Technology and communication have grown rapidly in the digital era and gave many advantages for businesses to develop their current products and services to people. However, it leads to increased competition between businesses. Therefore, each business has its strategy to have a competitive advantage rather than its competitors. To achieve these competitive advantages, sometimes businesses need additional funds to buy resources while maintaining their current performance. But, not all businesses have additional funds available for them. One of the ways to gather funds is by joining the stock market in a related country.  Businesses or companies that issue the ownership of the businesses or companies to the public for the first time are called Initial Public Offering (IPO)

Stock market is the exchange of buying, selling, and issuance of shares publicly to own the ownership of a business or a company. The stock market has a purpose to connect a business that needs funding and investor that has additional money to fund a business [1]. Therefore, companies or businesses that issue the stock market have the advantage to get funds from the investment without waiting to get operational profit to fund the company. In contrast, investors will eventually get a return for the investment in some period of time-based on the company regulation (dividend). 

In the digital era, there are technology facilities that support investors to choose which financial instrument for the investment portfolio. This investment has the sole purpose to generate income in a certain time. Hence, with the ease of information access and technology, people start to invest in some financial instruments in the capital market such as obligations, mutual funds, and the stock market. According to surveys by Indonesia Stock Exchange (BEI), Nielsen, and Universitas Indonesia, people with an age range of 18-25 years old have the highest potential to become an investor in the stock market.  

The number of investors in Indonesia is rapidly growing in the stock market. Single Investor Identification (SID) in September 2019 stated that the growth of investors with the age of 18-25 increased by 181.01% from 79.000 investors in 2016 to 222.000 investors in 2019. The growth has exceeded the age of 41-100 years which only has the growth of 22.88% in 2019 [2]. From the data provided [2], it can be seen that Gen-Z in the globalization era where technology has rapidly been implemented by the financial institutions allow them to invest as soon as possible. 

Figure 1.1.: Number of Single Investor Identification (SID) 2015-2019

Source:  Indonesia Stock Exchange (2019)

The increased trendline of Single Investor Identification (SID) in Indonesia affected transaction volume and the frequency of the transaction in the stock market.  From the data in IDX Statistics provided [3], Indonesia's stock market volume and frequency performance increased each year. In 2019, Indonesia's stock market has a transaction volume of Rp3,562 Trillion Rupiah and increased 43.06% to Rp5,096 Trillion Rupiah in 2022. In addition, the transaction frequencies are increased more significantly from 114,857,097 times in 2019 to 319,821,157 times in 2021, or 178.45% increased from 2019. These positive trendlines figure out that Indonesia has a significant increase to make a transaction in the stock market as a result of the increased number of investors and intensity of activity transactions in Indonesia. 

Figure 1.2.: Total Stock Trading summaries 2019-2021

Source: Indonesia Stock Exchange (2019-2021)

To support the increased trendline of total stock trading summaries, the average of the stock market transactions and frequencies need to be seen. From the data provided [3], the average transaction volume in Indonesia increased by 41.91% from Rp14,540 Million to Rp20,633 Million per day which means Indonesia’s investors increased their daily transaction volume. This is supported by the increased frequency of daily transactions that increased significantly from 468,804 transactions per day to 1,294,822 transactions per day. These data provided means that Indonesia Investors are getting more frequent to make transactions each day, but it does not mean that all Indonesia’s investors have a clear and systematic investment decision-making process. 

Figure 1.3.: Average Stock Trading summaries 2019-2021

Source: Indonesia Stock Exchange (2019-2021)

The investment decision-making process is a process that depends on individual factors [4]. There are a lot of factors that affect someone before the investors finally make a decision. When someone wants to consider investment decision-making, investors encounter high complex factors such as risk, ambiguity, and selection overload [4]. These factors can be handled if an investor makes a rational decision in investment, especially in the stock market. Investor rational decision is associated with a high financial literacy rate as higher financial literacy has a tendency to be engaged in processes leading to optimal decision making  [5]. Therefore, the growth of Single Investor Identification (SID) in Indonesia needs to be followed by financial literacy to see whether Indonesian investors have acted rationally in the stock market. 

The era of globalization led to the importance of financial literacy knowledge to manage money in the long term. Each individual has a minimum value of knowledge to know how to manage their assets for future needs. Financial Literacy has been an essential part of life skills for human beings in economic activities. According to [6], Financial literacy is knowledge, skills, and beliefs that can influence attitudes and behavior to improve the quality of processing and financial decision-making for achieving prosperity. In addition, according to [7] a sufficient level of financial literacy will have a favorable impact on a person's financial conduct, such as effectively establishing or allocating resources. 

