E3S Web of Conferences 426, 01047 (2023) https://doi.org/10.

1051/e3sconf/202342601047
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The Effect of Financial Literacy, Investment Decision, and

Overconfidence on Mental Accounting in The Term of Investing
in Cryptocurrency
Alexander Suriadi1, Andreas Dongan Wibawa1, and Setiani Putri Hendratno1*
1
Accounting Department, School of Accounting, Bina Nusantara University, Jakarta, Indonesia 11480

Abstract. Investment is a financial activity known by many people. With the advance of technology, people
can now invest in digital currency. The purpose of this study is we would like to know the factors affecting
mental accounting. Whether financial literacy, investment decision, and overconfidence affect mental
accounting regarding investment activities in cryptocurrency. To do this, we use a quantitative method with
six-point Likert scale questionnaires as a measurement to collect samples. The questionnaires are shared
with individuals from different regions that have or do not have an experience in investing activities. In
addition, the demographic is further categorized into age, gender, and education level. We got 279 samples,
mainly from Southeast Asia and a few from East Asia, Europe, and North America. The data will be
processed using SEM-PLS software to conduct the result. The finding implies that investing in
cryptocurrency is strongly affected by the investor’s behaviour, such as mental accounting. Overconfidence
is a significant factor contributing to investors’ mental accounting and investment decisions, while financial
literacy is only associated with decision-making and not related to mental accounting.

1 Introduction digital currencies such as Bitcoin, Ethereum, and Litecoin

are the most known within cryptocurrency. However,
Investment is an activity to commit resources to achieve even as an exchange method on computer networks,
later benefits, which is common in a financial activity. In cryptocurrency is not controlled by any government
recent years, COVID-19 broke out, resulting in significant authority or banks. Therefore, without any safety
changes in many sectors, and which financial sector also organization or legal laws overseeing these coins other
got affected by it. Fortunately, technology has developed than the system itself, we can say that it is one of these
drastically, as we can see in this current period. Many digital currencies risks. The transactions on the crypto
individuals are doing their activities from home using the market are visible to the public, but the person's identity
internet, thus increasing the use of the internet to do remains anonymous. It can be a part of fraud or hacks.
investing activities, and people also start trying Another risk that often occurs in cryptocurrency is
cryptocurrency investments. The virus outbreak also liquidity. The crypto market is always open 24/7, even on
caused most financial markets to change drastically, holidays and weekends. Hence it is impossible to monitor
ranging from 10% to 0% in one day [1,2]. The the growth every time. This makes the currency easy to
cryptocurrency market was already really liquid, with the increase or decrease drastically or, in other words, very
fall of the financial market making it much riskier to liquid. Many people argue that stock is risky, but
invest in it. Even with the high risk of cryptocurrency, cryptocurrency is the riskiest investment distinct from
people still tend to invest in it. stock now because it is not tangible. But it is not the real
Cryptocurrency is a digital currency created using problem because cryptocurrency tends to be volatile with
encryption algorithms. After the accelerating unexpected occasions. Significant incidents may affect
technological innovation started, many aspects changed the price of currencies, not their liquidity. Al-Yahyaee,
drastically, especially when the Internet of Things (IoT) Mensi, Ko, Yoon & Kang [3] stated that market
and blockchain were introduced. This blockchain later efficiency is still high even with high liquidity but low
functions as the base of cryptocurrency. As usual, how volatility. If both liquidity and volatility are high, then the
currencies work, this digital currency known as market becomes inefficient.
cryptocurrency can be used as an alternative form of With all the high risks in making a cryptocurrency
payment with a peer-to-peer exchange system. Many investment, it is usual for an individual with excellent

*
Corresponding authors: [email protected]

