Cognitive Bias on Financial Decision-Making in MSMEs
Abstract
This study aims to analyze the effect of cognitive bias on the Financial Decision Making of MSME actors in Bandung City. The research method used is descriptive verification with quantitative approach. Data were collected through questionnaires distributed to 385 MSME actors in Bandung City. The variables being studied for independent variables are overconfidence bias, confirmation bias, herding bias, anchoring bias, hindsight bias, the illusion of control bias, loss aversion bias, endowment bias, regret aversion bias, and status quo bias, while for the dependent variable is Financial Decision Making. Regression results show that overconfidence bias and loss aversion bias positively affect financial decision-making, while the illusion of control bias has a negative effect. Other cognitive bias variables do not affect Financial Decision Making. Cognitive biases that cause suboptimal financial decisions can hinder the productivity of MSMEs, this can affect the contribution of the MSME sector to the National Gross Domestic Product.
References
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Malmendier, U., & Taylor, T. (2015). On the Verges of Overconfidence. Journal of Economic Perspectives. https://doi.org/10.1257/JEP.29.4.3
Moore, D. A., & Schatz, D. (2017). The three faces of overconfidence. Social and Personality Psychology Compass, 11(8), 1-12.
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Northcraft, G. B., & Neale, M. A. (2017). Anchoring bias in strategic decision-making: Role of experience and expertise. Organizational Behavior and Human Decision Processes, 142(1), 55-67.
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Samuelson, W., & Zeckhauser, R. (2020). Status quo bias in multi-alternative decision making: Implications for business strategy. Strategic Management Journal, 41(5), 959-978.
Smoliński, P. R., & Brycz, H. (2024). Individual differences in inaccurate versus accurate economic judgment and decision making. Metacognitive approach. Personality and Individual Differences. https://doi.org/10.1016/j.paid.2023.112500
Sumiyana, S., Na'im, A., Nugroho, A. H. L., & Kurniawan, F. D. (2023). Multiple measurements of CEOs' overconfidence and future earnings management: evidence from Asia-Pacific developing countries. Humanities & Social Sciences Communications. https://doi.org/10.1057/s41599-023-02279-5
Suyanto, S., & Wibowo, A. (2021). The Influence of Confirmation Bias on Investment Decision Making: The Case of Individual Investors in Indonesia. Jurnal Akuntansi dan Keuangan Indonesia, 18(2), 127-141.
Tambunan, T. (2020). MSMEs in Indonesia: Important Issues on Its Role, Growth, and Development. Journal of Economics and Business, 23(2), 167-182.
Thaler, R. H. (2016). Behavioral economics: Past, present, and future. American Economic Review, 106(7), 1577-1600.
Tjandrasa, B. B., & Tjandraningtyas, J. M. (2018). The Effects of Personality Types and Demographic Factors on Overconfidence Bias and Decision Making of Investment Types. International Journal of Biological Sciences. https://doi.org/10.9744/IJBS.1.2.57-62
Tomal, M. (2024). The Endowment Effect and Housing Studies: The Role of Multiple Reference Points. Critical Housing Analysis. https://doi.org/10.13060/23362839.2024.11.2.576
Tversky, A., & Kahneman, D. (2018). Prospect theory and financial decision making: A retrospective evaluation. Annual Review of Finance and Economics, 10(1), 345-367.
Acedo, F. J., & Muñoz, J. M. (2004). Cultural influences on cognitive biases: The case of anchoring bias. International Journal of Psychology, 39(3), 213-219.
ADB. (2020). Tackling the COVID-19 economic crisis in Asia and the Pacific. Asian Development Bank.
Ahmad, M., Shah, S. Z. A., & Abbass, Y. (2021). The role of heuristic-driven biases in entrepreneurial strategic decision-making: evidence from an emerging economy. Management Decision. https://doi.org/10.1108/MD-09-2019-1231
Audretsch, D. B., & Thurik, A. R. (2001). What is new about the new economy?: Sources of growth in the managed and entrepreneurial economies. Industrial and Corporate Change, 10(1), 267-315.
