The Effect of Overconfidence, Representative, Anchoring, and Availability Biases on Investment Decisions and Market Efficiency
Abstract
This study looks at how behavioral biases affect investment choices and market efficiency. This research was conducted because many millennials invest on a bandwagon without having a good understanding of investment. This kind of study use the structural equation modeling analysis method. The study's findings indicate that the bias variable overconfidence behavior can strongly influence perceived market efficiency. Nevertheless, choices about investments are unaffected by the overconfidence bias, representational bias, anchoring, and availability behavior. The variable investment decision significantly influences perceived market efficiency. Investors with investment experience above five years and a high income can make a difference in investment decisions chosen by investors. This study theme's practical application relates to the findings of overconfidence bias, which has a substantial detrimental impact on investors' perceptions of market efficiency. A high degree of confidence among investors can lead to illogical judgments and disregarding all dangers, resulting in inefficient market circumstances.
Keyword: anchoring, financial behavior, investment decision, market efficiency, overconfidence
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References
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Goenadi, G. F., Murhadi, W. R., & Ernawati, E. (2022). The Influence of Financial Literacy on Financial Inclusion: Social Capital as Mediating Variable. Media Ekonomi dan Manajemen, 37(2), 195-209. http://dx.doi.org/10.24856/mem.v37i2.2738
Hair Jr, J. F., Howard, M. C., & Nitzl, C. (2020). Assessing measurement model quality in PLS-SEM using confirmatory composite analysis. Journal of Business Research, 109, 101-110. https://doi.org/10.1016/j.jbusres.2019.11.069
Hayat, M.A., Khuram, B. and Bushra, G. (2006). “Understanding investment behavior of individual investors: how they handle investment decisions? Do they act rationally?”.
Hirshleifer, D., Subrahmanyam, A., & Titman, S. (1994). Security analysis and trading patterns when some investors receive information before others. The Journal of Finance, 49(5), 1665–1698. https://doi.org/https://dx.doi.org/10.1111/j.1540-6261.1994.tb04777.x
Ikram, Z. (2016). An empirical investigation on behavioral determinantson, impact on investment decision making, moderating role of locus of control. Journal of Poverty, Investment and Development, 26, 44–50. https://core.ac.uk/download/pdf/234695651.pdf
Irshad, S., Badshah, W., & Hakam, U. (2016). Effect of representativeness bias on investment decision making. Management and Administrative Sciences Review, 5(1), 26–30. https://d1wqtxts1xzle7.cloudfront.net/42908270/26-30-libre.pdf?1456083431=&response-content-disposition=inline%3B+filename%3DManagement_and_Administrative_Sciences_R.pdf&Expires=1701186635&Signature=V6fbUkxmJSTlgnmJ3AnZturAHP8gu12b1Ecls8yy4O0xaRy5iaJaz7cu
Ishfaq, M., & Anjum, N. (2015). Effect of anchoring bias on risky investment decision. Evidence from Pakistan equity market. International Journal of Engineering and Management Research (IJEMR), 5(4), 32–38. https://ijemr.vandanapublications.com/index.php/ijemr/article/view/701/657
Jain, J., Walia, N., & Gupta, S. (2020). Evaluation of behavioral biases affecting investment decision making of individual equity investors by fuzzy analytic hierarchy process. Review of Behavioral Finance, 12(3), 297–314. https://doi.org/10.1108/RBF-03-2019-0044
Jain, R., Jain, P., & Jain, C. (2015). Behavioral Biases in the Decision Making of Individual Investors. The IUP Journal of Management Research, 14(3), 7–27. proquest.com/docview/1703647114?accountid=32499
Javed, H., Bagh, T., & Razzaq, S. (2017). Herding effects, over confidence, availability bias and representativeness as behavioral determinants of perceived investment performance: an empirical evidence from Pakistan stock exchange (PSX). Journal of Global Economics, 6(1), 1–13. https://doi.org/10.4172/2375-389.1000275
Kahneman, D., Slovic, S. P., Slovic, P., & Tversky, A. (1982). Judgment under uncertainty: Heuristics and biases. Cambridge university press. https://doi.org/10.4324/9781912282562
Khan, M. Z. U. (2017). Impact of availability bias and loss aversion bias on investment decision making, moderating role of risk perception. Management & Administration (IMPACT: JMDGMA), 1(1), 17–28.
