ISSN : 2088-6365
e-ISSN : 2477-5576 Economic: Jurnal Ekonomi dan Hukum Islam, Vol.8, No. 2 2017
An analysis of Decision Making in the Stock Investment
Yuniningsih Yuniningsih1, Sugeng Widodo2, Barid Nizarudin Wajdi 3
University of National Development “Veteran” East Java, Surabaya, P.O Box 60294 Indonesian
University of Wijaya Kusuma, Surabaya Indonesia
Email : yuniningsih@upnjatim.ac.id
Abstract.
The research objective is to test how much risk investors are willing to take when making
their investment associated with the loss aversion, in terms of the risk taking behavior in relation
with that of the loss aversion. The later, the loss aversion is treated as the independent variable
reviewed from the two sides of the gain and loss domain. When investors are in loss aversion within the gain domain, they tend to have a lower risk taking behavior than that of the loss domain. Such tendency of investorrsquo;s behavior differences in those two different domains is described in a
hypothetical value function (Kahneman and Tversky, 1979). ANOVA Test is applied to determine the risk taking behavioral differences in the two domains toward the loss aversion. Hypothesis test
results with the alpha index indicate that investors, when in the loss aversion of the gain domain, have a lower risk taking than that of the loss aversion in the loss domain. Meanwhile, using post hoc for significant test results in that the loss aversion has a significant influence for the risk taking
decision making in investment, particularly in that of the stocks.
Keywords: decision making, investment, loss aversion, risk taking.
- Introduction
Investors must consider many factors for decision making in investment both the long
term and the short one, also with the nature of investment assets as well as financial investment. There are factors to be considered either in the form of internal and external ones. The former can be derived from the investors themselves such as the level of education, knowledge,
willingness or psychologically, while the latter is the macro external factors (both economics
and politics) and the micro ones (the financial statements of the company or industry). Finance theory has shifted from fundamental finance theory to that of behavior with different emphasis.
This fundamental finance theory relies on the economics while the behavior is on the
psychology theory1.
One of the fundamental finance theories is the efficient market hypothesis (EMH),
which was introduced by Fama (1970). EMH describes the efficiency of the market with the
Muh. Barid Nizaruddin Wajdi, Yuli Choirul Ummah, and Devit Etika Sari, “UKM Development Business
Loan,” IJEBD (International Journal Of Entrepreneurship And Business Development) 1, no. 1 (October 1, 2017): 99– 109, accessed November 9, 2017, http://jurnal.narotama.ac.id/index.php/ijebd/article/view/350.
122 Sekolah Tinggi Agama Islam Darul Ulum Banyuwangi
ISSN : 2088-6365
e-ISSN : 2477-5576 Economic: Jurnal Ekonomi dan Hukum Islam, Vol.8, No. 2 2017
assumption that people always tend to think rationally in every action. This theory of behavioral finance is a combination between finance theory and the psychology. Shefrin (2001) states that
behavioral finance is a psychological phenomenon affecting the behavior finance2. One theory
of behavior finance is the prospect theory of Kahneman and Tversky (1979) stating that one will make different decisions at different conditions, namely during the gain or the loss. This making
of the decision described in the prospect theory is also related to investment decisions made by
investors3. Some of the factors that influence the decision making for individual investment are the framing effect, loss aversion, over reaction, under reaction, overconfident and other
demographic factors such as gender, age, education, income, wealth and marital status (Mittal,
2010).
Loss aversion empirically is regarded as the sensitivity level of people towards the loss
which is twice as much as the gain even with the same nominal amount (Kahneman and Tversky (1979), Kahneman et al., (1990). This means that a person will experience deeper
regret when losing than the pleasure obtained during experiencing gains despite the same
amount. Such loss is regarded as an extraordinary event while the gain is considered as a matter of course that does not lead to anything special. Both of these may affect any different behavior
or act from investors while under different conditions. This difference is supported by the
statement from Haight and List (2005), Thaler et al., (1997), Kahneman et al. (1990) Levi (1992); basically, the loss aversion is the tendency of a person to be more considerate, sensitive
and high prudential toward the decline than the increasing price or property owned. The loss
aversion at the gain or loss domains will affect investors in their risk-taking assessment in making investment decisions, whether behaving as risk seekers or risk aversion4.
Investors in making investment decisions always have consideration on affecting factor
that will affect the level of investor courage in taking investment risks. At present more and more information may affect decisions, mainly about the uncertain information. Such
uncertainty received by investors will determine how high or low the risk- taking investment.
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Nisaul Barokati and Fajar Annas, “Pengemb
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