Baddeley, M. (2020). Information cascades and herding in financial markets: Evidence from a new retail investor survey. Journal of Economic Psychology, 81(4), 102297.
Bank Indonesia. (2022). Laporan Survei Nasional Literasi dan Inklusi Keuangan 2022. Bank Indonesia.
Baron, J. (2008). Thinking and deciding (4th ed.). Cambridge University Press.
Bell, D. E. (2017). Utility, regret, and decision theory: Recent developments and applications in finance. European Journal of Operational Research, 256(1), 1-11.
Benoit, J. P., & Dubra, J. (2023). Apparent overconfidence: Replication and extensions. Journal of Economic Behavior & Organization, 212(C), 316-335.
Benscheidt, K., & Carpenter, J. P. (2020). Advanced Counter-Biasing. Journal of Economic Behavior and Organization. https://doi.org/10.1016/J.JEBO.2020.05.019
Bikhchandani, S., & Sharma, S. (2023). Herd behavior in financial markets: A review and synthesis. Review of Financial Studies, 36(8), 3564-3597.
BPS. (2024). Statistik UMKM Indonesia 2024. Badan Pusat Statistik.
Costa, D. F., Carvalho, F. de M., Moreira, B. C. de M., & Prado, J. W. do. (2017). Bibliometric analysis on the association between behavioral finance and decision making with cognitive biases such as overconfidence, anchoring effect and confirmation bias. Scientometrics. https://doi.org/10.1007/S11192-017-2371-5
Cueva, C., & Rustichini, A. (2015). Is financial instability male-driven? Gender and cognitive skills in experimental asset markets. Journal of Economic Behavior and Organization. https://doi.org/10.1016/J.JEBO.2015.08.014
Devenow, A., & Welch, I. (2020). Rational herding in financial economics revisited: New evidence from asset allocation. Journal of Finance, 76(5), 2745-2783.
Dupont, D. Y., & Lee, G. (2002). The endowment effect, status quo bias and loss aversion: rational alternative explanation. Journal of Risk and Uncertainty. https://doi.org/10.1023/A:1016371414952
Engler, J.-O., Abson, D. J., & Wehrden, H. von. (2019). Navigating cognition biases in the search of sustainability. AMBIO: A Journal of the Human Environment. https://doi.org/10.1007/S13280-018-1100-5
Ericson, K. M. M., Ericson, K. M. M., Fuster, A., Fuster, A., & Fuster, A. (2014). The Endowment Effect. Annual Review of Economics. https://doi.org/10.1146/ANNUREV-ECONOMICS-080213-041320
Fischhoff, B. (2016). Debiasing decision makers: From hindsight bias to sustainable judgments. Judgment and Decision Making, 11(6), 547-562.
Forbes, W. (2015). Behavioral finance: The adaptive markets hypothesis. John Wiley & Sons.
Giraud, R. (2012). Money matters: an axiomatic theory of the endowment effect. Economic Theory. https://doi.org/10.1007/S00199-010-0552-Z
Groves, K. S., & Vance, C. M. (2024). Avoiding critical entrepreneurial cognitive errors through linear/nonlinear thinking style balance. Journal of Small Business Management. https://doi.org/10.1080/00472778.2024.2363837
Hiller, N. J., & Hambrick, D. C. (2017). Self-evaluation, external evaluation, and entrepreneurial overconfidence: An analysis of venture capitalists' investment decisions. Journal of Management Studies, 54(8), 1288-1315.
Hirschey, M., & Nofsinger, J. R. (2021). Investment analysis and behavior (3rd ed.). McGraw-Hill.
Kahneman, D. (2021). Thinking, fast and slow (2nd ed.). Farrar, Straus and Giroux.
Kiarie, F. K., & Kinyua, G. (2021). Cognitive biases and financial management decisions among small and medium enterprises in Kenya: A systematic review. International Journal of Business Management, Entrepreneurship and Innovation, 3(3), 75-88.
Li, M., Petruzzi, N. C., & Zhang, J. (2017). Overconfident Competing Newsvendors. Management Science. https://doi.org/10.1287/MNSC.2016.2469
Loomes, G., & Sugden, R. (2018). Regret theory and measurable utility: Recent developments and applications. Journal of Economic Surveys, 32(4), 1003-1027.
