As Indonesia's capital market continues to attract millions of new retail investors, understanding investor psychology has become increasingly important. Digital trading platforms, social media, and online investment communities have made financial information more accessible than ever before. Yet these same channels can also amplify cognitive shortcuts, causing investors to rely on instinct, recent news, or personal confidence instead of objective analysis.
Lee and Tifany argue that behavioral finance provides a more realistic explanation of investment behavior than traditional financial theory. Rather than assuming investors always make rational choices, behavioral finance recognizes that psychological biases frequently shape financial decisions, especially during periods of uncertainty.
Studying Investor Psychology in Indonesia
The researchers surveyed 400 active retail investors participating in the Indonesia Stock Exchange (IDX). Participants were selected because they had maintained an active securities account, possessed at least one year of investment experience, and had traded stocks within the previous six months.
Responses were collected through structured online questionnaires distributed via investor communities, securities firms, university investment galleries, and investment-related social media platforms. Instead of focusing solely on financial performance, the researchers examined five common heuristic biases:
- Overconfidence bias
- Availability bias
- Anchoring bias
- Representativeness bias
- Gambler's fallacy
The study then evaluated how these biases influenced investors' risk perception, and whether risk perception ultimately affected investment decision-making. Statistical modeling was used to examine the relationships among these psychological factors.
Three Biases Significantly Shape Risk Perception
One of the study's most important findings is that not all psychological biases influence investors in the same way.
The researchers found that three heuristic biases significantly affect how investors perceive investment risk:
- Availability bias, where investors rely heavily on information that is easiest to access, such as recent financial news or popular discussions on social media.
- Representativeness bias, where recent market performance is mistakenly assumed to predict future outcomes.
- Gambler's fallacy, where investors incorrectly believe that previous market movements influence future price changes.
In contrast, overconfidence bias and anchoring bias showed no significant influence on investors' perception of risk among Indonesian retail investors.
These findings suggest that today's investors increasingly evaluate risk using current market information rather than relying solely on excessive self-confidence or historical price references.
Risk Perception Improves Investment Decisions
The research also demonstrates that risk perception has a significant positive effect on investment decision-making.
Investors who carefully evaluate uncertainty before investing are more likely to make rational financial decisions than those who react impulsively or follow market sentiment. According to the findings, risk perception acts as an essential psychological filter between information and action.
Interestingly, the influence of psychological bias varies depending on the type of bias involved.
The mediation analysis revealed four distinct patterns:
- Availability bias affects investment decisions both directly and indirectly through risk perception (partial mediation).
- Representativeness bias influences investment decisions only after altering investors' perception of risk (full mediation).
- Gambler's fallacy also affects investment decisions exclusively through changes in perceived risk (full mediation).
- Overconfidence bias influences investment decisions directly without involving risk perception, while anchoring bias shows neither direct nor indirect influence.
These results indicate that risk perception is an important—but selective—psychological mechanism rather than a universal explanation for all investor behavior.
Why These Findings Matter
The study offers practical implications for multiple stakeholders.
For individual investors, the findings serve as a reminder that investment decisions should not rely solely on trending information, viral financial advice, or recent market movements. Developing the ability to assess investment risk objectively can improve long-term financial outcomes.
For financial educators, the research highlights the importance of incorporating behavioral finance into investor education. Teaching investors to recognize cognitive biases may be just as valuable as teaching financial analysis.
For financial regulators and securities firms, understanding investor psychology can help design educational campaigns that reduce irrational investment behavior and improve market stability.
The findings are also relevant to financial technology companies. AI-powered investment platforms and robo-advisors could incorporate behavioral indicators to identify situations where users may be influenced by cognitive biases, helping investors make more balanced decisions.
Authors Emphasize the Role of Investor Psychology
Lee and Tifany conclude that heuristic biases influence investment decisions through different psychological pathways rather than a single mechanism.
Their findings suggest that risk perception selectively mediates the relationship between cognitive bias and investment behavior, extending Behavioral Finance Theory within the context of emerging capital markets such as Indonesia. They also recommend that future studies examine institutional investors, compare different countries, and explore additional factors such as financial literacy, artificial intelligence, social media sentiment, and market volatility.
Author Profile
Cheng-Wen Lee is a faculty member in the Department of International Business, Chung Yuan Christian University, Taiwan. His research focuses on international business, behavioral finance, strategic management, and financial decision-making.
Firza Tifany is a doctoral researcher in the Ph.D. Program in Business at Chung Yuan Christian University, Taiwan. Her research interests include behavioral finance, investor psychology, risk perception, investment decision-making, and financial behavior in emerging markets.
Source
Lee, Cheng-Wen & Tifany, Firza. When Bias Drives Investment Decisions: The Mediating Role of Risk Perception. International Journal of Sustainable Applied Sciences (IJSAS), Vol. 4, No. 7, 2026.
DOI: https://doi.org/10.59890/ijsas.v4i7.13.
URL: http://ijsasjournal.my.id/index.php/ijsas
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