important to financial decision-
making. This finding has also been supported by the study of Cobb-Clarka et al. (2016).
McNair et al. (2016) have indicated that external LOC and borrowing behavior are related.
As is seen, the extant literature relates LOC to financial decisions such as saving and
borrowing. Therefore, we relate internal LOC to risky investment.
2.4 Financial literacy – risky investment intention

Although relevant literature has been lacking in defining FL (Huston, 2010), Servon and
Kaestner (2008) described it as “a person’s ability to understand and make use of financial
K concepts”. Financial literacy or knowledge is different from an individual’s education level.
46,10 A person may be higher educated while this person may have no knowledge about the main
financial concepts such as time value of money, stocks, bonds and risk diversification. Or, a
person may be less educated, whereas that person may be more familiar to these financial
issues than the higher educated person.
Akerlof and Shiller (2010) have emphasized on people’s unawareness of the basic
1712 financial topics (i.e. compound interest) and argue saving problem in that many people do
not save enough on average. Yet, whether people are financially knowledgeable could
explain greatly various financial or economic behaviors. Individuals have increasingly been
more active and responsible for their financial planning since global crisis increased
financial comprehension’s importance (Mandell and Klein, 2009; Robb and Woodyard, 2011;
Shahrabani, 2012). The diversity of financial products, many of which are rather
complicated (Van Rooij et al., 2007) and the advent of financial market deregulation (Mandell
and Klein, 2009) also contributed to its importance.

Furthermore, some research has revealed that financial knowledge made difference in
investment perceptions. Diacon (2004) has showed that financial experts and people with
lower financial knowledge had different risk perceptions. Financial experts prefer more
risky alternatives than laypeople due to their low risk perceptions. Wang et al. (2011) have
concluded that knowledge-related scales correlated highly with risk-related scales.
Past research has revealed that FL has a positive impact on portfolio diversification
(Guiso and Jappelli, 2008), higher stock participation (Van Rooij et al., 2007), preparedness
for post-retirement (Lusardi and Mitchell, 2007), wealth accumulation (Van Rooij et al., 2012),
etc. Yet, while focusing on FL, demographic and socioeconomic factors, these studies
seemed to ignore other individual/attitudinal factors (see Aren and Aydemir, 2014b for
details).
Indeed, financial literacy as a cognitive and learnable component in nature could
influence risky decision-making environment. However, contrary to the past research (Van
Rooij et al., 2007), we posit that FL has a negative impact on risky financial behavior. Due to
limited information assimilation and processing (Dolinsky and Feinberg, 1986) and bounded
rationality (Simon, 1955), we anticipate that higher financial knowledge could direct
individuals to display less willingness to undertake risky investments. Ngosi and Braganza
(2009) have mentioned that information sources could be easily ignored owing to processing
and maintenance costs. Hence, we propose that financial literacy has a negative impact on
risky investment intention.
We also anticipate that FL would have an indirect effect by interacting with individual
factors. Despite using regression model rather than SEM, our previous research has shed
light on this indirect effect (Aren and Aydemir, 2015). More clearly, people with emotional
abilities and internal LOC would tend to have higher risky investment intention. Yet, when
they are financially knowledgeable, their intention scores would lessen due to their limited
information processing. Financial knowledge may make risky decision-making even more
difficult. Consequently, due to their higher emotional abilities and self-control, people may
get more optimistic about risky investments. However, it may lessen by financial
knowledge.
Similarly, we expect that RA, in general, has a negative impact on risky investment
intention. This seemingly obvious relationship may differentiate by level of the FL. When
these risk-avoidant people are also financially literate, they would avoid more as this
increased knowledge could make decision environment even more complicated. The
negative relationship would probably strengthen from the lower to the higher.
3. Research design Risk-taking
In the light of extant research, this study posits the research model below (Figure 1). behaviour
The hypotheses derived from this model are as follows:
H1. EI has a positive impact on risky investment intention.
H2. RA in general has a negative impact on risky investment intention.

1713
H3. LOC has a negative impact on risky investment intention.
H4. FL has a negative impact on risky investment intention.
H5. The relationship between EI and risky investment intention is weaker for the higher
financially literate group.
H6. The relationship between LOC and risky investment intention is weaker for the
higher financially literate group.
H7. The relationship between RA in general and risky investment intention is stronger
for the higher financially literate group.
3.1 Measurement of variables

