Page 1 of 16
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
Page 2 of 16
88
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