Is it true that negative cognitive biases always have a negative impact? Does this also apply to decision-making, including financial decisions?
Research conducted by Dr. Dormauli Justina, S.E., M.Si., from the Doctoral Program in Management Science at the Faculty of Economics and Business, UGM, shows that the decision to invest in the capital market is not solely determined by rationality but is also influenced by psychological factors. Excessive self-confidence, coupled with confirmation bias, actually encourages participation by potential retail investors.
“Excessive self-confidence has a significant causal relationship with capital market participation. This causality between self-confidence and capital market participation is further reinforced by confirmation bias,” explained Dormauli in the 3 Minute Thesis program titled The Influence of Self-Confidence and Confirmation Bias on Capital Market Participation.
In a study titled “The Influence of Self-Confidence on Capital Market Participation with Confirmation Bias and Risk Propensity as Moderating Variables: A Study of Potential Retail Investors,” he sought to examine how psychological factors influence individual decisions regarding participation in the capital market.
The study was conducted as an internet-based laboratory experiment involving 358 potential retail investors recruited by students. The results showed that potential retail investors with overconfidence were more likely to participate in the capital market than those with low self-confidence.
Another finding shows that confirmation bias reinforces both of these relationships. The presence of confirmation bias encourages potential retail investors with both excessive and low self-confidence to participate in the capital market.
“Through the perspective of self-confidence theory and confirmation bias, these findings provide important insights for capital market stakeholders in strengthening the Indonesian capital market,” he explained.
He added that technological advancements and the flood of information via social media do not merely enrich financial knowledge. These conditions also influence decisions regarding participation in the capital market.
Dormauli reiterated that negative cognitive biases do not always lead to poor decisions. When used appropriately, cognitive biases can lead to constructive decisions.
The full video of the 3 Minute Thesis program titled “The Influence of Self-Confidence and Confirmation Bias on Capital Market Participation” can be accessed at: http://ugm.id/KepercayaanDiriDanPartisipasiPasarModal
Reportage by: Kurnia Ekaptiningrum
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