Our survey instrument consists of 50 items, 34 items of which are five-point Likert type
scale anchored at 1 = strongly disagree and at 5 = strongly agree. The remaining 16
questions represent financial literacy and have only one correct answer.
3.1.1 Emotional intelligence. We tapped into the 33-item scale of Schutte et al. (1998)
which was also validated in four dimensions by Ciarrochi et al. (2001). Yet, we used a 16-item
reduced version generated from our pilot study. This reduced scale already encompasses all
four subscales (perceiving emotions, managing one’s own emotions, managing others’
emotions and using emotions). For all dimensions, higher scores denote to higher EI level.
Scale items were coded as P1, P2, P3 and P4 for perceiving emotions; MS1, MS2, MS3 and
MS4 for managing one’s own emotions; MO1, MO2, MO3 and MO4 for managing others’
emotions; and U1, U2, U3 and U4 as using emotions.
Emotional
Intelligence
Risky
Investment
Locus of Intention
Control
Risk
Aversion in
General
Figure 1.
Financial
Literacy Research model
K 3.1.2 Risk-aversion in general. This scale comprises seven items. We combined three items
46,10 of Donthu and Gilliand (1996) with four items of Burton et al. (1998). Higher scores denote
to higher risk aversion in general. Scale items in the questionnaire were represented by
R1-R7.
3.1.3 Locus of control. To measure the variable, we exploited the scale of Perry and
Morris (2005). Higher scores refer to individuals with external LOC. Scale items were
1714 represented by L1-L7.
3.1.4 Financial literacy. In measuring this variable, we used the scale by Van Rooij et al.
(2011). Actually, this scale discusses FL in two dimensions: basic and advanced FL. Five
items refer to basic FL, while the remaining items represent advanced FL. Each question has
only one correct answer. By assigning one point to each correct answer, we calculated an
index through these points. Regarding both dimensions, we deem the index point equal to or
less (greater) than median value as low (high) basic or advanced FL.
Van Rooij et al. (2011) have claimed that advanced FL, rather than the basic one, is likely
to influence on stock market participation. We also expect that knowing about the
differences between stock and bond, their functions and the concept of risk diversification
(i.e. advanced FL) could be more associated to risky investment intention. Therefore, we
merely hypothesize advanced FL in our research.
3.1.5 Risky investment intention. Resorting to theory of planned behavior (Ajzen, 1991),
we exploit a four-item risky investment intention (Dodds et al., 1991) as the indicator of
actual risky investment behavior. Higher scores imply higher risky-investment intention.
Scale items were represented by N1-N4.
Table I exhibits the wordings of Likert type scale items, whereas (advanced) financial
literacy questions illustrate advanced financial literacy questions which are as follows:
(1) Which of the following statements describes the main function of the stock
market?
the stock market helps to predict stock earnings;
the stock market results in an increase in the price of stocks;
the stock market brings people who want to buy stocks together with those
who want to sell stocks; and
do not know.
(2) Which of the following statements is correct? If somebody buys a stock of firm B
in the stock market;
he owns a part of firm B;
he has lent money to firm B;
he is liable for firm B’s debts; and
do not know.
(3) Which of the following statements is correct?
once one invests in a mutual fund, one cannot withdraw money in the first
year;
mutual funds can invest in several assets, for example can invest in both
stocks and bonds;
mutual funds pay a guaranteed rate of return which depends on their past
performance; and
do not know.
Items Wordings
Risk-taking
behaviour
Emotional intelligence
P1 I am aware of my emotions as I experience them
P2 By looking at their facial expressions, I recognize the emotions people are experiencing
P3 I know why my emotions change
P4 I easily recognize my emotions as I experience them
MS1 When I am faced with obstacles, I remember the times I was faced with similar obstacles and 1715
overcame them
MS2 I expect that I will do well on most things I try
MS3 I expect good things to happen
MS4 When I am faced with a challenge, I give up because I believe I will faila
MO1 I like to share my emotions with others
MO2 I arrange events others enjoy
MO3 I present myself in a way that makes a good impression on others

MO4 I help other people feel better when they are down
U1 When my mood changes, I see new possibilities
U2 Emotions are one of the things that make my life worth living
U3 When I am in a positive mood, solving problems is easy for me
U4 When I feel a change in my emotions, I tend to come up with new ideas
Risk aversion in general
R1 I don’t like to take risks
R2 Compared to most people I know, I like to live life on the edgea
R3 I have no desire to take unnecessary chances on things
R4 Compared to most people I know, I like to gamble on thingsa
R5 I would rather be safe than sorry
R6 I want to be sure before I purchase anything
R7 I avoid risky things
Locus of control
L1 There is really no way I can solve some of my problems
L2 I am being pushed around in life
L3 There is little I can do to change the important things in my life
L4 I can do anything I set my mind to
L5 What happens to me in the future depends on me
L6 Helpless in dealing with the problems of life
L7 I have little control over the things that happen to me
Risky investment intention
N1 While making investment decision, I generally prefer risky alternatives
N2 If I were going to make an investment, I would consider risky investment alternatives
N3 The likelihood of buying risky investments is high
N4 My willingness to buy risky investment is high
Table I.
Note: aReverse coded Scale items
(4) Which of the following statements is correct? If somebody buys a bond of firm B:
he owns a part of firm B;
he has lent his money to firm B;
he is liable for firm B’s debts; and
do not know.
K (5) Considering a long period (for example 10 or 20 years), which asset normally
46,10 gives the highest return?
savings accounts;
bonds;
stocks; and
do not know.
1716
(6) Normally, which asset displays the highest fluctuations over time?
aavings accounts;
bonds;
stocks; and
do not know.
(7) When an investor spreads his money among different assets, does the risk of
losing money:
increase;
decrease;
stay the same; and
do not know.
(8) If you buy a 10-year bond, it means you cannot sell it after five years without
incurring a major penalty. True or false?
true;
false; and
do not know.
(9) Stocks are normally riskier than bonds. True or false?
true;
false; and
do not know.
(10) Buying a company stock usually provides a safer return than a stock mutual
fund. True or false?
true;
false; and
do not know.
(11) If the interest rates fall what should happen to bond prices?
rise;
fall;
stay the same; and
do not know.
3.2 Sampling
For all parts, this study used survey instrument in order the collect research data. This
study operationalized or measured risky investment behavior, the dependent variable,
through risky investment intention scale. Hence, this scale enabled us to target the people
who have already any risky investment and also those who are able to invest. Meanwhile,
the financially independent people were assumed to be able to invest. Therefore, convenient Risk-taking
sampling method was used as the target population was considered unknown. Yet, in this behaviour
sampling process, financially dependent people were excluded from the study, and the
people with a regular income have been chosen. Hence, it can be said that a convenient
sampling process compatible with the study’s target population was pursued by the
researchers. Accordingly, the researchers made conversations with the people from
institutions such as firm, bank and insurance company, public organization and university
via telephone. Then, survey instrument was sent to these targeted people through electronic
1717
mail. Those people who agreed to take part in the study were asked to send their responses
to the researchers individually by e-mail. Regarding the participants from universities, the
survey instruments were delivered by hand. As mentioned above, students who were under
18 and financially dependable have been excluded from our study as their financial
decisions probably could not be meaningful. Briefly, this research used convenient sampling
method for both the pilot and original study, as the researchers did not generate the target
population. However, the process was compatible with the study’s definition of target
population.
3.2.1 Pilot study. We fulfilled two pilot studies between September and December 2014.
In the former one, we aimed to obtain a reduced version of EI scale. A total of 214
_
participants from five big cities of Turkey (Istanbul, _
Ankara, Bursa, Izmir and Kocaeli)
consisting of public–private sector employees, students and retired people, participated in
the study. Out of 33 items, 16 items with higher factor loadings and item reliability were
selected to enable each dimension to be quite represented.
The latter pilot study, consisting of 112 participants, was conducted on university
personnel and students in Kocaeli, Turkey. Those financially dependent students (mostly
undergraduate students) were excluded from the study. This pilot study aimed to test
factorial structures of variables and the posited relationships between those variables. In
both studies, questionnaires were delivered by hand or e-mail to the people who agreed to
take part in the study.
3.2.2 Original study. We tested the posited relationships in the research model through a
survey instrument conducted on individuals which are aged 18 years or above and
financially independent. As we aimed to measure their behavioral intention toward risky
investment, individuals already having any risky investment or being able to invest formed
_
our target sample. With convenient sampling, 496 individuals from Istanbul, _
Ankara, Izmir,
Bursa and Kocaeli participated in our study between November 2014 and February 2015.
Participants chosen include public–private university employees, postgraduate students,
teachers, public–private sector employees and retired people. Our questionnaires were
delivered by hand in the university campus or by e-mail to the other participants all of
which agreed to take part in the study. Table II summarizes the descriptive statistics of the
study sample.
3.3 Measure validity, reliability and dimensionality