© The Authors, published by EDP Sciences. This is an open access article distributed under the terms of the Creative Commons Attribution License 4.0
(https://creativecommons.org/licenses/by/4.0/).
E3S Web of Conferences 426, 01047 (2023) https://doi.org/10.1051/e3sconf/202342601047
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financial literacy or financial knowledge background to 2 Literature Review

do well in this activity. There are studies about financial
literacy, financial knowledge, and the financial outcome.
Fernandes, Lynch, and Netemeyer [4] did a study to 2.1.Behavioural finance Theory
explain the benefit of using financial literacy. They The study of investment activities is affected by many
assessed financial literacy and found that positive factors, and one of them is behavioural finance which is
financial behaviour is positively associated. They also connected to psychology and other types of investor
find that an individual with an intervention in their behaviour in handling information and taking action in
financial literacy and knowledge has minimal impact on many financial situations [10].
their financial behaviour. These findings cause a conflict It is stated by Barber & Odean [13] that behavioural
regarding the study. A study conducted by Bernheim, finance is a factor that will lead an investor to make a
Beret & Maki [5] found that individual who has an financial decision such as for investment. Regarding
excellent financial education since high school has good investment decisions, behavioral finance is highly
financial literacy and higher subsequent saving rate, while correlated with mental accounting, and overconfidence
Mandell [6] finds mixed result and also suggest that a usually results in decision-making later on.
good financial education since high school does not Mental accounting can be described as a process of
associate with financial literacy but they do find that it is categorizing and evaluating money to see the economic
related to financial behaviour of an individual. outcome [14]. With the uncertainty and the high risk of
Investing in a stock market is already risky, but cryptocurrency, an individual's cognition is highly
investing in cryptocurrency is a lot riskier, hence affected by emotion, resulting in irrational, partially
investing in cryptocurrency. Mushinada & Veluri [7] rational decisions [12].
stated that investors needed rational decision-making to This Study assumes that an individual’s mental
achieve the most valuable outcome. Not only that, another accounting is affected by psychological factors such as
study by Kahneman & Tversky[8] said that under overconfidence and knowledge factors such as financial
uncertainty, an individual's behavioural aspect would literacy.
affect their judgment in the related activity. Furthermore,
a recent study by Rahman [9] documented the correlation
of behavioural factors with the risk from the activity. In 2.2.Financial Literacy
the behavioural factor, overconfidence is one factor that
will have the most effect on investor decision-making In many financial activities, it can be concluded that
rationality because investors tend to overestimate their financial literacy will lead people to better financial
ability and underestimate the risk of investing in behaviour [15]. Financial literacy can be defined as an
cryptocurrency. An investor must look at the factor that individual’s ability to understand how to manage their
can help make a rational decision. financial activities, Remund [16] defines financial literacy
With investing in cryptocurrency, behavioural finance as a measuring degree of an individual understanding of
will play a significant role because it will be used to take the key financial concept and ability to manage financial
action while playing with investment activities [10]. activities through a short-term decision making and long-
Financial behaviour will help an individual to enhance the term planning on economic conditions.
ability to regulate daily planning, budgeting, checking, Mandell [17] stated that financial knowledge is
managing, and storing funds. In previous research that had essential to make a financial decision such as investing. It
been done, psychology had been a factor that affected is known that an individual with good financial literacy is
investors in doing their activity [11] and one of them is more likely to participate in the stock market, and
mental accounting. Mental accounting has a significant someone that has a low level of financial literacy,
role in making decisions for investment activities. Still, it especially less knowledge about stocks and bonds, will
usually causes the investor to make an irrational decision participate less often in stock market activities [18].
and can make an individual behave counterproductively Previous research has provided evidence that financial
[12]. literacy has a significant role in making decisions. It is
Therefore, the primary purpose of this study is to find known that it has a significant effect on making judgments
if there is an effect on people’s mental accounting about investment-related decisions [19]. In making an
regarding their investment activities in cryptocurrency. It investment-related decision, it is usually associated with
is dire to know what will affect an investor's mental mental accounting. Baker, Kumar, Goyal & Gaur [20]
accounting. Hence, it is possible to make a rational stated that mental accounting biases are associated with
decision regarding the risk of investing surrounding financial literacy. Still, other research from Takeda,
cryptocurrency during a financial crisis time. For the Takemura & Kozu [21] said otherwise because the
study, it can raise several questions: increase in financial literacy does not appear to be
1. Does financial literacy affect mental accounting? associated with mental accounting biases.
2. Does investment decision affect mental accounting? In terms of investing in cryptocurrencies, Zhao &
3. Does overconfidence affect mental accounting? Zhang [22] stated that financial literacy was found to be
associated with investing in cryptocurrency, although it is
not statistically significant. It is also stated that investment
experience significantly impacts investing in

