The Determinants of Investment Decision and Impact of Risk Tolerance

Abstract

This study aims to analyse the influence of financial literacy, investment experience, and herding behaviour on investment decisions among the people of Lhokseumawe City, while also examining the mediating role of risk tolerance. Despite the rapid rise of investors in Aceh, particularly among the younger population aged 20–40, financial literacy levels remain relatively low, with only 49.87% of the population considered financially literate (OJK, 2022). This mismatch between high enthusiasm and limited knowledge presents a problem that motivates this study. A quantitative approach was applied using Structural Equation Modeling (SEM) with SmartPLS as the analytical tool. The sample consisted of 100 respondents engaged in investment activities. The results indicates that investment experience and herding behavior have a positive and significant effect on investment decisions, while financial literacy does not have a significant effect. Furthermore, risk tolerance has a positive effect on investment decisions and serves as a mediating variable between investment experience and investment decisions. However, risk tolerance does not mediate the relationship between financial literacy or herding behavior and investment decisions. This research contributes to a deeper understanding of the psychological and financial knowledge factors in investment decision-making and highlights the crucial role of risk tolerance in strengthening these relationships.

Keywords: Financial literacy: investment experience; herding: risk tolerance: investment decisions