How overconfidence and mental accounting influence investments? The moderating role of financial literacy

Johny Budiman; Jason Yodiputra; Candy Candy; Isnaini Nuzula Agustin

doi:10.20885/AMBR.vol5.iss1.art1

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June 10, 2024

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October 14, 2024

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February 4, 2025

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Abstract

This research aims to investigate the influence of behavioral finance on stock investment decision-making in Indonesia, considering both rational and irrational behaviors. Key behavioral finance factors, including overconfidence, herding bias, mental accounting, and loss aversion, are examined to understand their impact on stock investment decisions, the financial literacy as moderating variables has been added to the model. A self-administered questionnaires were distributed to 391 active trading stock investor in Indonesia. Using Partial Least Squares method, the results shows that loss aversion and overconfidence negatively influence the investment decision. Further, the analysis confirmed the role of financial literacy as moderating variable for mental accounting and overconfidence. It is also consistent with the notion that financial literacy at least in terms of mental accounting biases under some conditions might actually reinforce certain specific cognitive shortcuts. This study’s results suggest policymakers and financial educators should work to increase investors’ literacy about finance, as well as their ability to identify biases they hold which could be used against them when making investment decisions.

Keywords

Herding bias Investment decision Loss aversion Mental accounting Overconfidence

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Budiman, J., Yodiputra, J., Candy, C., & Agustin, I. N. (2025). How overconfidence and mental accounting influence investments? The moderating role of financial literacy. Asian Management and Business Review, 5(1), 1–18. https://doi.org/10.20885/AMBR.vol5.iss1.art1

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References

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Ahmad, M., & Shah, S. Z. A. (2022). Overconfidence heuristic-driven bias in investment decision-making and performance: mediating effects of risk perception and moderating effects of financial literacy. Journal of Economic and Administrative Sciences, 38(1), 60–90. https://doi.org/10.1108/JEAS-07-2020-0116
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Anagol, S., Balasubramaniam, V., & Ramadorai, T. (2021). Learning from noise: evidence from India’s IPO lotteries. Journal of Financial Economics, 140(3), 965–986. https://doi.org/10.1016/j.jfineco.2021.02.003
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Bouteska, A., & Regaieg, B. (2020). Loss aversion, overconfidence of investors and their impact on market performance: evidence from the US stock markets. Journal of Economics, Finance and Administrative Science, 25(50), 451–478. https://doi.org/10.1108/JEFAS-07-2017-0081
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Geloso, V., & Kufenko, V. (2019). Can markets foster rebellion? the case of the 1837–38 rebellions in Lower Canada. Journal of Economic Behavior & Organization, 166, 263–287. https://doi.org/10.1016/j.jebo.2019.06.005
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Hair, J. F., Hult, G. T. M., Ringle, C. M., Sarstedt, M., Danks, N. P., & Ray, S. (2021). Partial Least Squares Structural Equation Modeling (PLS-SEM) Using R. Switzerland: Springer International Publishing. https://doi.org/10.1007/978-3-030-80519-7
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Joshi, A., Kale, S., Chandel, S., & Pal, D. (2015). Likert scale: explored and explained. British Journal of Applied Science & Technology, 7(4), 396–403. https://doi.org/10.9734/BJAST/2015/14975
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References

Adil, M., Singh, Y., & Ansari, M. S. (2022). How financial literacy moderate the association between behavior biases and investment decision? Asian Journal of Accounting Research, 7(1), 17–30. https://doi.org/10.1108/AJAR-09-2020-0086

Ahmad, M., & Shah, S. Z. A. (2022). Overconfidence heuristic-driven bias in investment decision-making and performance: mediating effects of risk perception and moderating effects of financial literacy. Journal of Economic and Administrative Sciences, 38(1), 60–90. https://doi.org/10.1108/JEAS-07-2020-0116

Ahmed, R., Riaz, S., Aqdas, R., Ibn, S., & Hassan, U. L. (2021). The relationship among overconfidence, economic expectation, social factors and investment decision making behavior with the mediating and moderating effects. Journal of Contemporary Issues in Business and Government, 27(02), 1075-1088. https://doi.org/10.47750/cibg.2021.27.02.127

Aigbovo, O., & Ilaboya, O. J. (2019). Does behavioral biases influences individual investment decisions. Management Science Review, 10(1), 68–89.