This study used structural equation modelling (SEM) to test research hypotheses regarding
direct effects of the independent variables on the dependent variable. Hair et al. (2010) states
that SEM could be considered as a particular combination of both interdependence and
dependence techniques as it grounds on factor analysis and multiple regression analysis.
Yet, in SEM, dependent variables in one relationship could become independent variables in
subsequent relationships. Moreover, the relationships estimated through regression models
will always be weaker due to the measurement error. However, SEM accounts for the
K Attributes Frequency (%) Valid (%)
46,10
Gender
Male 270 54.4 55.4
Female 217 43.8 44.6
Missing 9 1.8
1718 Age
20-30 230 46.4 46.8
31-40 197 39.7 40.1
41-50 52 10.5 10.6
51 and above 12 2.4 2.4
Missing 5 1.0
Education
High school or less 24 4.8 4.9

Graduate 250 50.4 50.9
Postgraduate 217 43.8 44.2
Missing 5 1.0
Marital status
Married 247 49.8 50.9
Single 238 48.0 40.1
Missing 11 2.2
Income
2000 TL* and below 122 24.6 25.2
2.001-5.000 TL 300 60.5 61.9
5.001-10.000 TL 50 10.1 10.3
10.001 TL and above 13 2.6 2.7
Missing 11 2.2
Advanced financial literacy
Low 292 58.4 58.4
High 204 41.1 41.1
Table II. Missing 0
Descriptive (total
sample: 496) Note: *TL: Turkish Liras
amount of measurement error in the latent variables (Hair et al., 2010). By virtue of its two
unique features, SEM is advantageous over regression models.
This research also used multigroup SEM (Hair et al., 2010) to examine indirect effect of
financial literacy on the relationships between other independent and dependent variables.
This indirect effect is called as moderating effect which occurs when the moderator (an
independent variable or construct) changes the strength or even the direction of a relationship
between two constructs in the model (Hair et al., 2014). In other words, in this study, we posit
that financial literacy interacts with the other independent variables and changes or
moderates the relationships between these variables and the dependent variable. Multigroup
SEM is mostly used in the moderating effect examination in the studies (Byrne et al., 1995;
Byrne et al., 1996; Pousette and Hanse, 2002; Delgado-Ballester, 2004; De Luca and
Atuahene-Gima, 2007; Teo et al., 2009) as it enables to compare the research model as a
whole between subgroups.
First, pursuing two-step approach (Anderson and Gerbing, 1988), for validity and
reliability purposes, we conducted a series of confirmatory factor analyses. Due to their
weaker factor loadings and modification indices, MO1, MS3, L1, L4, L5, R5 and R6 were
deleted. Besides, only EI with four subdimensions was evaluated with second-order Risk-taking
measurement model. Consequently, all subdimensions were confirmed in the measurement behaviour
model. The other scales in the study were already unidimensional.
Goodness-of-fit indices of final measurement model propose that the posited model fits
with the observed data ( x 2/df- Chi-square/degree of freedom = 2.27; goodness of fit index
(GFI) = 0.90; comparative fit index (CFI) = 0.92; root mean square error of approximation
(RMSEA) = 0.05) while the measurement model yielded in significant chi-square statistic
( x 2 (314) = 712.15 p < 0.01) due to this statistic’s sensitivity to larger sample size (Jöreskog,
1719
1969). Whereas GFI and CFI values refer to acceptable model fit, RMSEA statistic values at
good level. Besides, Hair et al. (2010, p. 667) propose that other measures of fit should be used
against the less meaningful chi-square value as sample size gets larger and as the variables
in a model increase. Table III summarizes factor loadings (FL), construct reliability (CR) and
average variance extracted (AVE).
When examined, in Table III, significant factor loadings indicated convergent reliability
at item level (Anderson and Gerbing, 1988). Besides, consistent with suggestions of Hair
et al. (2010), standardized factor loadings were above 0.50 and 0.70 largely, also providing
support for convergent validity. The variance shared between a construct and its indicators
is greater than the variance between a construct and other constructs (Fornell and Larcker,
1981), showing discriminant validity. Even though AVEs in EI for high group, in RA for low
group and in LOC for high group were less than 0.50, the relationships between these
Whole sample Low financial literacy High financial literacy

