Is risk aversion an obstacle for Indonesian beginner investor? / Andi Fauziah, Budi Purwanto and Wita Juwita Ermawati

Beginner investors with high financial literacy, have not completely dared to invest with indications of psychological barriers in accordance with prospect theory. This paper investigates whether the prospect theory exists in the decision making of individual investor investment decision using the value function of cumulative prospect theory proposed by Tversky and Kahneman (1992). Firstly, the ward method is used to separate capital market actors with the tendencies of investor and traders, assuming that the investor is more unaffected to the daily closing price changes. The next analysis is only focusing on tend to be trader's type respondents. Each trader's decision is grouping on a binary scale with decision wether to sell or hold the stock. After that, binary logistics regression is used to mapping the probabilities of each trader's decision on 2 types of return (net assets return and buying price base return). The probabilities from logistics regression then multiplied by the return resulting a return value that is subsequently used in nonlinear regression. The results from the buying price base return prove the hypothetical value function of prospect theory. Traders from Indonesia Stock Exchange Investment Gallery show a convex curve on a gain condition and a concave curve on the loss condition. In the gain condition, someone will behave as a risk-averse, while in the loss condition as a risk seeker. This research contributed to the development of quantitative methods in testing the prospects theory on stock transactions.