Investment Decision Making Process for Institutional Investors in The Stock Market Influenced by Overconfidence Bias

Abstract

Many anomalies had been revealed and tested since the invention of Efficient Market Hypothesis theory by Eugene Fama in 1970. This theory is the main pillar of neoclassical finance that does not recognize the noise trader in the stock market. The EMH hypothesize that all available information in the market reflects the financial asset prices because market participants are rational processors of information. However, based on the empirical evidence found, this theory cannot give adequate information of such irrational behaviour that happen in the market which construct anomaly that one of the anomaly is overconfidence bias. This anomaly has been widely documented in psychology and has become a central feature in economics and behavioural finance, and it showed that overconfidence have strong impact on investment decision. This overconfident bias has serious impact on markets by affecting pricing form and trading volume in the stock markets. A structured literature review has been carried out that examine published research, evaluates contributions, and summarizes the characteristics of overconfidence bias, institutional investor, methods to recognize overconfidence bias and strategies for investment decision making. Based on the situation in the stock market and evidence found, this thesis contributes in providing new investment decision making process by examined the occurrence of anomalies in the stock market, and after that choose the best strategy which can maximize the return for institutional investor and increase the efficiency in the stock market.