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Advances in Social Sciences Research Journal – Vol. 9, No. 7

Publication Date: July 25, 2022

DOI:10.14738/assrj.97.12646. Ekatama, M. F., & Sutrisno. (2022). Effect of Financial Literation and Financial Bias on Investment Decisions. Advances in Social

Sciences Research Journal, 9(7). 87-102.

Services for Science and Education – United Kingdom

Effect of Financial Literation and Financial Bias on Investment

Decisions

Muhammad Faris Ekatama

Universitas Islam Indonesia

Sutrisno

Universitas Islam Indonesia

ABSTRACT

At this time human awareness to have a decent life is very high, so financial planning

is needed. One of the financial planning is an investment decision. In investing,

many variables are thought to influence the decision. The purpose of this study is to

examine several variables that influence a person's decision to invest. The variables

studied were financial literacy and financial need which consisted of

Overconfidence, Representativeness, Familiarity, and Risk Perception. The number

of respondents in this study were 156 people who live in the Special Region of

Yogyakarta, they consisted of students, university students, and working. The data

were collected using a questionnaire with a Lichkert scale. Data analysis used

multiple regression analysis with a significance level of 0.05. The results of the

study found that financial literacy has a positive and significant effect, as well as

Overconfidence, Representativeness, Familiarity and Risk Perception have a

positive effect on investment decisions.

Keywords: Financial Litercy ̧ Overconfidence, Representativeness, Familiarity, Risk

Perception

INTRODUCTION

Most of the Indonesian people have carried out investment activities with the aim of having a

decent and sufficient life. However, Indonesian people usually allocate money or income in

several forms, such as consumption, savings and investment. Of these funds, the type of

distribution that is most preferred in the future is the type of investment. According to

(Pritazahara & Sriwidodo, 2015), personal financial management investment planning is vital

for everyone today, because investment is also included in the learning process in studying

current and future finances. Investment can be interpreted as sacrificing a source of income or

funds to buy a stock or product now in the hope of getting a profit in the future. Joko Salim

(2010: 7) states that a person's goals in investing are as follows: first, just in case, second, to get

a profit, third to beat inflation, fourth to have a wrong life in the future, and fifth to prepare a

pension fund.

Based on (Trinugroho & Roy, 2011), there are several investors in the capital market who tend

to show irrational behavior which is influenced by psychological factors that are contrary to

classical theory. Meanwhile, Monowar's (2013) study found that investors in the decision- making process show high or irrational opportunism. In research conducted by (Carolynne L J

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Advances in Social Sciences Research Journal (ASSRJ) Vol. 9, Issue 7, July-2022

Services for Science and Education – United Kingdom

Mason & Richard M S Wilson: 2000) regarding financial literacy which only makes a person

able to make decisions based on relevant information. Financial literacy does not guarantee

that the right decisions are made, because a person does not always make decisions based on

economic rationale. Then it can allow an investor to make decisions that are not quite right. An

investor who is prone to biased behavior causes systematic errors and choices of investment

decisions that only satisfy but do not maximize benefits and this event is known as behavioral

finance. When making an investment, it is necessary to make the right decisions where each of

the decisions can affect the investment results. In determining a decision, each individual will

behave rationally and irrationally, depending on the information obtained. Someone with good

financial literacy tends to have better control in determining a diversified investment because

they have a lot of financial information. For example, knowing the range of interest rates and

conditions on the market, understanding how their credit risk profile and personal situation

correspond to interest rates so that they can determine which investment is best for them

(Hilgert et al., 2003).

Basically, investment decisions that are made will affect success in the future, but there are

several factors that influence investment decisions, one of which is Behavioral finance, the

definition of Behavioral finance is a theory that focuses on the psychological influence of

investors in financial decision making and the investor market sometimes makes a decisions

when market conditions are bobbing or floating full of uncertainty. The psychological literature

finds that a person can make mistakes both systematically in thinking such as being too sure of

one's abilities or too dependent on past experiences (Ritter, 2003). Irrational investment

decisions occur under certain conditions of uncertainty and risk. In an uncertain investment

world, investors tend to take overconfidence decisions (Im & Oh, 2016). The content of

behavioral finance consists of Overconfidence, Representativeness, Familiarity bias, and risk

perception.

