Irrational factors in decision-making to choose the sharia stock

Abstract

The increasing popularity of Islamic finance has led to a growing demand for Shariacompliant investment products, including Sharia stocks. Investors who adhere to Islamic principles often seek to direct their funds towards investments aligned with their religious and ethical values. However, the decision-making process in choosing Sharia stocks may not always be rational, as various psychological and behavioural factors can influence it. Behavioural finance research has identified several irrational elements that can impact an individual's investment decisions, such as overconfidence and herding behaviour, as well as religiosity and financial literacy factors. In Sharia-compliant investments, these irrational factors may play a significant role in an investor's choice to allocate funds to Sharia stocks, potentially leading to suboptimal decisions that deviate from rational financial considerations. Thus, this thesis aims to examine the influence of overconfidence and herding behaviour combined with religiosity and Sharia stock financial literacy on the decision-making process of investors when selecting Sharia-compliant stocks. All the variables in the model proceed with the Partial Least Square - Structural Equation Modelling (PLS-SEM) method. Using primary data from 290 respondents who are Sharia stock investors in Indonesia, this study found that religiosity, Sharia stock financial literacy, and overconfidence significantly impact decision-making to invest in Sharia stock. However, religiosity did not affect Sharia stock financial literacy substantially, and Sharia stock financial literacy was insignificant in mediating between religiosity and the decision to invest in Sharia stock. The results of this study show that Sharia stocks as Sharia-based investing instruments cannot separated from the ideological irrational aspects. Investors with a high sense of religiousity, literacy, and confidence in the Sharia value of a stock are the crucial factors in convincing them to choose a Sharia-based investing instrument.