Ajzen, I. (2020). The theory of planned behavior: frequently asked questions. Human Behavior and Emerging Technologies, 2(4), 314–324. https://doi.org/10.1002/hbe2.195

Almeida, R., & Gonçalves, F. (2023). The impact of cognitive biases on stock market investments. Financial Research Letters, 47. https://doi.org/https://doi.org/10.1016/j.finre.2023.01.001

Al-Tamimi, H., Hassan, A., & Obeidat, S. M. (2020). Factors influencing individual investor behavior: evidence from the UAE. International Journal of Islamic and Middle Eastern Finance and Management, 13(2), 299–318. https://doi.org/https://doi.org/10.1108/IMEFM-03-2020-0149

Anagol, S., Balasubramaniam, V., & Ramadorai, T. (2021). Learning from noise: evidence from India’s IPO lotteries. Journal of Financial Economics, 140(3), 965–986. https://doi.org/10.1016/j.jfineco.2021.02.003

Ani, N. C., & Özarı, Ç. (2020). Behavioral finance: investors psychology. IOSR Journal of Economics and Finance, 11(1), 46–50. https://doi.org/10.9790/5933-1101024650

Arran, R. (2023). Behavioral finance: the psychology behind financial decision-making. Business Studies Journal, 15(5), 1–2.

Banerjee, A. V. (2020). A simple model of herd behavior. The Quarterly Journal of Economics, 107(3), 797–817. https://doi.org/10.2307/2118364

Barber, B. M., & Odean, T. (2019). Trading is hazardous to your wealth: the common stock investment performance of individual investors. The Journal of Finance, 55(2), 773–806. https://doi.org/10.1111/0022-1082.00226

Barberis, N. (2019). Behavioral finance: an overview. Annual Review of Financial Economics, 11, 1–35. https://doi.org/https://doi.org/10.1016/j.jfineco.2019.03.006

Barberis, N., Shleifer, A., & Vishny, R. (2019). A model of investor sentiment. Journal of Financial Economics, 49(3), 307–343. https://doi.org/https://doi.org/10.1016/S0304-405X(98)00027-

Bouteska, A., & Regaieg, B. (2020). Loss aversion, overconfidence of investors and their impact on market performance: evidence from the US stock markets. Journal of Economics, Finance and Administrative Science, 25(50), 451–478. https://doi.org/10.1108/JEFAS-07-2017-0081

Candy, C., & Novita, I. (2021). Herding behavior of indonesia investor: role of personality traits and motivation factors. International Journal of Economics, Business and Accounting Research (IJEBAR), 5(2), 296–303.

Candy, C., & Vira, V. (2024). Financial behavior as key factors affecting Indonesian gen-Z entrepreneurial intention. International Journal of Applied Business Research, 6(02), 152-172. https://doi.org/10.35313/ijabr.v6i02.363

Cao, C., Leggio, K., & Schniederjans, M. (2005). A comparison between Fama and French’s model and artificial neural networks in predicting the Chinese stock market. Computers & Operations Research, 58, 233–240. https://doi.org/https://doi.org/10.1016/j.cor.2021.02.013

De Bondt, W. F., & Thaler, R. (1985). Does the stock market overreact?. The Journal of finance, 40(3), 793-805. https://doi.org/10.1111/j.1540-6261.1985.tb05004.x

Etikan, I., Musa, S. A., & Alkassim, R. S. (2016). Comparison of convenience sampling and purposive sampling. American Journal of Theoretical and Applied Statistics, 5(1), 1-4. https://doi.org/10.11648/j.ajtas.20160501.11

Geloso, V., & Kufenko, V. (2019). Can markets foster rebellion? the case of the 1837–38 rebellions in Lower Canada. Journal of Economic Behavior & Organization, 166, 263–287. https://doi.org/10.1016/j.jebo.2019.06.005

Gilenko, E., & Chernova, A. (2021). Saving behavior and financial literacy of Russian high school students: an application of a copula-based bivariate probit-regression approach. Children and Youth Services Review, 127. https://doi.org/10.1016/j.childyouth.2021.106122

Hair, J. F., Hult, G. T. M., Ringle, C. M., Sarstedt, M., Danks, N. P., & Ray, S. (2021). Partial Least Squares Structural Equation Modeling (PLS-SEM) Using R. Switzerland: Springer International Publishing. https://doi.org/10.1007/978-3-030-80519-7

Hair, J. F., Risher, J. J., Sarstedt, M., & Ringle, C. M. (2020). When to use and how to report the results of PLS-SEM. European Business Review, 31(1), 2–24. https://doi.org/10.1108/EBR-11-2018-0203

Hastings, J. S., Madrian, B. C., & Skimmyhorn, W. L. (2013). Financial literacy, financial education, and economic outcomes. Annual Review of Economics, 5(1), 347–373. https://doi.org/10.1146/annurev-economics-082312-125807

Hinzen, F. J., John, K., & Saleh, F. (2022). Bitcoin’s limited adoption problem. Journal of Financial Economics, 144(2), 347–369. https://doi.org/10.1016/j.jfineco.2022.01.003

Hirshleifer, D., & Hong Teoh, S. (2003). Herd behaviour and cascading in capital markets: a review and synthesis. European Financial Management, 9(1), 25–66. https://doi.org/10.1111/1468-036X.00207

