The Effect of Overconfidence Bias and Representativeness Bias on Investment Decision With Risk Tolerance as Mediating Variable

Abstract

This research is intended to determine the effect of overconfidence bias and representative bias on investment decisions with risk tolerance as a mediating variable. The object of this research is investors who invest in the Indonesian Capital Market. The technique of collecting data is by using a questionnaire through online media and a literature study with the criteria of active investors with a sample of 200 investors. Data analysis in this study uses an alternative method of Structural Equation Modeling (SEM) version 3.0. The first stage in this research is to test the validity of each variable's questions along with their reliability. The second stage examines the relationship between overconfidence bias and representativeness bias on investment decisions with risk tolerance as a mediating variable. The results of this study indicate that the overconfidence bias variable and the representative bias have a significant positive effect on investment decisions either directly or through the mediating risk tolerance variable.

The Role of Risk Tolerance in Mediating the Effect of Overconfidence Bias, Representativeness Bias and Herding on Investment Decisions

“…The positive thinking and confidence is also beneficial for the company in stock exchange because more and more investors that will put their capital in a certain company, hence it will open more opportunities to success. The understanding the Representativeness Bias positively impacts the investment decision is in accordance with the findings of the studies undertaken by [3], [10], [11], [21], [22] and [23] which showed that Representativeness Bias have positive impacts towards investment decision. Based on this findings, second hypothesis could be formulated as follows: H.2 : Representativeness Bias have positive impacts on investment decision.…”

“…The result of this study strengthen previous studies that shows the positive influence of Overconfidence Bias towards investment decision, including those undertaken by [3], [4], [5], [6], [11], [18] and [24]. On the contrary, the finding of this study does not support the studies that found that Overconfidence Bias does not have any influence on investment decision, as those undertaken by [8], [9] and [20].…”

“…the investor to produce objective analysis. The study showed that the impact of Representativeness Bias towards investment decision making process do exist, as also found by [11] and [12]. On the other hand, [13] found that Representativeness Bias has negative impact towards investment decision making process.…”

“…Risk Tolerance mediation variable is chosen in this model due to consistent results of previous studies which showed the positive influence of Risk Tolerance as independent variables towards investment decision, as also found by [3], [4], [8], [29], [30], [31] and [32]. The most recent study undertaken by [11] proved that there is direct positive impacts between Risk Tolerance and investment decision, as well as indirect impacts between Overconfidence Bias and Representativeness Bias with the investment relation through Risk Tolerance. Based on the theory and empirical findings, the formulated hypotheses are as follows: H.…”

“…Theory and understanding of Overconfidence Bias positively affects the investment decision as it is found by [3], [4], [5], [6], [11], [17], [18], [19], [21] that described how Overconfidence Bias positively impact the investment decision. Based on the theory and empirical findings, first hypothesis can be inferred as follows: H.1 : Overconfidence Bias positively impacts the investment decision.…”