The Relationship Between Behavioural Biases and Financial Inclusion with Special Focus on the Moderation Role of Financial Literacy

Abstract

In modern capitalist societies, financial development is often seen as a key determinant of a country’s overall progress. As such, improving financial inclusion and literacy has become crucial to advance the global rankings of developing countries. This study investigates the impact of behavioural biases on financial inclusion in Sri Lanka’s growing digital economy, whilst analysing the moderating role of financial literacy. Using data from 207 households and a Partial Least Squares Structural Equation Modelling (PLS-SEM) approach, the study highlights optimism and herding as major factors driving people towards services provided by financial institutions; conversely, the impact of loss aversion and self-control biases are deemed insignificant. Financial literacy was found to strengthen the positive effects of optimism and herding, thereby showcasing its importance in moderating the optimal usage of digital financial tools. However, the researchers also note that addressing issues like loss aversion and poor self-control require more personalized approaches, such as behavioural nudges, beyond just financial education. In a context where digitization is reshaping economies, the above findings suggest that financial inclusion should be approached through both technological and human behavioural lenses. For policymakers, this means that strategies must integrate financial education with behavioural insights to truly promote inclusive financial systems. The study points to the need for further research into other behavioural influences and how different demographic factors may interact with financial decision making in the digital era.