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cryptocurrency [23]. But in the end, Zhao & Zhang [22] Meanwhile, higher financial literacy affects
also stated that even though investment experience is a investment decisions, leading to overconfidence [28]. For
greater factor for investing in cryptocurrency, a high rate female investors, the effect of high financial literacy on
of financial literacy will help to enhance the experience overconfidence bias is more likely to emerge rather than
that individuals have. male-related investment decisions [29]. This
Regarding the topic, it can be said that financial overconfidence later may affect mental accounting caused
literacy affects investment activities. It also raises by loss when people are too confident in investment
questions regarding the literacy could also have affected decisions.
an individual’s mental accounting during investment
H3. Overconfidence has an effect on an individual's
activities, so it raises a hypothesis:
mental accounting in regard to investing in
H1. Financial literacy has an effect on an individual's cryptocurrency.
mental accounting in regard to investing in
cryptocurrency.
3 Methodology
2.3.Investment Decision
This study uses questionnaires to collect data about
Investment is an activity to get profit in the future by mental accounting. The questionnaire has four sections:
putting some funds into certain businesses in the capital the demographic section and three other sections for the
market. In general, people make investments to gain more variable items. For the questionnaire items, we used
wealth. However, investment needs enough knowledge multiple paper sources as references.
and skill to reach their financial goals. Intuition about
business would also be necessary to determine which
stock to buy or sell. Bodie, Kane & Marcus [24] in Santi, Table 1. Summary of Variables and Total Number of Items
Sahara, & Kamaludin [25] stated that there are two Variable Number of Sources
important aspects in investment which are return and risk. Items
These aspects will mainly affect investment decisions and Financial Zhao & Zhang
mental accounting. Investment decisions can affect Literacy 6 items [22], Krische
mental accounting depending on the purpose and income. [19], Tae Kim,
There are dimensions in investment decisions, such as Anderson &
what, where, when, how much, or how long the investor Seay [30]
is willing to invest. The aspects, especially the risks, will Investment Santi, Sahara &
affect the psychology of the investors in decision-making. Decision Kamaludin[25],
Because if the investors decide to use unspent money, 5 items Nareswari,
they will likely not overthink it if their investment fails. Balqista &
The investor's purpose also plays a role in whether they Negoro[31]
focus on the gains or losses. Usually, investors are more Overconfidence Naveed &
likely to become loss aversion if they run into loss in the 6 items Taib[32], Adil,
first place. On the other hand, if they have a gain first and Singh &
then a loss, it is less influential because the loss is covered Ansari[29]
by the previous gain [26]. Mental Olsen, Kasper,
Accounting Kogler,
H2. Investment Decision has an effect on an individual's 5 items Muehlbacher &
mental accounting in regard to investing in Kirchler[33],
cryptocurrency. Muehlbacher &
Kirchler[34]
2.4.Overconfidence
In the questionnaire, each section will use a 6-point
Overconfidence is a subjective view or assumption of Likert scale to gather the respondent's answers. The point
people being confident in their ability rather than actual of using a 6-point Likert scale is to avoid a biased
performance. In terms of investing, it can occur when respondent response or an answer that the respondent does
people feel too confident with their financial judgment not want to answer willingly to the question the researcher
when estimating the risks [27]. Overconfidence has a has asked [35]. The 6-point Likert scale will be 1 =
significant effect on investment decisions. For example, strongly disagree, 2 = Disagree, 3 = Somewhat disagree,
the easiest way to see overconfidence bias is from gender 4 = Somewhat Agree, 5 = Agree, 6 = Strongly Agree.
differences. Barber & Odeans [27] stated that Male The questionnaire's target respondents are individuals
investors tend to be more overconfident compared to still studying in high school and above, and it is open to
female related to investments. Male investors believe they individuals who never did an investing activity. The
are more competent with their financial knowledge and questionnaire will not be focused on one specific region.
skills than female investors. This competence is It is an open questionnaire for regions, e.g. as, South East
considered masculine because man is more dominant in Asia, East Asia, Europe, and North America.
financial matters.

