Investor Competence and Decision Familiarity Bias Analysis for Portfolio Diversification

Abstract

Investor's decision to maximize returns and reduce investment risk is to diversify their portfolios. According to the Behavioral Finance study, the investment decision is influenced by emotional psychology. Therefore, this study aims to examine psychological factors, that is investor competence and familiarity bias towards the decision of individual investor portfolio diversification. Data were collected using a questionnaire for active investors in Malang, Surabaya and Jakarta. Research questionnaire were distributed in person or online. The results showed that the competence investors has a positive and significant effect on the decision of investor portfolio diversification. Meanwhile, familiarity bias has a significant negative effect on investor portfolio diversification decision. This reflects that investment decisions in trading are influenced by limited rationality, emotional factors, and individual personality traits. Whereas in conditions of economic and financial uncertainty, its is believed that humans cannot escape the aspects of psychological bias in the decision-making process.

Comparison of multicriteria decision-making methods in portfolio formation

“…The investors work with information, its systematization, classification, acceptance, and rejection influences portfolio diversification. Researchers study the influence of familiarity (Nurcahya & Maharani, 2021), loss aversion, disposition effect and representativeness (Moosa & Ramiah, 2017), herd behavior (Gavrilakis & Floros, 2021), and other biases on portfolio formation. In this context, multicriteria decisionmaking methods receive considerable attention.…”