The Effect of Overconfidence Bias on Investors Decisions in the Egyptian Stock Market: The Role of Information Acquisition

Abstract

The aim of this paper is to empirically test the relationship between overconfidence bias on investor decisions. This paper also contributes to a better understanding of the role of information acquisition in moderating the relationship between behavioral biases and investor decisions. The findings confirm that behavioral biases (overconfidence bias) distort the rationality of individual investors' decisions, and that information acquisition significantly moderates the relationship between overconfidence bias and investor decisions. This study adds to the existing behavioral finance literature by highlighting the underutilized potential of information acquisition in managing irrationality caused by overconfidence bias. Individual investors can benefit from this study by better understanding the negative impact of behavioral biases as well as the utility of information acquisition in dealing with irrationality caused by overconfidence bias. The study attempts to combine behavioral finance and information acquisition literature with an aim concept to extend a theoretical understandings of investor decisions.

Effect of Psychological Factors on Investment Decisions of Millennial Investors in an Emerging Country

“…Investment decisions are one of the main topics in the study of behavioral finance, which highlights the importance of considering psychological factors in making financial decisions. Behavioral finance explains various things about how investors behave and how their decisions are influenced by their behavior and explains how investors process information, cultivate beliefs, and make decisions with positive and negative consequences (Metwally, 2023). Investment decisions are important due to their large impact on investors' decision-making behavior (Hunjra et al, 2016).…”

“…According to Ahmed et al (2022), investors who experience psychological bias in their decisions will not make fair judgments which ultimately affect the quality of their investment decisions. Overconfident investors have a higher tendency to take risks by allocating funds in high-risk assets (Ainia & Lutfi, 2019) and trade more frequently which leads to worse investment performance and higher transaction costs (Metwally, 2023). This condition will have an unfavorable impact on investment decisions because the decision is not based on accurate information and facts but on a subjective assessment of one's own abilities.…”

“…Overconfident investors exaggerate the quality and accuracy of personal information compared to available data and tend to underestimate risk which leads them to hold too many risky assets (Aljifri, 2022). They tend to transact excessively and have a larger trading volume than rational investors, which indicates their tendency to ignore risk (Metwally, 2023). recognize uncertainty (Ahmad & Shah, 2020).…”