From time to time, financial literacy has been a core value for someone to make a decision, one of them is to make an investment decision. In investment, planning is one important step to choose the right investment to get continuity gain and reduce the potential loss for investors.  [8] stated that financial literacy developed people’s mindset and financial intelligence and motivated people to plan and manage money. Therefore, people with financial literacy have the awareness to utilize financial products like stock, insurance, and other financial products. In conclusion, Financial Literacy is one of the main factors that affect investment planning and might change investment decisions from that planning. For this reason, people need to know about financial literacy to increase their return from the investment that has been made.

Unfortunately, there are issues on financial literacy that support rational decisions on investment in the stock market in Indonesia. According to [9]. Although current national financial literacy increased from 29.7% in 2018 to 38.03% in 2019, the highest financial literacy in the financial services sector is still in Banking with 36.12% and Insurance with 19.40% as the lowest financial literacy comes from the Investment sector, especially the capital market which is only 4.92% from total respondents [9]  as can be seen in Figure 1.4.  

Figure 1.4.: Percentage Financial literacy respondents to Financial Services Sector 

Source : Otoritas Jasa Keuangan (2019)

In addition, Investors are normal human beings as people have behavioral sentiments along with a brain of knowledge [10].  Therefore, investors as humans are not fully rational and affected by their behavior and perception of the market, which is also studied in financial behavior. Financial behavior is all human behavior related to money management that includes investment, saving, and other financial circumstances behavior.In the stock market, financial behavior specifically studied the psychological effect of investors and its impact on the market [11]. One of psychology literature from [12] found that people made mistakes systematically in their minds because they are overconfident with their ability and dependent on past occurrences. Consequently, investors’ behavior affected their investment decision-making which contradicts the Efficient Market Hypothesis. The one factor of investor financial behavior is bias. This is in line with the fact from behavioral finance literature that finds evidence of markets that are not efficient and investors’ biases have a significant influence on stock price [13]

Behavioral biases are one of the potential sentiments that affect the behaviors and investment-decision making especially on the stock market. Many biases influence the investment decision-making of an investor. Cognitive Psychology suggests that investment decision-making is influenced by biases like overconfidence bias [14].  Overconfidence bias happens when people have overestimated the analogy and the evaluation of their cognitive ability [15,16] found that usually, overconfidence happens in a group of men investors, young generation investors with minimal portfolios, and also investors with low income. 

Another bias can be categorized as heuristic bias named availability bias. Availability bias occurs when people make decisions depending only on relevant events in their minds [17]. Availability bias refers to the condition when people determine possibilities of some occurrences based on their knowledge of a similar occurrence and not by relevant and available information. 

There are still other biases that affect investment decisions like herding bias, representativeness, and familiarity bias [18]. In familiarity bias, investors tend to choose the financial product or investment an instrument that is familiar to them [19]. The bias occurs because investors tend to feel confident to choose a company that they are familiar with rather than invest in an unfamiliar company. As a result, people with high familiarity bias prefer to choose a company with big market capitalization rather than a company that is categorized in second or third liner, or people will choose a company that familiar to their daily life rather than a company that does not exist in their surroundings. 

The last bias that few research compared to the stock market is the illusion of control and the bandwagon effect. The illusion of control describes when people believe that they can predict outcomes when they are involved in it [20]. While bandwagon effect essentially describes when people tend to think that others' perceptions are true to be followed. The bandwagon effect stated that people with their perspective will eventually change decisions if their surroundings said the opposite of the individual perspective. 

As there are a lot of biases that influence the investment decision, the study aims to prove existing research on the effect of financial literacy and research on biases and their influence on investment decisions; such as overconfidence bias, Availability Bias, Familiarity Bias, Illusion of Control, and Bandwagon effect. The study will focus on the Gen-Z in the 18-25 age group that made at least one transaction in the last year in the stock market. The sample of the study is based on the most Single Investor Identification (SID) growth in Indonesia which has been increasing dramatically in response to technological and social media influence which affects more on Gen-Z. Therefore, the study will see whether Gen-Z investors have been rational and have sufficient financial literacy or Gen-Z only consider based on their biases before making an investment decision. The objective of the paper is to investigate the influence of overconfidence bias, familiarity bias, availability bias, an illusion of control, bandwagon effect, and financial literacy on Gen-Z’s investment decision in the stock market.

