Investment Decision-Making Under Behavioral and Market Influences

Abstract

The study in this paper aims to analyze how Herding Behaviour, Investment Performance and Perceived Market Efficiency affect Investment Decisions of individual investors in the Indonesian capital market, moderated by Investor Experience. Emerging market investors face the issue of information asymmetry, behavioral biases, and varying expectations for market efficiency, all of which can impact investment decisions adversely. Behavioural finance is used in the research to explain the phenomenon in question, using a quantitative approach with the method of Structural Equation Modelling – Partial Least Squares (SEM-PLS). The model is operationalized by using Likert scale indicators that have been taken from previous international studies, and active Indonesian retail investors. The researcher conceptualizes that the herd behavior, perceived market efficiency and investment performance positively influences investment decision. Herding is expected to be less prevalent with increasing investor experience and investment performance and market efficiency is expected to be more prevalent and stronger with increasing investor experience. This study, on theoretical grounds, adds to the behavioural finance field by combining the variables for herding behaviour, market efficiency and experience of the investors. On a practical level, it provides guidance for regulators, brokers, and investor education schemes to create strategies for reducing the harmful effects of the behavioral biases on rational decision making among retail investors in emerging markets.