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From the questionnaire that was given using a Google Worker 145 51.9
form, the total respondent collected was 279. This study Self-employed 16 5.7
used the Structural Equation Model-Partial Least Square Entrepreneur 18 6.5
(SEM-PLS) to measure the variable. This analysis method Unemployed 13 4.7
uses validity and reliability tests to measure the
consistency and accuracy of variables. Have Yes 248 88.9
Investing No 31 11.1
Knowledge
4 Results
Investing Less than 2 172 61.7
This study uses SmartPLS version 3.2.9, a structural Experience years
equation model or SEM software that aims to test 2 or 2 - 5 years 81 29.0
more relations between variables that are usually difficult 5 - 10 years 14 5.0
Over 10 years 12 4.3
to measure using a technique such as combining factor
analysis and regression analysis to show the result
between those variables [36].
4.2 Validity Test

4.1 Sample Demographic Figure 1 shows the estimated measurement model. The
data that had been collected from the questionnaire had
From the shared questionnaires, we managed to get 279 been imported and examined with SmartPLS software. As
respondents. The respondents are mostly from Asia, it is presented in Image I, there are 4 indicators which are
mainly Southeast (86.4 percent) and East, with a few from X1 (financial literacy), X2 (investment decision), X3
Europe and North America. For age, the number of (overconfidence) & Y (mental accounting). The SEM
respondents mainly varies between under 26 (36.2 PLS application will indicate if the indicator is valid or
percent), 27 - 42 (23.7 percent), and 43 - 58 years old not by the number provided. If the indicator has a result
(33.3 percent). Meanwhile, gender is dominated by males <0.7, it means that it is not valid, and if the result is >0.7
(73.5 percent). Education is mostly filled with it means that it is valid. After importing the data, it can be
undergraduate (42.7 percent) or graduate students (40.5 seen that from the four indicators, there are two estimated
percent). Therefore, jobs are dominated by students (31.2 indicators that have a result below 0.7 which are FL 4 and
percent) and workers (51.9 percent). Most of the ID 4. Because these two indicators have a result below
respondents who filled out the questionnaire know about 0.7, it is not valid and therefore cannot be used. The two
doing investment activities (88.9 percent). Despite that, invalid indicators (FL4 & ID 4) will be removed and the
most of the respondent's experience in investment-related PLS Algorithm will be recalculated to make the valid
activities is less than two years (61.7 percent), followed estimation model.
by 2-5 years of experience (29.0 percent).

Table 2. Sample Demographic.

Profile Group Total Percentage

(%)

Region South East Asia 241 86.4

East Asia 27 9.7
Europe 4 1.4
North America 7 2.5

Age Below 26 101 36.2

27 - 42 66 23.7
43 - 58 93 33.3
59 - 77 12 4.3
Above 77 7 2.5

Gender Male 205 73.5

Female 74 26.5 Fig 1. Estimated Measurement Model

Education High School 23 8.2 Figure 2. Shows the valid estimated model after the
Undergraduate 119 42.7 recalculation of the PLS algorithm. In the image it can be
Graduate 113 40.5 seen that the two indicators (FL 4 & ID 4) had been
Post-graduate 15 5.4 removed resulting in every indicator that is now over 0.7
Doctorate 9 3.2 which has the meaning of the indicator are now valid to
be used. An indicator can be stated to meet the convergent
Jobs Student 87 31.2

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validity and have a high level of validity when the outer <0.7 is considered not reliable [38]. According to the
loading is >0.7 [37]. table, we can see that all variables have both methods of
the Reliability Test are high (>0.7). Therefore, the results
of the reliability test have met the criteria and all variables
are reliable.
Table 4. Construct Reability.

