The Influence of Overconfidence Bias, Loss Aversion, and Herding Behavior on Stock Investment Decisions among Retail Investors
Keywords:
Behavioral Finance, Overconfidence Bias, Loss Aversion, Herding Behavior, Investment Decision, Retail Investors, Stock Market, Prospect TheoryAbstract
This study investigates the influence of behavioral biases, specifically overconfidence bias, loss aversion, and herding behavior on stock investment decisions among retail investors. Grounded in the principles of Behavioral Finance, the research challenges the assumption of investor rationality by examining how psychological factors shape financial decision-making. A quantitative research approach was employed, using structured questionnaires to collect data from 250 retail investors. The data were analyzed using descriptive statistics, reliability analysis, correlation, and multiple regression techniques. The findings reveal that all three behavioral biases have a significant positive impact on investment decisions. Among them, overconfidence bias emerged as the most influential factor, indicating that investors who overestimate their knowledge and abilities are more likely to make assertive and frequent investment decisions. Herding behavior was also found to significantly affect decisions, suggesting that investors tend to follow the actions of others, especially in uncertain market conditions. Additionally, loss aversion plays a critical role, as investors exhibit a strong preference to avoid losses, consistent with Prospect Theory. The model explains a substantial proportion of variance in investment decisions, highlighting the importance of psychological factors in financial behavior. The study contributes to the growing literature on behavioral finance by providing empirical evidence on the role of cognitive biases in retail investment decisions. It also offers practical implications for investors, financial advisors, and policymakers by emphasizing the need for increased awareness, financial education, and strategies to mitigate the adverse effects of behavioral biases. Overall, the findings underscore the importance of integrating behavioral insights into investment decision-making frameworks to better understand and improve investor outcomes in modern financial markets.
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