Socio-economic, Trading Sophistication and Self-reflection on Investors’ Overconfidence Bias: Evidence from Colombo Stock Exchange

Abstract

Individual investor’s behavior is extensively influenced by biases that highlighted in the growing discipline of behavior finance. This study is one of another effort to assess the determinants of behavioral biases in investor’s investment decision-making. The present study has analyzed the influence of socio-economic, trading sophistication and self-reflection factors, which cause changes in the extent of overconfidence level among the individual individuals. The study analyses the perception of 243 survey responses from individual investors of Colombo Stock Exchange. A survey has been conducted to investigate the influence of determinants of overconfidence with the help of a well-structured close-ended questionnaire. The collected data are analyzed with the help of t-test, ANOVA and simple linear regression. The results show that those self-reflective males who has high education qualifications and have more investment experience are more subject to the overconfidence. The study also concludes that the investors’ age, profession and income do not influence investors' overconfidence bias. The potential limitations of the present survey can be ascribed to socially desirable responses and their difference with actual market behavior. Further, due to time and resource constraint, the data set is limited to investors of only Colombo Stock Exchange. Moreover, this study is most relevant for financial advisors, as it facilitates them in gaining a better understanding of their clients’ psychology. It can aid them in developing behaviorally modified portfolio, which best suits their clients’ predisposition, and the study is useful for the market regulators, financial educators, stock market advisors and individual investors in avoiding costly investment mistakes. Moreover, the study attempts to explore the impact of demographic and investment characteristics in one go, which makes it a valuable contribution in the existing literature.

Keywords: Colombo Stock Exchange, Overconfidence, Self-reflection, Socio-economic, Trading Sophistication