The Influence of Risk Perception, Risk Tolerance, and Loss Aversion on Investment Decision

Abstract

Purpose: Small and Medium Enterprises (SMEs) in Indonesia are facing increasingly intense competition in today’s dynamic industrial environment. Many of them encounter various challenges, including business failure, and often lack attention to maintaining financial stability to ensure their business operates efficiently and sustainably. SME owners prioritize financial profits and daily operational costs over other essential areas, such as risk management, long term planning, and innovative strategies to address changing market conditions. Business owners who focus solely on profits and operational expenses frequently overlook other aspects, such as investment opportunities that could enhance their competitiveness. This study seeks to examine how risk perception, risk tolerance, and loss aversion influence investment decision making. Methodology/Approach: This research uses a quantitative methodology, analyzing data collected from a sample of 214 respondents selected through the convenience sampling method. This method involved distributing a questionnaire with questions to owners of food and beverage SMEs. The data obtained was then analyzed using multiple linear regression. Results/Findings: The study reveals that risk perception does not significantly influence investment decision making, while risk tolerance has a strong positive impact, and loss aversion shows no effect. Limitations: This research is conducted with data reflecting current market and economic conditions. Investment decisions are highly influenced by the ever changing market situation, so unexpected events such as economic crises or major innovations in finance could cause significant shifts in investor behavior. These shifts could drastically affect investment decisions, especially in the short term, which means the findings of this study may not fully reflect investor responses in different future market conditions. Contribution: This study provides active investor engagement by making informed investment decisions, potentially enhancing investment performance, particularly amidst uncertain market dynamics. Novelty: The novelty of this research lies in its specific focus on the food and beverage SME sector. Most previous studies are either more general or focus on other sectors, so this focus provides new more specific insights.