Construct FL* CR AVE FL* CR AVE FL* CR AVE
Emotional intelligence (EI) 0.85 0.59 0.87 0.64 0.79 0.49

Perception 0.79 0.86 0.71
Managing (Self) 0.68 0.72 0.68
Managing (Others) 0.83 0.81 0.60
Utilization 0.76 0.79 0.78
Risk aversion (RA) 0.83 0.50 0.82 0.49 0.90 0.72
R1 0.74 0.69 0.83
R2 0.56 0.80 0.89
R3 0.63 0.66 0.59
R4 0.84 0.61 0.52
R7 0.75 0.71 0.77
Locus of control (LOC) 0.82 0.54 0.84 0.58 0.77 0.45
L2 0.74 0.70 0.66
L3 0.67 0.86 0.76
L6 0.83 0.67 0.68
L7 0.70 0.81 0.58
Risky investment intention (I) 0.93 0.77 0.92 0.75 0.94 0.80
N1 0.84 0.80 0.87
N2 0.94 0.91 0.96
N3 0.88 0.89 0.88
N4 0.86 0.87 0.87 Table III.
Factor loadings,
Notes: FL: Factor loadings; CR: Construct reliability; AVE: Average variance extracted; *: All factor
loadings are standardized estimates and statistically significant at level 95 %; **: R1, R2, R3, R4, R7, L2, L3, construct reliability
L6, L7, N1, N2, N3, N4 are item codes of the relevant unidimensional scales; italic data significance level are and average variance
95 % confidence level extracted
K constructs and their indicators were fortunately greater than those of other constructs.
46,10 Hence, this also provides additional evidence for discriminant validity (Fornell and Larcker,
1981). In Table IV showing this, the diagonal elements were replaced by square root of AVE
(i.e. construct–indicator relationship) and off-diagonal elements represent correlations
among constructs.
In addition, we estimated a series of two-factor models suggested by Bagozzi et al. (1991).
1720 Amid these models, we compared the unrestricted models to relevant restricted models in
which the covariances between any two constructs were fixed to unity. Chi-square change
did not refer to any model improvement in each pair, revealing that they were distinct.
Hence, it was significant (p < 0.05) and indicated discriminant validity again.
3.4. Analyses and results

For all analyses (including validity, reliability and dimensionality measurements), IBM
SPSS Statistics and AMOS 22 were used. As SEM estimation procedure necessitates normal
distribution assumption, first, we obtained skewness/kurtosis statistics. These statistics
could be used to examine normality assumption (Hair et al., 2014). Our skewness/kurtosis
statistics were not greater than three and ten (in absolute values), respectively, referring not
to any severe non-normality suggested by Kline (2011, p. 63). Table V shows these values
calculated through IBM SPSS Statistics, and this program suggest that skewness and
kurtosis statistics should be not greater than 3 and 4, respectively. Anyway, our values also
fulfill these boundaries. Second, all missing values were replaced by median values of each
indicator as any approach is appropriate when the missing data are less than ten per cent of
observations (Hair et al., 2010). Then, we proceeded to our hypothesis testing analyses after
these preliminary tests.
3.4.1 Direct effects. To investigate direct or main effects, we estimated a structural
equation model on whole sample. Model fit indices ( x 2/sd = 2.23; GFI = 0.90; CFI = 0.92;
RMSEA = 0.05) indicated acceptable fit regarding x 2/sd, GFI, CFI and good fit concerning
EI RA LOC I
Whole sample
EI (0.77)
RA 0.02 (0.71)
LOC 0.37 0.18 (0.74)
I 0.00 0.39 0.24 (0.88)
Low Adv. Fin. Lit.
EI (0.80)
RA 0.03 (0.70)
LOC 0.38 0.16 (0.76)
I 0.02 0.28 0.39 (0.87)
High Adv. Fin. Lit.
EI (0.70)
RA 0.02 (0.85)
LOC 0.37 0.19 (0.67)
I 0.03 0.52 0.02 (0.90)
Table IV. Notes: EI: Emotional intelligence; RA: Risk aversion; LOC: Locus of control; I: Risky investment intention;
Correlations between Adv. Fin. Lit: Advanced financial literacy; italic data significance level are 95 % confidence level; *All
variables* values are significant at 0.05 error level
Variables Mean SD Skewness Kurtosis
Risk-taking
behaviour
Financial literacy 3.96 3.27 0.38 1.05
Managing self’s emotions
MS1 4.12 0.86 1.31 2.52
MS2 4.12 0.82 0.89 0.81
MS3 3.99 0.84 0.90 1.22
MS4 4.10 0.90 1.19 1.52
1721
Uisng emotions
U1 3.77 0.90 0.74 0.70
U2 4.08 0.89 1.11 1.54
U3 4.40 0.82 1.76 3.90
U4 3.87 0.89 0.61 0.13
Managing others’ emotions

