The Effect of Behavioral Finance on Stock Investment Decisions

Since the 1960s, the topic of risk perception was employed to explain investors' behaviors. In effect, within the framework of investor behavior, risk perception is the risk an investor believes exists in the stocks trading, whether or not a risk actually exists. The concept of risk perception has a strong foundation in the area of investor behavior that is rather analogous to the discipline of behavioral finance.

Perception is the process by which an individual is in search of preeminent clarification of sensory information so that investor can make a final judgment based on their level of expertise and past experience.

Risk perception is the subjective decision-making process that individuals employ concerning the assessment of risk and the degree of uncertainty.

The notion of risk perception is best utilized with an approach that is interdisciplinary and multidimensional in nature for a given decision, situation, activity, or event as pointed out in Ricciardi. When an individual makes judgments relating to a financial instrument, the process incorporates the collection of financial risk measurements and behavioral risk indicators.

Researchers defined risk perception as a belief held by an individual, group, or society about the chance of occurrence of a risk or about the extent, magnitude, and timing of its effect(s), and as a behavioral study researcher defines it is the way people "see" or "feel" toward a potential danger or hazard.

Risk perception is a communication source which can prepare investors to obtain risk according to their understanding. So we dare say that the concept of risk perception attempts to explain the evaluation of a risky situation (event) on the basis of instinctive and complex decision-making, personal knowledge, and acquired information from the outside environment.

Researchers used the following indicators to measure risk perception:

1. Fears to invest in stocks that don't have a certain gain.
2. Vigilant about stocks which show sudden changes in price or trading activity.
3. Worries of investing in stocks that had a past negative performance in trading.
4. Feelings about participating in a buy/sell at the stock market.
5. Investment knowledge, experiences, and education.