Khurshid, M. R. (2012). Overconfidence and perceived market efficiency. Journal of Contemporary Research in Business, 3(10), 984-997.
Koputra, T., & Mahadwartha, P. A. (2021). Herding Behavior Detection: Bullish and Bearish Cases. Proceedings of the 18th International Symposium on Management (INSYMA 2021), 180(Insyma), 11–15. https://doi.org/10.2991/aebmr.k.210628.003
Luong, & Ha. (2011). Behavioral factors influencing individual investors decision-making and performance.: A survey at the Ho Chi Minh Stock Exchange (p. 103). https://www.diva-portal.org/smash/get/diva2:423263/FULLTEXT02
Malkiel, B. G. (2003). The efficient market hypothesis and its critics. Journal of Economic Perspectives, 17(1), 59–82. https://doi.org/10.1257/089533003321164958
Massa, M., & Simonov, A. (2005). Behavioral biases and investment. Review of Finance, 9(4), 483–507. https://doi.org/10.1007/s10679-005-4998-y
Murhadi, W. R., Kencanasari, F. R., & Sutedjo, B. S. (2023). the Influence of Financial Literacy and Financial Interest on the Financial Risk Tolerance of Investor in Indonesia. Journal of Law and Sustainable Development, 11(2), 1–16. https://doi.org/10.55908/sdgs.v11i2.310
Murhadi, W. R., Sutejo, B. S., & Xuân, P. T. H. (2024). The Big Five Personality Traits Indonesia Investor during the Covid-19 Pandemic. Media Ekonomi dan Manajemen, 39(1), 99-114. http://dx.doi.org/10.56444/mem.v39i1.4381
Murhadi, W.R., Frederica, D., & Marciano, D. (2024). The effect of financial literacy and demographic variable on behavioral biases. Asian Economic and Financial Review (AEFR), 14(4):312-325. https://doi.org/10.55493/5002.v14i4.5037
Murithi, D. K. (2014). The effect of anchoring on investment decision making by individual investors in Kenya [University of Nairobi]. http://hdl.handle.net/11295/77723
Ngoc, L. T. B. (2014). Behavior pattern of individual investors in stock market. International Journal of Business and Management, 9(1), 1–16. https://doi.org/10.5539/ijbm.v9n1p1
Onsomu, Z. N. (2014). The impact of Behavioural biases on investor decisions in Kenya: Male vs Female. http://oaji.net/articles/488-1404475281.pdf
Pompian, M. M. (2006). Behavioral Finance and Wealth Management-How to Build Optimal Portfolios That Account for Investor Biases. In Financial Markets and Portfolio Management (Vol. 21, Issue 4). Springer Nature BV.
Pompian, M. M. (2012). Behavioral finance and investor types: managing behavior to make better investment decisions. John Wiley & Sons.
Ritter, J. R. (2003). Behavioral finance. Pacific-Basin Finance Journal, 11(4), 429–437. https://doi.org/10.36198/9783838587301
Sarengat, L. M., & Mahadwartha, P. A. (2022). The Effect of Financial Technology Usage to Financial Literacy Among Millennial Generation. Jurnal Ilmiah Indonesia, 7(5), 1–20. https://doi.org/https://jurnal.syntaxliterate.co.id/index.php/syntax-literate
Shah, A. K., & Oppenheimer, D. M. (2008). Heuristics made easy: an effort-reduction framework. Psychological Bulletin, 134(2), 207. https://doi.org/10.1037/0033-2909.134.2.207
Shah, S. Z. A., Ahmad, M., & Mahmood, F. (2018). Heuristic biases in investment decision-making and perceived market efficiency: A survey at the Pakistan stock exchange. Qualitative Research in Financial Markets, 10(1), 85–110. https://doi.org/10.1108/QRFM-04-2017-0033
Shefrin, H. (2002). Beyond greed and fear: Understanding behavioral finance and the psychology of investing. Oxford University Press on Demand.