MO1 3.81 0.94 0.80 0.61
MO2 3.96 0.89 0.91 0.96
MO3 3.95 0.86 0.99 1.63
MO4 3.80 0.87 0.88 1.13
Perceiving emotion
P1 3.17 1.10 0.19 0.64
P2 3.35 1.02 0.34 0.36
P3 3.81 0.93 0.78 0.53
P4 4.04 0.80 0.84 1.16
Risk Aversion
R1 3.05 1.17 0.12 0.86
R2 3.47 1.02 0.58 0.14
R3 3.76 1.03 0.88 0.45
R4 3.36 1.10 0.40 0.62
R5 3.90 0.97 0.85 0.47
R6 4.10 0.86 1.05 1.41
R7 3.42 1.06 0.27 0.50
Risky investment Intention
N1 2.49 1.09 0.47 0.35
N1 2.54 1.11 0.39 0.56
N1 2.49 1.10 0.51 0.47
N1 2.54 1.16 0.51 0.56
Locus of control
L1 2.70 1.05 0.21 0.66
L2 2.09 1.10 0.98 0.33
L3 2.33 1.10 0.61 0.35
L4 2.33 1.14 0.22 0.80
L5 3.56 1.10 0.63 0.29 Table V.
L6 2.08 0.99 1.01 0.82 Skewness and
L7 2.34 1.07 0.84 0.25 kurtosis
RMSEA. Accordingly, results showed that EI has a positive influence on risky investment
intention, supporting our H1. In other words, Table IV shows that emotional intelligence
variable is found as a significant factor (p: 0.007) with the 0.16 standardized coefficient. RA
in general is found to have a negative impact on intention, providing evidence for H2. In
Table IV, the variable is significant and has a standardized estimate of 0.46. H3 could not
K be supported as the relevant relationship was found positive. Unfortunately, FL had not a
46,10 significant direct effect on risky investment intention; hence, H4 was not supported.
Table VI summarizes structural model estimates of whole sample, namely, the results of
direct effect hypotheses.
3.4.2 Indirect effects. H5, H6 and H7 anticipate that the relationships between EI, LOC
and RA in general and risky investment intention would diversify across low–high FL
1722 scores of participants. To examine this moderating effect, we estimated multigroup SEM
applied widely in literature (Byrne et al., 1995; Byrne et al., 1996; Teo et al., 2009).
3.4.2.1 Measurement invariance tests. Before predicting structural path estimates, in
multigroup SEM, first, we should satisfy measurement invariance tests between two
groups. More specifically, by fulfilling invariance tests, we could be able to fix structural
path differences between two groups only to indirect effect of FL. Otherwise it is possible to
say that the structural path differences among groups may be also stemmed from
measurement characteristics or biases rather than only moderating effect. Thus,

comparisons between restricted models are needed to indicate that two measurement
models are invariant regarding configural, metric, scaler, factor covariance, factor variance
and error variance.
Primarily, using a common method in studies (Higgins et al., 1997; Malar et al., 2011), we
split a whole sample with the median value of advanced FL variable. Then, we had a
categorical variable, forming a base for grouping effects. Following Hair et al. (2010) for all
six stages, the configural or baseline model in which there is no restriction between groups
and which all parameters were estimated separately for each group showed good
(acceptable) fit regarding RMSEA (CFI) statistics. This means that configural invariance
was satisfied. The restricted model in which factor loadings between two groups are equal
to each other showed a significant improvement, referring to factor loadings or metric
invariance. More clearly, in Table V, nonsignificant p-value (0.15) means that the restriction
that the two groups are same regarding factor loadings or metric characteristics is accepted.
The restricted model in which intercepts of factors are constrained to be equal between
two groups showed a significant improvement. Thus, the scaler invariance or construct
mean equality between groups was satisfied. More clearly, in Table V, nonsignificant
p value (0.36) means that the restriction that the two groups are same regarding factor
intercepts or scaler characteristics is accepted.
In the next restricted model in which the covariances between constructs are constrained
to be equal across groups, the model did not exhibit a significant improvement. Thus, we
could not support factor covariance invariance. The significant p-value (0.00) in Table V
shows that the restriction that two groups are same regarding factor covariances is not
accepted. In the fifth stage, where construct variance equality across groups is assessed, the
restricted model exhibited a significant improvement over the previous model, indicating
that factor variances are nearly identical between groups. In the last stage where the
Structural paths Estimates Standard estimates Standard error p
Emotional intelligence ! Intention 0.41 0.16 0.15 0.007

Risk aversion ! Intention 0.53 0.46 0.06 0.000
Table VI. Locus of control ! Intention 0.48 0.39 0.07 0,000
Parameters estimates Adv. fin. lit. ! Intention 0.07 0.04 0.08 0.361
of the structural
model (whole sample) Note: Adv. fin. lit.: Advanced financial literacy
restrictions are that the error terms of each indicator remains invariant across low–high Risk-taking
financially literate groups, it is seen that the model did not show any improvement over the behaviour
previous one. That is to say, error terms of indicators were variant across groups. To sum
up, comparisons amid a series of nested models showed configural, metric, factor variance,
scalar invariance between two groups, whereas it did not indicate factor covariance and
error variance invariance.
When the measurement invariance is achieved for all six stages, researchers may refer to
full invariance. However, it is difficult to satisfy in practice (Steenkamp and Baumgartner,
1723
1998). Then, partial invariance is suggested by Byrne et al. (1989). Thus, we may extend to
the structural path estimation procedure, fulfilling partial invariance. Table VII illustrates
model comparisons between above-mentioned models.
3.4.2.2 Multigroup structural model estimation. In this stage, as a first model, identical to
totally free model (TFM), we calculated path estimates separately for each group. In the
other restricted models, in every turn, we will restrict each model in that only one path
estimate is to be equal across groups.
When we constrained only the EI ! Intention path to be equal between groups, there
was a nonsignificant difference, showing that the effect of EI does not change across low or
high FL groups. In other words, the moderation effect does not exist. H5 was not supported.
In the restricted model where the LOC ! Intention relationship is assumed to be the
same across groups, model fit seems to get weaken. Significant difference between TFM and
restricted Model 2 refers to the existence of moderation effect, providing support for H6.
When we constrained only RA ! Intention path to be equal between groups, there was a
statistically nonsignificant difference between models, revealing that moderation effect does
not exist. Thus, we could not support H7. Table VIII demonstrates the comparison between
totally free model and all restricted models.
Moreover, Table IX exhibits structural model parameters on the basis of both whole
sample and two groups. When examined, it can be seen that the RA ! Intention
relationship is significant in both groups. The EI ! Intention relationship is significant and
Model x2 df RMSEA CFI Dx 2 Ddf p
Configural invariance 1158.36 628 0.041 0.90