Malmendier, U., & Taylor, T. (2015). On the Verges of Overconfidence. Journal of Economic Perspectives. https://doi.org/10.1257/JEP.29.4.3
Moore, D. A., & Schatz, D. (2017). The three faces of overconfidence. Social and Personality Psychology Compass, 11(8), 1-12.
Nga, J. K. H., & Yien, L. K. (2013). The influence of personality trait and demographics on financial decision making among Generation Y. Young Consumers: Insight and Ideas for Responsible Marketers. https://doi.org/10.1108/YC-11-2012-00325
Northcraft, G. B., & Neale, M. A. (2017). Anchoring bias in strategic decision-making: Role of experience and expertise. Organizational Behavior and Human Decision Processes, 142(1), 55-67.
O'Connor, G. E. (2019). Exploring the Interplay of Cognitive Style and Demographics in Consumers' Financial Knowledge. Journal of Consumer Affairs. https://doi.org/10.1111/JOCA.12195
OECD. (2016). Financing SMEs and entrepreneurs 2016: An OECD scoreboard. OECD Publishing.
Otoritas Jasa Keuangan. (2021). Survei Nasional Literasi dan Inklusi Keuangan 2021. OJK.
Pouget, S., Sauvagnat, J., & Villeneuve, S. (2017). A mind is a terrible thing to change: confirmatory bias in financial markets. Review of Financial Studies. https://doi.org/10.1093/RFS/HHW100
Raj, G. P. (2024). Biases and investment decision: an analysis of demographics using PLS-MGA. International Journal of Accounting and Information Management. https://doi.org/10.1108/ijaim-08-2024-0282
Samuelson, W., & Zeckhauser, R. (2020). Status quo bias in multi-alternative decision making: Implications for business strategy. Strategic Management Journal, 41(5), 959-978.
Smoliński, P. R., & Brycz, H. (2024). Individual differences in inaccurate versus accurate economic judgment and decision making. Metacognitive approach. Personality and Individual Differences. https://doi.org/10.1016/j.paid.2023.112500
Sumiyana, S., Na'im, A., Nugroho, A. H. L., & Kurniawan, F. D. (2023). Multiple measurements of CEOs' overconfidence and future earnings management: evidence from Asia-Pacific developing countries. Humanities & Social Sciences Communications. https://doi.org/10.1057/s41599-023-02279-5
Suyanto, S., & Wibowo, A. (2021). The Influence of Confirmation Bias on Investment Decision Making: The Case of Individual Investors in Indonesia. Jurnal Akuntansi dan Keuangan Indonesia, 18(2), 127-141.
Tambunan, T. (2020). MSMEs in Indonesia: Important Issues on Its Role, Growth, and Development. Journal of Economics and Business, 23(2), 167-182.
Thaler, R. H. (2016). Behavioral economics: Past, present, and future. American Economic Review, 106(7), 1577-1600.
Tjandrasa, B. B., & Tjandraningtyas, J. M. (2018). The Effects of Personality Types and Demographic Factors on Overconfidence Bias and Decision Making of Investment Types. International Journal of Biological Sciences. https://doi.org/10.9744/IJBS.1.2.57-62
Tomal, M. (2024). The Endowment Effect and Housing Studies: The Role of Multiple Reference Points. Critical Housing Analysis. https://doi.org/10.13060/23362839.2024.11.2.576
Tversky, A., & Kahneman, D. (2018). Prospect theory and financial decision making: A retrospective evaluation. Annual Review of Finance and Economics, 10(1), 345-367.
Published
2025-05-23
How to Cite
PURNAMASARI, Imas et al.
Cognitive Bias on Financial Decision-Making in MSMEs.
Eko-Regional: Jurnal Pembangunan Ekonomi Wilayah, [S.l.], v. 20, n. 1, p. 95-109, may 2025.
ISSN 2620-8849.
Available at: <https://jos.unsoed.ac.id/index.php/er/article/view/14805>. Date accessed: 02 june 2025.
doi: https://doi.org/10.32424/er.v20i1.14805.
Section
Articles
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