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The Impact of Heuristics, Prospect, Market and Herding Towards in The Investment Decisions and Performance: A Study on Individual Investors in Jakarta, Indonesia

Karina Maharani, Ardo Ryan Dwitanto, Yulita Fairina Susanti

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Abstract

The study of finance has been evolving in the past decades. Previously, economists generate predictions on the stock market based on the traditional finance theory. However, the flaw of this theory is that it does not take into account the fact that investors can be irrational and biased. As the result, this theory often could not explain the stock market anomaly very well. On the other hand, the study of behavioral finance started to be well-known after Daniel Kahneman and Vernon Smith won the 2002 Nobel Prize in Economics. This study complements the gap in traditional finance study as it recognizes the fact that investors and market are not fully rational. Therefore, it is often used to analyze how behavioral biases can affect the investment decisions of investors and can further explain why the stock market anomalies occurs. Since researches on behavioral finance is relatively limited, especially in Asia and Indonesia, this research is expected to fill the gap and add contribution to the existing behavioral finance journals in Indonesia. This research aims to analyze the impact of behavioral finance factors towards the investment decisions of individual investors in Jakarta. The behavioral finance factors include heuristics, prospect, market and herding factors. Moreover, this research also investigated the impact of investment decision on the investment performance. Through using Partial Least Square - Structural Equation Modelling(PLS-SEM) analysis method, this research identified that heuristics, prospect, and herding factors have a significant impact on the investment decision. Meanwhile, market factor does not show a significant impact on the investment decision. This research also founds that the investment decisions, which was derived from behavioral finance factors, have a significant and negative influence on the investment performance of individual investors in Jakarta. Keywords: Behavioral finance, Herding, Heuristics, Investment decision, Individual investors, Market, Prospect

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What this paper is about

The study of finance has been evolving in the past decades. Previously, economists generate predictions on the stock market based on the traditional finance theory. However, the flaw of this theory is that it does not take into account the fact that investors can be irrational and biased. As the result, this theory often could not explain the stock market anomaly very well. On the other hand, the study of behavioral finance started to be well-known after Daniel Kahneman and Vernon Smith won the 2002 Nobel Prize in Economics. This study complements the gap in traditional finance study as it recognizes the fact that investors and market are not fully rational. Therefore, it is often used to analyze how behavioral biases can affect the investment decisions of investors and can further explain why the stock market anomalies occurs. Since researches on behavioral finance is relatively limited, especially in Asia and Indonesia, this research is expected to fill the gap and add contribution to the existing behavioral finance journals in Indonesia. This research aims to analyze the impact of behavioral finance factors towards the investment decisions of individual investors in Jakarta. The behavioral finance factors include heuristics, prospect, market and herding factors. Moreover, this research also investigated the impact of investment decision on the investment performance. Through using Partial Least Square - Structural Equation Modelling(PLS-SEM) analysis method, this research identified that heuristics, prospect, and herding factors have a significant impact on the investment decision. Meanwhile, market factor does not show a significant impact on the investment decision. This research also founds that the investment decisions, which was derived from behavioral finance factors, have a significant and negative influence on the investment performance of individual investors in Jakarta. Keywords: Behavioral finance, Herding, Heuristics, Investment decision, Individual investors, Market, Prospect

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Available abstract

The study of finance has been evolving in the past decades. Previously, economists generate predictions on the stock market based on the traditional finance theory. However, the flaw of this theory is that it does not take into account the fact that investors can be irrational and biased. As the result, this theory often could not explain the stock market anomaly very well. On the other hand, the study of behavioral finance started to be well-known after Daniel Kahneman and Vernon Smith won the 2002 Nobel Prize in Economics. This study complements the gap in traditional finance study as it recognizes the fact that investors and market are not fully rational. Therefore, it is often used to analyze how behavioral biases can affect the investment decisions of investors and can further explain why the stock market anomalies occurs. Since researches on behavioral finance is relatively limited, especially in Asia and Indonesia, this research is expected to fill the gap and add contribution to the existing behavioral finance journals in Indonesia. This research aims to analyze the impact of behavioral finance factors towards the investment decisions of individual investors in Jakarta. The behavioral finance factors include heuristics, prospect, market and herding factors. Moreover, this research also investigated the impact of investment decision on the investment performance. Through using Partial Least Square - Structural Equation Modelling(PLS-SEM) analysis method, this research identified that heuristics, prospect, and herding factors have a significant impact on the investment decision. Meanwhile, market factor does not show a significant impact on the investment decision. This research also founds that the investment decisions, which was derived from behavioral finance factors, have a significant and negative influence on the investment performance of individual investors in Jakarta. Keywords: Behavioral finance, Herding, Heuristics, Investment decision, Individual investors, Market, Prospect

Key concepts: Herding, Prospect theory, Behavioral economics, Stock market, Financial economics, Herd behavior, Heuristics, Economics

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