Metric invariance 1184.92 648 0.041 0.90 26.56 20 0.15
Scalar invariance 1188.15 651 0.041 0.90 3.23 3 0.36 Table VII.
Factor covariance invariance 1232.26 661 0.042 0.89 44.11 10 0.00
Factor variance invariance 1233.82 665 0.042 0.89 1.55 4 0.82
Measurement
Error variance invariance 1317.66 692 0.043 0.88 83.84 27 0.00 invariance tests for
low versus high
Note: Italic data significance level are 95% confidence level financial literacy
Model x2 df Dx 2 Ddf p
Totally Free Model (TFM) (no restriction) 1158.363 628

Restricted Model 1 (EI ! Intention) 1159.279 629 0.91 1 >0.05
Restricted Model 2 (LOC ! Intention) 1197.823 629 6.05 1 <0.05
Table VIII.
Restricted Model 3 (RA ! Intention) 1190.765 629 2.5 1 >0.05 Model comparison
between totally free
Notes: EI: Emotional Intelligence; LOC: Locus of Control; RA: Risk Aversion and restricted models
K greater for low financial literate group, whereas it is insignificant and weaker for the high.
46,10 Similarly, from low to high literate group, the LOC ! Intention relationship becomes
weaker and even insignificant. Although moderating effect manifested only on the LOC !
Intention statistically, on other two paths there are also substantial or practical differences
between groups regarding EI and RA. Without examining the moderating effect of FL, we
could have obtained moderate path estimates since the moderated relationship balances the
1724 diversifying effects of low–high literate groups when estimated jointly.
Finally, Table X tabulates the results of our research hypotheses regarding whether they
were supported.
4. Discussion and conclusion

4.1 Theoretical and practical implications
To extend and expand the comprehension of individual risky financial behavior into
behavioral/attitudinal motives, non-ignorable effort has been devoted by behavioral finance.

Our study contributes to this research body by examining the effects of major factors such
as EI, LOC and RA in general and FL on risk-taking intention.
First, our finding that EI has a positive influence on risky investment intention shows
consistency with the findings in other risk settings. Most importantly, to our knowledge, we
provide evidence that superior and innate emotional skills are important to also risky
financial behavior for the first time. Additionally, there occurs an ongoing controversial
issue in the literature on how emotions and rationale take place jointly on decision-making
processes. Therefore, our finding serves this research stream in support of emotions. The
given effect can be explained in that higher emotional abilities enable individuals to feel
more confident and courageous; hence, conducting them into risky investments. Indeed,
Ciarrochi et al. (2001) have detected a positive relationship between EI – and all its
dimensions – and self-esteem. On the other hand, it is also found in that study that there is a
Whole sample N = 496 Low Adv. Fin. Lit. N = 292 High Adv. Fin. Lit. N = 202
Parameters Estimates Estimates Estimates
Table IX.
EI ! Intention 0.41 (0.16)* 0.49 (0.24)* 0.05 (0.01)
Structural and RA ! Intention 0.53 (0.46)* 0.39 (0.37)* 0.57 (0.53)*
multigroup LOC ! Intention 0.48 (0.39)* 0.52 (0.54)* 0.13 (0.08)
structural model
parameters Notes: Values in parentheses represent standardized estimates; *p < 0.05
Hypothesis Result
H1 EI has a positive impact on risky investment intention Accepted