In general, overconfidence bias is often associated with and equated with optimism, however,

there is a difference between overconfidence bias and optimism bias. For Malmendier (2005),

overconfidence bias is related to the expertise of investors, on the other hand, optimism bias is

related to results originating from aspects outside the system (exogenous). Overconfidence

research on investment decisions carried out by (Bulent & Yilmaz, 2015) generally involves

male investors, young investors, investors with low portfolios and low income investors. For

Lakshmi (2016) Overconfidence is described as a belief that is too much in reasoning,

evaluation and cognitive skills. The concept of Overconfidence comes from a part of

psychological research that creates when people overestimate the expertise and truth of the

data they share. Some investors believe and think their expertise is above the average of other

investors and can complete tasks well and have an unrealistic level of self-assessment

(Pompian, 2006).

Another aspect that affects the attitude of investment decisions is Representativeness.

Representativeness is investment decision making based on stereotype thinking (Shefrin,

2007: 14). A stereotype is an investor's decision-making attitude based on past experiences and

data that match his mental reflection. A person with large Representativeness tends to

overreact when obtaining financial data or other data from colleagues or family who have

invested in the industry. Investors tend to be very vigilant in ensuring investment decisions. In

the research of Ravindra, et.al (2015), it is shown that human representativeness tends to be

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Ekatama, M. F., & Sutrisno. (2022). Effect of Financial Literation and Financial Bias on Investment Decisions. Advances in Social Sciences Research

Journal, 9(7). 87-102.

URL: http://dx.doi.org/10.14738/assrj.97.12646

based on decisions about equality. Not only that, for research from Ackert and Deaves (2010:

142) the Representativeness aspect affects investment decisions because they think most

investors comment on good company, good investment.

Meanwhile, Familiarity is the behavior of investors who tend to choose an investment based on

something familiar or familiar (Nofsinger, 2005: 64). (Huberman, Gur, 2001) argue that

"Familiarity is associated with a general sense of comfort with the known and discomfort with

— even dislike for and fear of — aliens and distant." For example, when presented with the

option to choose between Apple and Synaptics stocks, investors are more likely to choose

Apple. In research (Redhead, 2008: 551) familiarity can cause investors to prefer investing in

whatever they think and investors know and understand so that what is on their mind will be

chosen. Because they are familiar with the company and use the products more often.

Familiarity bias prevents investors from analyzing the actual potential of lesser known

companies and stocks, which may turn out to be more profitable than known options.

The investment decision is also influenced by another aspect, namely the perceived risk.

Everyone is certainly different in calculating and seeing the risk of an investment. For Siti and

Wiwik (2013), the interpretation of Risk Perception is an evaluation of investors in a risky

atmosphere, where the evaluation is very dependent on the psychological characteristics and

condition of the person. Hung et naval (AL) research. (2010), show that data on risk and return

have a significant influence on decisions about investment allocation, but the effect of data

clarity does not apply to investors who have different levels of financial knowledge and risk

aversion. Research by Cho & Lee (2006) shows that perceived risk increases the number of

searches for data and the frequency of transactions if the invested legacy is low.

THEORITICAL REVIEW AND HYPOTHESIS

Investment decisions

According to Eduardus Tandelilin (2010: 9), the fundamental thing in the investment decision

process is understanding the relationship between return and risk of an investment. An

investment decision is a policy or decision taken to invest in one or more assets for future

benefits (Dewi Ayu Wulandari and Rr. Iramani, 2014). This is a significant challenge that

investors must face. When making investment decisions, investors have 2 behaviors, namely

rational and irrational. Rational behavior is the behavior of a person who thinks based on

healthy ideas based on the analysis of the data obtained, on the other hand, irrational behavior

is the behavior of a person who is not based on healthy ideas and is based on future predictions.

Financial literacy and investment decisions

Financial literacy is the knowledge of managing personal finances, namely the ability to use

financial literacy appropriately in the process of making financial decisions to achieve

prosperity and avoid financial problems. This index variable comes from Chen and Volpe

(1998) who argue that there are several important aspects of financial knowledge, namely:

basic financial concepts (understanding of interest rates, inflation and currency exchange

rates), savings and loans (for savings and loans, such as credit), insurance (knowledge of

insurance, such as life, health and motor vehicle insurance products), investment (knowledge

of market interest rates, stocks, bonds, and investment risk). This is because by having a high

level of financial knowledge, a person will learn more and be able to minimize the risks they

face. Financial literacy (financial knowledge) will further influence the way people save,