The impact of overconfidence and herding bias on stock investment decisions mediated by risk perception

Abstract

This study examines the impact of overconfidence bias, herding bias, and risk perception on stock investment decisions. This study uses explanatory research with a quantitative approach. The population in this study is the Generation Z Society, the generation born between 1997-2012 in Malang City who invests in the capital market. The sampling technique used in the study was purposive sampling. Data collection was used through surveys using questionnaires, and the use of Likert scales to test instruments. The data were analyzed using Structural Equation Model Partial Least Square (SEM-PLS) modeling. The results of this study indicate that overconfidence bias and herding bias contained in investors can reduce the quality of investment decisions. In addition, overconfidence bias and herding bias can also reduce investors' risk perception. The perception of risk in investors can influence investment decisions and increase the benefits of the investment process. Risk perception can mediate between overconfidence bias and herding bias on investment decisions. The results of this study suggest that investors should minimize the formation of bias when making investment decisions and diversify their portfolios to minimize risk.
 

The Risk Perception as a Mediator Between Herding and Overconfidence on Investment Decision by Gen Z in Indonesia

“…When making financial decisions, many investors have a propensity to follow the herd or overconfidence biases. Herding behavior results from the influence of risk perception on stock returns, as suggested by Almansour et al (2023), and is supported by Wibowo et al (2023) who stated that herding bias develops because of how much risk investors perceive from stock returns. Moreover, Almansour et al (2023) state that investors with overconfidence tend to possess a positive view of risk and demonstrate a greater propensity to embrace a risky approach when making investment decisions.…”

“…Herding behavior refers to a behavior in which an investor imitates the actions of another investment driven by a variety of causes and specific situations (Wibowo et al, 2023). Many investors may exhibit a delayed response to new information instead of relying on the trading actions of those believed to possess a higher level of expertise.…”

“…Studies have defined risk perception as individuals' views of an occurrence that has the potential to result in unfavorable outcomes. Risk perception refers to the cognitive process by which individuals assess and comprehend the degree of uncertainty and potential for negative outcomes linked to particular behaviors (Wibowo et al, 2023).…”

Impact of Behavioral Biases on Investors’ Stock Trading Decisions: A Comprehensive Quantitative Analysis

“…Fitri and Cahyaningdyah (20) explained that overconfidence significantly influences derivative investment in the international market. Wibowo et al indicated that herding and overconfidence biases in investors can impair the quality of stock trading and investment decisions (21) . Furthermore, herding bias and overconfidence bias might lower investors' risk perception.…”

Risk Tolerance, Overconfidence and Investment Decisions in Nepal

“…Risk perception can mediate between herding and overconfidence biases in investment decisions. Thus, investors should minimize the formation of bias for investment decisions and should diversify investment portfolios to reduce the risk [32].…”