The Influence of Overconfidence, Representative Bias, and Risk Tolerance in Investment Decision Making: Evidence on stock investors in Indonesia
Abstract
The purpose of this study is to analyze the influence of overconfidence, representativeness bias, and risk tolerance on investment decision making, in which psychological factors can influence investors in making investment decisions based on emotional and cognitive factors. The sample collection is carried out using a purposive sampling technique on 230 stock investors in Indonesia. The data are analyzed using the Smart PLS 3.2.8 application. This study indicates that overconfidence, representativeness bias, and risk tolerance significantly influence investment decision-making.The practical implications of this paper encourage investors to be wiser in relying on their overconfidence, representativeness bias, and risk tolerance on making investments. It provides awareness and understanding about controlling emotional and cognitive biases in investment management, which can be very useful for decision-makers and professionals in financial institutions. This paper helps investors choose better investment tools and avoids the repetition of expensive mistakes, which occur due to failure to recognize bias and valuation errors that make us all vulnerable to failing to make investment decisions. Thus, it is necessary to focus on specific investment strategies to control "mental mistakes" by investors.
Keywords: overconfidence, representativeness bias, risk tolerance, investment decision.
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