Indonesia Central Securities Depository (2023, October). Siaran Pers: Antusiasme Investor Muda Berinvestasi Terus Meningkat. Retrieved from https://www.ksei.co.id/files/uploads/press_releases/press_file/id-id/232_berita_pers_antusiasme_investor_muda_berinvestasi_terus_meningkat_20231031134735.pdf

Islam Khan, M. T., Tan, S. H., & Chong, L. L. (2016). The effects of stated preferences for firm characteristics, optimism and overconfidence on trading activities. International Journal of Bank Marketing, 34(7), 1114-1130. https://doi.org/10.1108/IJBM-10-2015-0154

Joshi, A., Kale, S., Chandel, S., & Pal, D. (2015). Likert scale: explored and explained. British Journal of Applied Science & Technology, 7(4), 396–403. https://doi.org/10.9734/BJAST/2015/14975

Kahneman, D. (2011). Thinking, Fast, and Slow. New York: Farrar, Straus and Giroux.

Kahneman, D., & Tversky, A. (2013). Prospect theory: an analysis of decision under risk. In MacLean, L. C., Ziemba, W. T. (Eds.), Handbook of the Fundamentals of Financial Decision Making: Part I (pp. 99-127). Singapore: World Scientific Publishing Company. https://doi.org/10.1142/9789814417358_0006

Kartini, K., & Nahda, K. (2021). Behavioral biases on investment decision: a case study in Indonesia. Journal of Asian Finance, Economics and Business, 8(3), 1231–1240. https://doi.org/10.13106/jafeb.2021.vol8.no3.1231

Khan, D. (2020). Cognitive driven biases, investment decision making: the moderating role of financial literacy. SSRN Electronic Journal, 1–25. https://dx.doi.org/10.2139/ssrn.3514086

Khan, M. 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.

Klapper, L., Lusardi, A., & Van Oudheusden, P. (2015). Financial literacy around the world: insights from the standard & poor’s ratings services global financial literacy survey. World Bank. Washington DC: World Bank, 2, 218-237.

Kumar, S., & Goyal, N. (2015). Behavioral biases in investment decision making: a systematic review. Qualitative Research in Financial Markets, 11(3), 323–345. https://doi.org/https://doi.org/10.1108/QRFM-07-2018-0084

Lusardi, A., & Mitchell, O. S. (2014). The economic importance of financial literacy: theory and evidence. Journal of Economic Literature, 56(1), 5–44. https://doi.org/https://doi.org/10.1257/jel.20161752

Malik, M. S., Hanif, M. I., & Azhar, M. Z. (2019). The impact of overconfidence bias on investment decisions: mediating role of risk tolerance. International Journal of Research and Innovation in Social Science, 3(8), 154-160.

Metawa, N., Hassan, M. K., Metawa, S., & Safa, M. F. (2019). Impact of behavioral factors on investors’ financial decisions: case of the Egyptian stock market. International Journal of Islamic and Middle Eastern Finance and Management, 12(1), 30–55. https://doi.org/10.1108/IMEFM-12-2017-0333

Michailova, J., Mačiulis, A., & Tvaronavičienė, M. (2017). Overconfidence, risk aversion and individual financial decisions in experimental asset markets. Economic Research-Ekonomska Istrazivanja, 30(1), 1119–1131. https://doi.org/10.1080/1331677X.2017.1311234

Mitchell, O. S., & Lusardi, A. (2015). Financial literacy and economic outcomes: evidence and policy implications. The Journal of Retirement, 3(1), 107. https://doi.org/10.3905/jor.2015.3.1.107

Mnif, E., Mensi, W., & Yoon, S. M. (2022). How does financial literacy impact stock market participation? evidence from emerging markets. Research in International Business and Finance, 60. https://doi.org/https://doi.org/10.1016/j.ribaf.2022.101636

Novandalina, A., Ernawati, F. Y., & Adriyanto, A. T. (2022). Risk attitudes, mental accounting and overconfidence in investment placement decision during and post Covid-19. International Journal of Economics, Business and Accounting Research (IJEBAR), 6(1), 498-506. http://dx.doi.org/10.29040/ijebar.v6i1.4453

Odean, T. (1998). Are investors reluctant to realize their losses? The Journal of Finance, 53(5), 1775–1798. https://doi.org/10.1111/0022-1082.00072

Özen, E., & Ersoy, G. (2019). The impact of financial literacy on cognitive biases of individual investors. Contemporary Issues in Behavioral Finance, 101, 77-95.

Podsakoff, P. M., MacKenzie, S. B., & Podsakoff, N. P. (2016). Recommendations for creating better concept definitions in the organizational, behavioral, and social sciences. Organizational Research Methods, 22(4), 754–774. https://doi.org/https://doi.org/10.1177/1094428118764975

Pokharel, P. R. (2020). Behavioral factors and investment decision: a case of Nepal. SSRN Electronic Journal. https://doi.org/10.2139/ssrn.3687104

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How overconfidence and mental accounting influence investments? The moderating role of financial literacy

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