Financial Literacy

According to [21], Financial literacy refers to an individual's capacity to understand how money works in this day and age, as well as how they manage and invest their money. Due to the development of financial institutions in the digital era, everyone needs to know financial literacy to better understand how money works. Financial literacy sharpens the financial knowledge of an individual to make a financial decision, one of them will be investment decisions on the capital market. Households with basic and market financial literacy are more inclined to invest in risky financial assets and are much more willing to compare financial goods when making investment decisions. [22]. Therefore, for people that understand financial literacy well, the national economy will be stable and there will be no global financial crisis [23]

Investment Decision

Investment is a commitment to several funds or other resources made at the time, intending to obtain several benefits in the future. Investors are the people or institutions that make investments in financial instruments. The investor is divided into two, individual investors consist of an individual who invests independently while the second one named institutional investors consist of institutions or companies that invest in a financial instrument for the sake of the institution and not an individual. there are several reasons someone does an investment, including (i) To get decent life in the future; (ii) Improving the standard of living; (iii) Reducing inflationary pressures; (iv) Encouragement to save Taxes

When people make investments, they make an investment decision to perform their action toward financial instruments. The investment decision is a process of alternative seeking from available information [24].  Investors need to understand and predict possible outcomes and it needs planning and sufficient knowledge for the investors’ investment decision. But, the investors' decisions in choosing financial instruments are mostly subjective. People's decisions might depend on expected costs, knowledge of the stock, and their risk perception that differs based on individual subjectivity [25]. For example, a study [26]found that some factors like income, wealth, and education are correlated to investment decisions in risky assets. There is also a study that proves age, gender, and level of education play a significant role in investment decision-making[9,27]. In Indonesia, there is also a study that found an interesting impact of cognitive aspect on obtaining accounting information to the share price in the stock market [28]. Therefore, from the previous studies, investors’ background and knowledge are factors that influence investment decisions. This should be tackled as the background, gender, age, and education may impact the irrationality of investors’ investment decision-making. 

For these reasons, as an investor, Investment decisions need to be as rational as possible to gain a return and avoid any possible loss. To make a rational investor, people need to make decisions based on financial literacy by considering relevant information. To make investment decisions, some terms need to be understood for investors; Return: Change price of investment over time which may be spoken in terms of the rate change. A positive return means a profit or gain while a negative return indicates a loss for investors. Risk: Probability of actual return lower than expected return on the investment made by the investor. On investment, there is a high possibility that the higher the risk that an investor is willing to take, the higher the return will be. But, in reality, the investment decisions will not go fully rational in the market. Investors sometimes make irrational decisions that are affected by their behavior in the market.  

Overconfidence Bias

Overconfidence is a type of bias that happens because there are differences between a person’s belief about their competence in comparison with the actual knowledge that person has [29]. In the Stock market,[30] said overconfidence is described as an investor's tendency to overestimate the accuracy of their information in relation to the stock's worth. [3] also said that overconfidence bias means when investors are extremely intensifying their predictions while investing. Overconfidence might distract how rational investors will act. Even if an investor has good financial literacy, overconfidence might exist as investors might get distracted and make poor investment decisions. Overconfidence has a negative influence on portfolio wealth.  Overconfidence can be measured as overestimation when people think they make better judgments than others. Therefore, overconfidence bias increased with the investor’s investments experience [31]. In addition, the research also stated that the higher the market returns, the higher the chance for an investor to trade more frequently as a result of overconfidence bias. [32] pointed out that overconfident investors rely on their information and do not assess the diversity of their portfolios.

Availability Bias

[33] said that Availability bias is assessing the probability of an event that will occur in the future based on previous situations. The availability bias occurs when an individual act on current, easily acquired information [34]. People with availability bias have a significant tendency to focus their attention on a specific truth rather than the whole picture, simply because one reality is more obvious or easily retained in their memory [35] 

Availability bias has a significant effect on investment decisions [36] and this condition occurs when an investor relies on information rather than other procedures [37,38] also stated that people tend to rely on their past information or experience to determine their future. Investors’ decisions tend to be influenced by the incident and implement it for their investment decision. For example, if an investor had experienced a loss in one stock, he/she will try to avoid investing in the same stock for future conditions. Investors also prefer to invest in stocks when they have information or knowledge about the stocks [39].Availability bias is influenced by the frequency of past information or infrequent occurrences that can be memorable for investors and implemented for future occurrences. [35] explored how the availability bias leads investors to focus on a stock that has already been owned multiple times.