Variable Composite Cronbach’s

Reliability Alpha

FL (X1) 0.908 0.887

ID (X2) 0.927 0.902

OC (X3) 0.938 0.920

MAC (Y) 0.935 0.913

4.5 R square
Fig 2. Valid Estimated Model
R square is a value that shows how much an independent
4.3 Average Varia3nce Extracted (AVE) variable affects a dependent variable. The value in R
square ranges between 0 to 1, indicating the effect of a
From the recalculation of the valid estimated model, combination of the independent to dependent variables.
calculating Average Variance Extracted (AVE) is the next Chin [37] stated the value of R square is categorized into
step of convergent validity after outer loadings to ensure three categories, which are strong (>0.67), medium
no more invalid variables. The value of AVE that is (ranging between >0.33 and <0.67), and low (ranging
considered valid is >0.5 because if the AVE is greater than between >0.19 and <0.33). The argument is also
0,5, it means that the latent variable has the ability to supported by a recent study from Hair, Ringle, and
explain more than half of the indicators on average [38]. Sarstedt [39] with the three categories' limit slightly
If there is an AVE value <0.5 it indicates that the variable different, which is strong (0.75), medium (0.50), and low
is not valid and needs to check back the outer loadings. (0.25).
From Table 2 it can be concluded that all the indicator’s In this table, we use R square adjusted to prevent
AVEs are >0.5 so it can be concluded that there are no problems that usually happen on normal R square, whose
more invalid variables. value always increases if a new independent variable is
added to the model. On the other hand, adding additional
Table 3. Construct Validity. variables using R square adjusted does not always result
in increased value, making it more accurate. To be
Variable Average Variance concluded, based on the table, we can see that the value
Extracted of the dependent variable (Y) is 0.767, which enters the
strong effect category (>0.75). This means that
FL (X1) 0.666 independent variables can explain 77% of dependent
variables while the remaining 23% is considered outside
ID (X2) 0.763 the scope of independent variables and cannot be
explained.
OC (X3) 0.715
Table 5. R Square.
MAC (Y) 0.742
Variable R Square

4.4 Reliability Test MAC (Y) 0.767

The reliability test consists of two parts which are

Composite Reliability and Cronbach’s Alpha. A 4.6 Hypothesis Testing
reliability test is a test to prove the accuracy and
consistency of an instrument in terms of measuring latent Hypothesis testing is done using bootstrapping one of the
variables. There are two methods to measure reliability SEM PLS applications. Bootstrapping is a process to
which are Composite Reliability and Cronbach’s Alpha. evaluate the significance level or the probability of the
The Composite Reliability is measuring the real value of direct effects, indirect effects, and total effects. The
reliability while Cronbach’s Alpha measures the lower bootstrapping process generates the result to test the
limit value of reliability. The value of reliability that is significance, which is the T-statistics and the P-value. The
considered valid or reliable is >0.7. If the reliability value T-statistics is a value used to test a hypothesis's

