Herding and Overconfidence Bias in Retail Investors’ Investment Decision Making From A Behavioral Finance Perspective
Keywords:
Behavioral Finance; Cognitive Bias; Investment Decision Bias; Investment Decision-Making; Investor BehaviorAbstract
This study aims to explore the stock investment decision-making behavior of individual retail investors from a behavioral finance perspective, with a particular focus on herding bias and overconfidence bias. The research was conducted among individual retail investors in the Indonesian capital market who actively use digital investment platforms and participate in investment communities. A qualitative research approach was employed, utilizing in-depth interviews with ten respondents selected through purposive sampling. Data analysis was carried out systematically through the stages of data reduction, data display, and conclusion drawing. The findings reveal that retail investors’ investment decision-making processes are not entirely based on rational considerations and comprehensive analysis. Herding bias emerges when investors tend to follow majority decisions, community recommendations, and market trends due to limited time and information, as well as social pressures such as fear of missing out (FOMO). In addition, overconfidence bias is reflected in investors’ excessive confidence in their own analytical abilities, particularly after experiencing past investment gains, which leads them to underestimate or ignore the inherent risks associated with investment decisions. Importantly, the results indicate that these two biases interact dynamically: investors who engage in herding behavior and subsequently experience investment gains tend to attribute the success to their own market intuition or analytical skills, thereby reinforcing overconfidence. Conversely, overconfidence in one’s perceived ability to identify “correct” market trends encourages investors to rely more heavily on crowd behavior, assuming that following popular trends confirms their personal judgment. This study provides empirical contributions to the behavioral finance literature and serves as a foundation for enhancing financial literacy and managing behavioral biases in stock investment decision-making.
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