H2 RA in general has a negative impact on risky investment intention Accepted
H3 LOC has a negative impact on risky investment intention Rejected
H4 FL has a negative impact on risky investment intention Rejected
H5 The relationship between EI and risky investment intention is weaker for the Rejected
higher financial literate group
H6 The relationship between LOC and risky investment intention is weaker for Accepted
Table X. the higher financial literate group
Hypothesis testing H7 The relationship between RA in general and risky investment intention is Rejected
results stronger for the higher financial-literate group
negative relation between emotional abilities and trait anxiety. Thereby, in the view of that Risk-taking
individuals with high EI are more likely to have high self-esteem and low anxiety, they behaviour
could be emotionally susceptible to undertaking a risky investment. Perhaps,
overconfidence bias argued in the literature can be fostered by EI.
Yet, we could not provide evidence that advanced FL does not diversify the relationship
between EI and risky investment intention. Although this moderating effect was
statistically insignificant, a practical or substantial difference draws our attention. The
given relationship was significant for low financial literate group, while it is insignificant for 1725
the high group. However, on whole sample, we found a significant but moderate
relationship. It can be said that from low to high financially literate group, the positive effect
of EI on risky investment intention weakens. Even though these people with relatively high
self-esteem and low anxiety are susceptible to risky investments because of their emotional
abilities, this emotional readiness does not remain enough when high financial knowledge is
included. This weakening effect may stem from the difficulty or the cost of processing this
knowledge. Or, the people with high EI may experience the illusion of control (Langer, 1975),
and they could elude this illusion with the inclusion of financial knowledge into the process.
Consequently, this finding can be recognized as similar to the approaches such as limited
information processing (Dolinsky and Feinberg, 1986) and bounded rationality (Simon,
1955).
Supporting the corresponding hypothesis, we revealed a significant and negative effect
of RA in general on risky investment intention. The posited relationship seems obvious at
first glance, however, an individual avoiding taking risks in general does not have to avoid
financial risk-taking in any case and vice versa. This discrepancy can derive from the
manner of problem structuring or information processing which differentiate intrinsic risk-
taking attitude from the observed behavior (Schoemaker, 1993). Weber et al. (2002) reveal
that risk-taking is domain specific. Yet, we could not statistically support the hypothesis
that FL changes this relationship. However, it is insignificant, a practical difference draws
attention here. Those people with lower financial knowledge tend to have higher intention
scores than higher knowledgeable people. Bounded rationality (Simon, 1955) assuming that
individuals have limited information gathering and computational capacity can explain this
difference. Dolinsky and Feinberg (1986) have stated that more knowledge results in
ineffective decision making due to people’s limited information processing capacity. Besides,
Ngosi and Braganza (2009) have mentioned about the uncertainty of processable
information as people easily discard information sources due to the cost of processing and
maintaining them. These findings explain within reason that people with more financial
knowledge who already avoid taking risks both in general and financially tend to abstain
from risky investments more. Knowledge could make the decision-making climate more
elaborate, not simpler. This also shows consistency with the tenet of behavioral finance that
decisions of individuals are influenced by both the decision environment and also the way of
problem framing (Tversky and Kahneman, 1986).
Unlike our expectations, we empirically observed a positive influence of LOC on risky
investment intention. More clearly, we found that people with external locus are more likely
to have higher risky investment intention. Yet, the studies focused on it generally links
internal LOC to risk-taking. Our finding shows that this is not the case in financial setting.
We have three explanations for it. First, the externals viewing the control of outcomes
outside their control may experience less discomfort about commission bias (Ritov and
Baron, 1992) than the internals. This may foster their risky investment intention. Second, the
externals deemed generally as fatalists may probably exhibit risky investment behavior
more as they do not relate the outcomes to themselves or they feel no personal responsibility
K in any case. Indeed, Davis and Davis (1972) have indicated that the internal individuals with
46,10 higher self-responsibility level blame themselves more for their mistakes than the externals
with lower self-responsibility level. Third explanation may be associated with our sample.
Studies in Turkish literature (Dag , 1991; Mocan-Aydın, 2000; Özmen and Sumer, 2011) have
showed that Turkish people tended to have external LOC. In addition to, in their study
conducted on adolescents, Özmen and Sumer (2011) have manifested that external LOC
1726 predicted both low and high risky behavior occurrence. Authors have proposed that
attributing outcomes to external or uncontrollable factors, instead of feeling self-
responsibility, could facilitate exhibiting risky behaviors. Therefore, in our study, the people
with external LOC may have higher risky investment intention score.
What’s more, we provide evidence that FL changes or moderates the relationship
between LOC and risky investment intention. More clearly, the people with external LOC
have relatively higher risky investment intention and however, the externals also with
higher FL tend to have lower intention scores. Herein, we can infer that the external people
may find information processing more complicated and demanding, compared to internal
people having self-control or responsibility. Hence, the high financial knowledge makes their
decision-making process more complex rather than easier. Thus, their risky intention scores
weaken with the inclusion of financial knowledge. Or, higher financial knowledge could be
enhancing their self-responsibility level for their decisions. Eventually, divergent effect of
FL on LOC and risky investment intention relationship could have been ignored without
consideration of this moderating effect.
More importantly, inconsistent with the previous research manifesting the significant
role of FL on financial behavior, we could not detect a notable influence on risky investment
intention. This unexpected finding can be explained through three arguments. First, our
advanced FL scale represents objective financial knowledge essentially. In individuals’
mind, risky investment behavior may be perceived as so uncertain and demanding that
objective financial knowledge could not satisfy this challenging process. Actually, this
finding still shows consistency with the research referring to limited information processing
approach. Second, it could be better to consider critiques on validity of this scale (Schuhen
and Schürkmann, 2014). Third, as stated before, FL in our study virtually represents
objective knowledge. At this point, we propose that objective financial knowledge is not so
sufficient in explaining the risky investment behavior as anticipated. If we had measured
subjective knowledge in addition to the objective one, we could have seen whether both
kinds of knowledge had a significant effect on the risky investment intention jointly. Thus,
Wang (2009) has manifested that subjective knowledge explained risk-taking in mutual
fund context more than that objective knowledge did. Further, subjective knowledge was
found as significant predictor of objective knowledge. Probably, it is better to develop a
scale encompassing both subjective (e.g. investment experience and familiarity with the
money/capital market functioning) and objective financial knowledge. This scale could
enable the FL concept to be represented well in the structural model. Instead of “financial
literacy” covering only objective knowledge, surely it could be better to call this latent
variable as “financial ability”.
All in all, the study findings seem to serve behavioral finance literature. Individual
factors addressed in this study are psychological factors expected to influence investment
decisions and to diversify them. At the same time, they refer to the emotional aspects of a
financial behavior. Most importantly, they are found as significant in predicting risky
investment intention in this study. On the other hand, FL can be recognized as the cognitive
component of risky financial behavior. Therefore, simply we designed this study in such a
manner that it could incorporate both emotional and cognitive parts of a financial behavior.
Our findings showed that emotional part directly had a significant role on financial Risk-taking
behavior. Though not directly, cognitive part has an indirect impact through changing the behaviour
relationship between individual factor (i.e. LOC) and financial behavior. The divergent effect
of cognitive part can be explained through behavioral finance tenets such as illusion of
control, limited information processing, bounded rationality.
These study findings have also practical implications. First, results point out that
psychological factors relatively ignored by classical finance could considerably explain
financial behavior. Microeconomically, financial intermediaries should emphasize on 1727
individual factors to ensure more funds for their system. For instance, consultants or
institutions could direct individual investors to investment alternatives tailored to their
individual differences. Hence, the establishment of the point where individuals stands
emotionally concerning financial risk-taking could be more conceivable. Instead of directing
people, who are ineligible for risky investing because of their certain traits or abilities, to
risky alternatives, probable risk takers should be persuaded for them.