Shefrin, H. (2006). A behavioral approach to asset pricing. Elsevier. 62(3), 70–71. https://doi.org/10.2469/faj.v62.n3.4158
Sudani, F. S., & Pertiwi, I. F. P. (2022). Financial Information Analysis to Minimize Availability Bias, Representative Bias, Anchoring Bias and Adjustment Bias, and Overconfidence Bias in Ivestment Decision Making (Study on Investors at the Sharia Investment Gallery of UIN Raden Mas Said. Social Science Studies, 2(5), 446–460. https://doi.org/https://doi.org/10.47153/sss25.3852022
Toma, F.M. (2015). Behavioral biases of the investment decisions of Romanian investorson the Bucharest stock exchange. Procedia Economics and Finance, 32, 200–207. https://doi.org/10.1016/s2212-5671(15)01383-0
Waweru, N. M., Munyoki, E., & Uliana, E. (2008). The effects of behavioural factors in investment decision-making: a survey of institutional investors operating at the Nairobi Stock Exchange. International Journal of Business and Emerging Markets, 1(1), 24–41. https://doi.org/10.1504/ijbem.2008.019243
Ali, W. (2019). The Impact Of Self-attribution Bias and Overconfidence Bias on Perceived Market Efficiency. SSRN Electronic Journal, 1–15. https://dx.doi.org/10.2139/ssrn.3417271
Bakar, S., & Yi, A. N. C. (2016). The impact of psychological factors on investors’ decision making in Malaysian stock market: a case of Klang Valley and Pahang. Procedia Economics and Finance, 35, 319–328. https://doi.org/10.1016/s2212-5671(16)00040-x
Baker, H. K., & Nofsinger, J. R. (2002). Psychological biases of investors. In Financial services review (Vol. 11, Issue 2). https://d1wqtxts1xzle7.cloudfront.net/49965186/Psychological_Biases_of_Investors20161029-6333-12aadgv-libre.pdf?1477766353=&response-content-disposition=inline%3B+filename%3DPsychological_Biases_of_Investors.pdf&Expires=1701184871&Signature=A955CWa3buw4G7
Baker, H. K., & Nofsinger, J. R. (2010). Behavioral finance: an overview. In Behavioral finance: Investors, corporations, and markets. Wiley Online Library. https://doi.org/10.1002/9781118258415
Barberis, N., & Thaler, R. (2003). A survey of behavioral finance. Handbook of the Economics of Finance, 1, 1053–1128. https://doi.org/10.1057/9781137381736_1
Bashir, T., Javed, A., Usman, A., Meer, U. I., & Naseem, M. M. (2013). Empirical testing of heuristics interrupting the investor’s rational decision making. European Scientific Journal, 9(28). https://core.ac.uk/download/pdf/236418178.pdf
Elizabeth, J., Murhadi, W. R., & Sutejo, B. S. (2020). Investor Behavioral Bias Based on Demographic Characteristics BT - Proceedings of the 17 th International Symposium on Management (INSYMA 2020). 6–12. https://doi.org/10.2991/aebmr.k.200127.002
Fajri, A., & Setiawati, E. (2023). The Influence of Over Confidence , Illusion of Control , Availability , Anchoring Bias and Financial Literacy on Investment Decision Making in the Community of Demak District As Beginning Investors . The International Journal of Business Management and Technology, 7(4), 187–198. https://www.theijbmt.com/archive/0952/1894310773.pdf
Fama, E. F. (1970). Efficient capital markets: A review of theory and empirical work. The Journal of Finance, 25(2), 383–417. https://doi.org/10.2307/2325488
Goenadi, G. F., Murhadi, W. R., & Ernawati, E. (2022). The Influence of Financial Literacy on Financial Inclusion: Social Capital as Mediating Variable. Media Ekonomi dan Manajemen, 37(2), 195-209. http://dx.doi.org/10.24856/mem.v37i2.2738
Hair Jr, J. F., Howard, M. C., & Nitzl, C. (2020). Assessing measurement model quality in PLS-SEM using confirmatory composite analysis. Journal of Business Research, 109, 101-110. https://doi.org/10.1016/j.jbusres.2019.11.069
Hayat, M.A., Khuram, B. and Bushra, G. (2006). “Understanding investment behavior of individual investors: how they handle investment decisions? Do they act rationally?”.
