The impact of disposition effect, herding and overconfidence on investment decision making moderated by financial literacy

Priyo Prasetyo, Sumiati and Kusuma Ratnawati
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Priyo Prasetyo: Univesity of Brawijaya
Sumiati: Univesity of Brawijaya
Kusuma Ratnawati: Univesity of Brawijaya

International Journal of Research in Business and Social Science (2147-4478), 2023, vol. 12, issue 9, 241-251

Abstract: Behavioral finance elucidates how investors rationally commit errors in the process of making investment decisions as a result of cognitive and emotional biases, ultimately resulting in unfavorable investment choices. People are unable to avoid a variety of behavioral biases that have an impact on investors' investment decision-making processes. The human mind employs shortcuts and emotional filters to interpret information, leading to errors in the decision-making process. The objective of this study is to investigate and assess the impact of behavioral biases such as disposition effects, herding, and overconfidence on investment decision-making. Additionally, we will examine how financial literacy moderates these biases. The research employed a purposive sample strategy to select generation Z investors in Kediri City. The sample size of 400 respondents was determined using the Krejcie & Morgan table. This research employs the Partial Least Squares (PLS) Structural Equation Model (SEM) analysis method using the SmartPLS version 3 data processing application. The research findings indicate that the disposition effect and overconfidence exert a substantial impact on investment decision-making; however, herding does not exhibit a significant influence on investment choice-making. Financial knowledge enhances the impact of the disposition effect on investment decision-making in a positive way. Financial literacy has a negative moderating effect on the influence of herding and overconfidence on investment decision-making among Generation Z investors in Kediri City. Key Words:Disposition Effect, Herding, Overconfidence, Financial Literacy

Date: 2023
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