Second, in explaining the individual financial behavior, this study found specific
financial knowledge as insignificant. As a probable reason, we propose that people have
limited information processing, meaning that more knowledge would not ensure a good
decision. Hence, consultants or financial institutions should take it into consideration while
intensively providing their customer with information about their financial products or
investment alternatives. Or they should remember that higher knowledge could make
decision-making process more complicated. Briefly, delineating the point where people
stand in terms of emotional factors and motivating them properly are more indispensable
than providing people with more financial information.
Third, advanced FL interacting with LOC has a substantial influence on risky
investment intention. More explicitly, people with external LOC have higher intention
scores. When these people also have higher advanced FL as well, their intention scores
lessen. So, due to their lower self-control, they feel less personal responsibility for their
decisions first. Yet, together with high FL, these people may get to a more realistic stage
concerning risky investment. Accordingly, educating them financially could eliminate their
likelihood of taking improper and redundant risks. As a whole, being able to take financial
risk due to certain emotional factors does not really make that risk-taking controllable or
manageable. Hence, in the presence of necessary financial knowledge, this emotional ground
available could turn into more realistic appearance. Then, financial education rises as a
prominent necessity still.
4.2 Limitations and suggestions

As in any study, this paper involves some limitations. First, while evaluating results, it
should be remembered that we exploited cross-sectional data. Yet, it is more appropriate to
tap into longitudinal data in the studies referring to causal relationships (Bono and
McNamara, 2011).
Second, FL scale in our study measures objective financial knowledge virtually.
Therefore, in our opinion, the literature has deficiency of a scale involving both subjective
and objective knowledge. Then, it could be possible for financial knowledge to be
represented in research models in a comprehensive manner. Third, we collected data from
individual investors. We had no opportunity to select our sample from institutional
investors. If we could, this study could produce more valuable results for institutional
audience. Last, this research employed convenient sampling method and it could be more
appropriate to use any probability sampling method. Nevertheless, the study sample can be
thought as capable of representing the target population since the researchers pursued a
K sampling process compatible with its definition. This could enable the results to be
46,10 generalizable beyond this study.
This study presents several future research areas. First, we collected data through survey
instrument. Yet, an experimental design may enable risky financial decisions to be measured
well. Second, resorting to the planned behavior theory, this study used the intention scale.
Accordingly, we suggest researchers replicate this study on actual financial behavior to
1728 validate the results. Last, this work focuses on major psychological factors. We propose that
future research may use personality traits and individual cultural factors as well.
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About the authors

Sibel Dinç Aydemir is a PhD in the Business Administration Department in Gebze Technical
University. Her research interests are behavioral finance, individual investor behavior and financial
risk-taking. Sibel Dinç Aydemir is the corresponding author and can be contacted at: saydemir@gtu.
edu.tr
Selim Aren is a Professor in the Business Administration Department in Yildiz Technical
University. His research focuses on behavioral finance, financial literacy and risk-taking.
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Sibel Dinç Aydemir Selim Aren

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Keywords Emotional intelligence, Financial literacy, Risk aversion, Locus of control,

2.1 Emotional intelligence – risky investment intention

2.2 Risk-aversion in general – risky-investment intention

2.3 Locus of control – risky investment intention

2.4 Financial literacy – risky investment intention

and Klein, 2009) also contributed to its importance.

H2. RA in general has a negative impact on risky investment intention.

H4. FL has a negative impact on risky investment intention.

3.1 Measurement of variables

MO3 I present myself in a way that makes a good impression on others

3.3 Measure validity, reliability and dimensionality

High school or less 24 4.8 4.9

Whole sample Low financial literacy High financial literacy

Emotional intelligence (EI) 0.85 0.59 0.87 0.64 0.79 0.49

3.4. Analyses and results

Managing others’ emotions

measurement characteristics or biases rather than only moderating effect. Thus,

Structural paths Estimates Standard estimates Standard error p

Emotional intelligence ! Intention 0.41 0.16 0.15 0.007

Model x2 df RMSEA CFI Dx 2 Ddf p

Conﬁgural invariance 1158.36 628 0.041 0.90

Totally Free Model (TFM) (no restriction) 1158.363 628

4. Discussion and conclusion

behavioral/attitudinal motives, non-ignorable effort has been devoted by behavioral ﬁnance.

H1 EI has a positive impact on risky investment intention Accepted

risky alternatives, probable risk takers should be persuaded for them.

4.2 Limitations and suggestions

Research, Vol. 36 No. 2, pp. 69-76.

cultural boundaries”, Counseling Psychologist, Vol. 28 No. 2, pp. 281-298.

analysis of determinants”, Journal of American Academy of Business, Vol. 15 No. 2,

Vol. 10, pp. 158-181.

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