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significance, which can be seen from the T-statistics experience is known to have a high correlation with
result. If the T-statistics is >1.96, then the hypothesis making a rational investment decision because it is more
testing is significant, and if the T-statistics is <1.96, then influential in doing investment activities, furthermore
the hypothesis testing is not significant [38]. cryptocurrency [22]. But that does not show if it affects
A P-value is used to check if the value of a people’s mental accounting. This study finds that
variable is below a significant level. The P-value testing behavioural bias has a high correlation with mental
can be seen by using the significance rate of 5% (0.05). If accounting. It is also known that psychological factors do
the value is >0.05, the H0 is accepted, and if the value is affect investors in making a rational decisions [11].
<0.05, that means the H0 is rejected [38]. Based on the findings, a conclusion can be stated that
financial literacy is not associated with mental
accounting. It also agrees with previous research by
Table 6. Bootstrapping Path Coefficient.
Takeda, Takemura & Gozu [21] that stated that financial
X1 X2 X3 literacy contradicts it. This finding also contradicts Baker,
Kumar, Goyal & Gaur's [20] finding that stated financial
Original Sample -0.132 0.226 0.865 literacy positively correlates with mental accounting.
(O) Mental accounting being part of behavioral finance
theory, which is highly correlated with psychology, is
T Statistic 1.325 2.397 41.191 highly affected by other psychological factors such as
(|O/STDEV) behavioural biases. With the high psychological factors
from the data result, it can be stated that the higher the
psychological factors, the lower the financial literacy will
P Values 0.186 0.017 0.000 affect mental accounting. This suggests that financial
literacy will show a minimum impact on investors' mental
Hypothesis 1 (H1) is to test if financial literacy (X1) accounting in making decisions for cryptocurrency
has an effect on an individual's mental accounting (Y) in investment investments. But regardless of the result that
regard to investing in cryptocurrency. Based on the table, financial literacy did not affect mental accounting,
it is stated that the T-statistic for financial literacy (X1) is financial literacy still has a key point in making a
1.325. This value is <1.96, meaning the hypothesis testing significant effect on making a judgment on financial
is insignificant. For the P-values, it is 0.186, which is activity. From the data, we can say that 66% of the
>0.05, therefore, H0 is accepted means that financial respondents know the risk of investing in cryptocurrency.
literacy does not affect an individual's mental accounting Still, financial literacy does not affect mental accounting
in regard to investing in cryptocurrency. because it is influenced by psychological factors such as
Hypothesis 2 (H2) is to test if an investment decision herding bias.
(X2) has an effect on an individual's mental accounting This finding will help individuals to have a better
(Y) in regard to investing in cryptocurrency. Based on the understanding of mental accounting that does not have or
table, the T-statistic for investment decision (X2) is 2.397. has a low influence on financial literacy. Individuals can
This value is >1.96, meaning the hypothesis testing is attend or participate in seminars, discussions, and
significant. For the P-values, it is 0.017, which is <0.05, simulations to improve their understanding of financial
therefore, H0 is rejected means that the investment literacy.
decision affects an individual's mental accounting in The next finding regarding investment decisions
regard to investing in cryptocurrency. stated that it affects mental accounting. A study by
Hypothesis 3 (H3) is to test if overconfidence (X3) has Nareswari, Balqista & Negoro [31] explained that
an effect on an individual's mental accounting (Y) in investment decisions are influenced by behavioural biases
regard to investing in cryptocurrency. Based on the table, that make investors unable to make rational decisions.
it is stated that the T-statistic for overconfidence (X3) is They also said this behavioural bias limits investors from
41.191. This value is >1.96, meaning the hypothesis doing classic financial theory, which is a technical and
testing is significant. For the P-value, it is 0.000, which is fundamental analysis. Metawa, Hassan, Metawa & Safa
<0.05, therefore, H0 is rejected means that overconfidence [40] also stated that herd behaviour is a behavioural factor
has an effect on an individual's mental accounting in that affects investment decisions. From the theory of
regard to investing in cryptocurrency. mental accounting itself, it is known that mental
accounting is highly affected by cognitive or
psychological factors and other factors such as age,
5 Discussion and Conclusion gender, and education. From the sample gathered, 54% of
the respondent’s investment decision is affected by family
This study aims to examine whether there is an effect of
and friends. The result also said that age has a significant
financial literacy, investment decision, and
effect on investment decisions. Most of the respondents
overconfidence on people’s mental accounting in terms of are Generation Z that are influenced by their close
cryptocurrency investing. Since the COVID-19 virus individuals. While Generation X is the second largest
outbreak in 2019, internet use has been increasing, and number of respondents. Which can show that herding
many people, mostly Generation Z, millennials, and even
biases have a role in it. The investor’s decision will affect
Generation X are doing investment activity, which has
how they categorize or evaluate their money on a crypto
been proven from the demographic result. Investing

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collect the data and the references they need.

7
E3S Web of Conferences 426, 01047 (2023) https://doi.org/10.1051/e3sconf/202342601047
ICOBAR 2023

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