Familiarity Bias

Familiarity bias is a bias that individuals choose to be more comfortable choosing products that they know or are familiar with rather than choosing products that they aren't familiar with. According to [40], Familiarity bias is a condition when people prefer the familiar, detest ambiguity, and seek strategies to avoid the unexpected is known as familiarity bias. The bias of stock diversification is due to recognition and familiarity. Irrational investors may make an investment decision of a stock that they are familiar with from their knowledge, environment, or other condition. For example, employees in a certain company often invest in the company that they are working in as they believe they are ‘familiar’ with the company as they believe they have informational advantages in the company [41,19] also stated that despite the well-documented knowledge received through foreign diversification, investors buy a disproportionate number of assets from their home country. However, this perspective does not mean mitigating the risk associated with low diversification [40]

Some research has been conducted regarding the impact of familiarity bias on investors’ behavior on the disposition effect laws. Previous research has shown that familiarity affects the fund managers to foreign firms rather than their own country [42]. A recent study also shows that in America, average funds outweigh stock from managers' home estate even if they have almost no information about them .Unfortunately, in Indonesia, there is less information regarding the relevance of familiarity bias of investors that prefers to choose stocks based on their familiarity. 

Illusion of Control

The concept of illusion of control is better understood generally by ‘Gamblers Fallacy. Gamblers Fallacy can be described when someone flips a coin five times and gets five heads in a row, people will assume that the next outcome will be tail. From the concept, Illusion of control states that an individual believes that they have control over a condition while they do not [43]. In addition, [44] stated that Illusion of control is defined as a circumstance in which a human believes that he or she can overcome and influence the outcomes of an unpleasant event. [6] also add that illusion control is a belief that is too strong to anticipate a result yet is not true in reality. 

Research [45] stated that investors make investment decisions based on their experience and preference to control the uncertainty in the future and overestimate their capability.  Hence, the performance of traders in financial instruments has been linked with the illusion of control bias which stated the impact of the illusion of control on financial instruments. Therefore, people who have the illusion of control are the one who takes more risk as risk-taker rather than people who are not. As the consequence, studies reveal that investors who were affected by the illusion of control performed much worse in analysis, risk management, and trading profits, resulting in a fall in their earning level. Illusion of control is usually connected with other biases.  A Study reveals that illusion of control has significantly affected the herding behavior of a person [46]. Other studies to see the connection between illusion of control and the stock market explained in the table

Bandwagon Effect

Environmental factors affect how investors react to make decisions.  The bandwagon effect is a psychological condition that people will do something because other people are doing the same even if other people have other beliefs and behaviors with that individual. In the stock market, this bias can be seen when a stock value is increasing and people discuss it more than it should be, an investor will buy the stock. [47,48] stated that bandwagon is a phenomenon where someone tends to choose sensitive things based on other people's choices and reacts and believes that if many people said it right, and it is right for an individual to do it. According to [49], the bandwagon effect may develop potential investors to pay attention both to their information and also about whether other investors are purchasing the stocks in the IPO or not. Therefore, based on the research conducted by Welch, the Bandwagon effect has influenced investors to go irrational even if they have information on them. Conflicting information between an investor and their surroundings might change the investment decision even if the information gathered by the investor is rational. 

The results of previous research from journal papers are shown below:

The research steps start from problem identification which is important to formulate the aim of the research. After the problem identification, the researcher does a literature study that contains references of theory and supporting data about the research object and the connection to the research question which will be used to determine the variable for the research. The primary objective of the literature review is to provide a clear explanation of the study's theories and terminology, as well as to assess the findings of previous relevant studies to support the research. Literature review from previous studies collected from relevant journals and research papers. Then, the literature will be used to get the research findings and draw conclusions to the researcher’s study.

From the literature review that has been done based on previous research, the researcher concluded that financial literacy and behavioral bias contain overconfidence bias, availability bias, familiarity bias, illusion of control, and bandwagon effect significantly related to Generation Z’s stock investment decision. Therefore, the researcher proposed the conceptual framework to describe the relationship between financial literacy and behavioral bias on Generation Z stock investment decisions.

Figure 2  Conceptual Framework

Source: Author’s Analysis

Based on the data that has been collected from the previous research, financial literacy, overconfidence bias, availability bias, familiarity bias, illusion of control, and bandwagon effect has a significant impact on Generation Z’s stock market investment decision. 

From the conceptual framework, the research will put a quantitative analysis to find the relationship of behavioral bias and financial literacy to Generation Z’s stock market investment decision. The study’s findings can be used to understand the tendencies of factors behind Generation Z’s investment decision and benefit to Generation Z in Indonesia as well as Indonesia’s government and IDX (Indonesia Stock Exchange).

The authors declare that they have no conflict of interest

No funding sources

The study was approved by the  Bandung Institute of Technology, Indonesia

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