Mitigating Investor Overconfidence: Insights from Behavioral Finance with Reference to the Colombo Stock Exchange

The behavioral finance literature shows that investors are inclined to behavioral biases in their investment decisions. As one of such behavioral biases, overconfidence bias has been a widely studied phenomenon in the literature, revealing its adverse consequences on investment decision making and efficient functioning of financial markets. However, the literature still does not sufficiently explain on how investors can mitigate it when making their investment decisions. Hence, based on the evolutionary perspective predicted by the Adaptive Market Hypothesis Theory, this study attempts to explore on what cognitive, affective, social and behavioral mechanisms mitigate individual investors’ overconfidence judgments in their stock investment decisions. A sample of individual investors of the Colombo Stock Exchange was surveyed through a self-administrated questionnaire to collect data, the analysis of which was conducted using the PLS-SEM. The results suggest that the investors learn about their overconfidence bias through the self-reflection on their past investment experiences. However, the extent of the self-reflection tends be low since it is not strengthened through investors’ desire for learning and their relationships with investment advisors and other investors, which could be attributed to the market uncertainties existed during period of the study. The findings of the study contribute to theory and practice in the context of individual investors’ decision-making.