Chain Reaction of Behavioral Bias and Risky Investment Decision in Indonesian Nascent Investors

Abstract

Early investors possess unique sets of decision-making characteristics. They are more open to experience and eager to face risks. However, to the best of the authors’ knowledge, the discussions of nascent investors upon making the investment decision and its eroding biases were still elusive. The vital role of emotion as a bias in decision making was also inadequately addressed. This study enhanced behavioral finance knowledge by examining emotion’s role in regulating the illusion of control, overconfidence, and investors’ decision making. In total, 456 initial investors in Indonesia participated in online questionnaires, forming the data for covariance-based structural model analysis. This study found that emotion significantly increased the illusion of control, but not overconfidence or decision making, contrary to the bulk of previous studies. The illusion of control exhibited a substantial significant effect of as much as 86.4% toward overconfidence, followed by a considerable increase in decision making. The results of our study also pointed to the unique chain effects of biases affecting the decision-making process of nascent investors in the emerging market. This finding implied they possessed a unique bias mechanism in constructing their decision.

Specifying and validating overconfidence bias among retail investors: a formative index

“…These indicators can also determine the overall overconfidence level of investors while taking an investment decision. The overconfidence among investors can be identified from the past investment success (Huang et al, 2022;S ¸enol and Onay, 2023) they have incurred as well as the positive illusions (Parmitasari and Syariati, 2022;Alp Coskun et al, 2023) defining that the investors tend to believe that they are better than average investors in the stock market. The investors were also assessed by their accuracy levels (Liu and Tan, 2021;Lu et al, 2022) in their past investment decisions.…”

“…Glaser and Weber (2007) defined better than average as the ability to think of themselves as above others. These positive illusions of people are making them overconfident in their trading behavior (Bregu, 2020;Parmitasari and Syariati, 2022;Alp Coskun et al, 2023). Investors often assume they are better than a certain group when the accuracy of the returns rises, which encourage them to engage in excessive trading (Dorfleitner and Scheckenbach, 2022;ul Abdin et al, 2022).…”

“…Past literature especially probed into the behavioral biases existing among investors while the decision-making process (Parmitasari and Syariati, 2022;Sachdeva et al, 2022;S ¸enol and Onay, 2023). The retail investors' biases can be examined to understand one of the forms of market anomalies (Kim and Shamsuddin, 2023) that exist in financial markets (Parhi and Pal, 2022;Baker et al, 2019).…”

Do heuristics affect Brazilian investors’ decision-making process?

“…Overconfidence bias means that the individual is overtly confident in their decisions and thus overestimates or exaggerates their ability to perform a task (Quaicoe and Eleke-Aboagye, 2021; Parmitasari et al ., 2022). As a result, decision makers overestimate their knowledge and information and ignore the available public information (George and Leszczyszyn, 2021; Theerthaana and Manohar, 2021).…”

SMEs’ Performance in Indonesia: The Nexus of Notable Ethics-Strategic Behavior Constructions

“…6 Investigating economic actors' behavior can contribute to knowledge expansion as it creates the foundational reasonings upon executing a task in market uncertainty, 7 eg, entrepreneurial orientation, market orientation, 8 or the potentiality of financial behavior. 9 How they manage their financial assets is subject to complex decision-making as part of their self-interests to rationally focus on their own needs. Adam Smith has long observed this selfish strategic behavior and even got moral support in his theory of moral sentiment.…”