The influence of financial literacy and risk perception on investment decision in Indonesia: How overconfidence bias may mediate the relationships?

Abstract

This study aims to explore the effect of financial literacy and risk perception on investment decision-making when overconfidence bias is present. To test the hypothesis, this study employs path analysis to determine the direct and indirect effect between the variables with data collected from Indonesian stock investors in Greater Jakarta Area. The result indicates that financial literacy has a significant effect on overconfidence bias and investment decisions. On the other hand, risk perception doesn’t have a significant direct effect but has a significant indirect effect on investment decisions. In this study, overconfidence bias mediates the relationship between financial literacy and risk perception. The findings from this research can be used by the investment industry analyst as based on advising investors where most investors in Indonesia stock exchange are risk neutral as long given enough return especially young investors that only have been in the market less than 2 years. This research also contributes to academic literature related to behavioral finance.