Hirshleifer, D., Subrahmanyam, A., & Titman, S. (1994). Security analysis and trading patterns when some investors receive information before others. The Journal of Finance, 49(5), 1665–1698. https://doi.org/https://dx.doi.org/10.1111/j.1540-6261.1994.tb04777.x
Ikram, Z. (2016). An empirical investigation on behavioral determinantson, impact on investment decision making, moderating role of locus of control. Journal of Poverty, Investment and Development, 26, 44–50. https://core.ac.uk/download/pdf/234695651.pdf
Irshad, S., Badshah, W., & Hakam, U. (2016). Effect of representativeness bias on investment decision making. Management and Administrative Sciences Review, 5(1), 26–30. https://d1wqtxts1xzle7.cloudfront.net/42908270/26-30-libre.pdf?1456083431=&response-content-disposition=inline%3B+filename%3DManagement_and_Administrative_Sciences_R.pdf&Expires=1701186635&Signature=V6fbUkxmJSTlgnmJ3AnZturAHP8gu12b1Ecls8yy4O0xaRy5iaJaz7cu
Ishfaq, M., & Anjum, N. (2015). Effect of anchoring bias on risky investment decision. Evidence from Pakistan equity market. International Journal of Engineering and Management Research (IJEMR), 5(4), 32–38. https://ijemr.vandanapublications.com/index.php/ijemr/article/view/701/657
Jain, J., Walia, N., & Gupta, S. (2020). Evaluation of behavioral biases affecting investment decision making of individual equity investors by fuzzy analytic hierarchy process. Review of Behavioral Finance, 12(3), 297–314. https://doi.org/10.1108/RBF-03-2019-0044
Jain, R., Jain, P., & Jain, C. (2015). Behavioral Biases in the Decision Making of Individual Investors. The IUP Journal of Management Research, 14(3), 7–27. proquest.com/docview/1703647114?accountid=32499
Javed, H., Bagh, T., & Razzaq, S. (2017). Herding effects, over confidence, availability bias and representativeness as behavioral determinants of perceived investment performance: an empirical evidence from Pakistan stock exchange (PSX). Journal of Global Economics, 6(1), 1–13. https://doi.org/10.4172/2375-389.1000275
Kahneman, D., Slovic, S. P., Slovic, P., & Tversky, A. (1982). Judgment under uncertainty: Heuristics and biases. Cambridge university press. https://doi.org/10.4324/9781912282562
Khan, M. Z. U. (2017). Impact of availability bias and loss aversion bias on investment decision making, moderating role of risk perception. Management & Administration (IMPACT: JMDGMA), 1(1), 17–28.
Khurshid, M. R. (2012). Overconfidence and perceived market efficiency. Journal of Contemporary Research in Business, 3(10), 984-997.
Koputra, T., & Mahadwartha, P. A. (2021). Herding Behavior Detection: Bullish and Bearish Cases. Proceedings of the 18th International Symposium on Management (INSYMA 2021), 180(Insyma), 11–15. https://doi.org/10.2991/aebmr.k.210628.003
Luong, & Ha. (2011). Behavioral factors influencing individual investors decision-making and performance.: A survey at the Ho Chi Minh Stock Exchange (p. 103). https://www.diva-portal.org/smash/get/diva2:423263/FULLTEXT02
Malkiel, B. G. (2003). The efficient market hypothesis and its critics. Journal of Economic Perspectives, 17(1), 59–82. https://doi.org/10.1257/089533003321164958
Massa, M., & Simonov, A. (2005). Behavioral biases and investment. Review of Finance, 9(4), 483–507. https://doi.org/10.1007/s10679-005-4998-y
Murhadi, W. R., Kencanasari, F. R., & Sutedjo, B. S. (2023). the Influence of Financial Literacy and Financial Interest on the Financial Risk Tolerance of Investor in Indonesia. Journal of Law and Sustainable Development, 11(2), 1–16. https://doi.org/10.55908/sdgs.v11i2.310
Murhadi, W. R., Sutejo, B. S., & Xuân, P. T. H. (2024). The Big Five Personality Traits Indonesia Investor during the Covid-19 Pandemic. Media Ekonomi dan Manajemen, 39(1), 99-114. http://dx.doi.org/10.56444/mem.v39i1.4381
Murhadi, W.R., Frederica, D., & Marciano, D. (2024). The effect of financial literacy and demographic variable on behavioral biases. Asian Economic and Financial Review (AEFR), 14(4):312-325. https://doi.org/10.55493/5002.v14i4.5037
Murithi, D. K. (2014). The effect of anchoring on investment decision making by individual investors in Kenya [University of Nairobi]. http://hdl.handle.net/11295/77723
Ngoc, L. T. B. (2014). Behavior pattern of individual investors in stock market. International Journal of Business and Management, 9(1), 1–16. https://doi.org/10.5539/ijbm.v9n1p1
Onsomu, Z. N. (2014). The impact of Behavioural biases on investor decisions in Kenya: Male vs Female. http://oaji.net/articles/488-1404475281.pdf
Pompian, M. M. (2006). Behavioral Finance and Wealth Management-How to Build Optimal Portfolios That Account for Investor Biases. In Financial Markets and Portfolio Management (Vol. 21, Issue 4). Springer Nature BV.
Pompian, M. M. (2012). Behavioral finance and investor types: managing behavior to make better investment decisions. John Wiley & Sons.
Ritter, J. R. (2003). Behavioral finance. Pacific-Basin Finance Journal, 11(4), 429–437. https://doi.org/10.36198/9783838587301
Sarengat, L. M., & Mahadwartha, P. A. (2022). The Effect of Financial Technology Usage to Financial Literacy Among Millennial Generation. Jurnal Ilmiah Indonesia, 7(5), 1–20. https://doi.org/https://jurnal.syntaxliterate.co.id/index.php/syntax-literate
Shah, A. K., & Oppenheimer, D. M. (2008). Heuristics made easy: an effort-reduction framework. Psychological Bulletin, 134(2), 207. https://doi.org/10.1037/0033-2909.134.2.207
Shah, S. Z. A., Ahmad, M., & Mahmood, F. (2018). Heuristic biases in investment decision-making and perceived market efficiency: A survey at the Pakistan stock exchange. Qualitative Research in Financial Markets, 10(1), 85–110. https://doi.org/10.1108/QRFM-04-2017-0033
Shefrin, H. (2002). Beyond greed and fear: Understanding behavioral finance and the psychology of investing. Oxford University Press on Demand.
Shefrin, H. (2006). A behavioral approach to asset pricing. Elsevier. 62(3), 70–71. https://doi.org/10.2469/faj.v62.n3.4158
Sudani, F. S., & Pertiwi, I. F. P. (2022). Financial Information Analysis to Minimize Availability Bias, Representative Bias, Anchoring Bias and Adjustment Bias, and Overconfidence Bias in Ivestment Decision Making (Study on Investors at the Sharia Investment Gallery of UIN Raden Mas Said. Social Science Studies, 2(5), 446–460. https://doi.org/https://doi.org/10.47153/sss25.3852022
Toma, F.M. (2015). Behavioral biases of the investment decisions of Romanian investorson the Bucharest stock exchange. Procedia Economics and Finance, 32, 200–207. https://doi.org/10.1016/s2212-5671(15)01383-0
Waweru, N. M., Munyoki, E., & Uliana, E. (2008). The effects of behavioural factors in investment decision-making: a survey of institutional investors operating at the Nairobi Stock Exchange. International Journal of Business and Emerging Markets, 1(1), 24–41. https://doi.org/10.1504/ijbem.2008.019243
Published
2024-11-26
How to Cite
MURHADI, Werner Ria; IRVANSYAH, Daniel; MAHADWARTHA, Putu Anom.
The Effect of Overconfidence, Representative, Anchoring, and Availability Biases on Investment Decisions and Market Efficiency.
Matrik : Jurnal Manajemen, Strategi Bisnis, dan Kewirausahaan, [S.l.], p. 125 - 136, nov. 2024.
ISSN 2302-8890.
Available at: <https://ojs.unud.ac.id/index.php/jmbk/article/view/117872>. Date accessed: 30 jan. 2025.
doi: https://doi.org/10.24843/MATRIK:JMBK.2024.v18.i02.p03.
Section
Articles
This work is licensed under a Creative Commons Attribution-ShareAlike 4.0 International License.
