Behavioral Biases and Risk Perception in Takaful Decision-Making: Evidence from Southeast Asia and GCC Countries

This study investigates the influence of behavioral biases, particularly overconfidence, herding behavior, and loss aversion, on risk perception and decision-making in Takaful operations. As a Shariah-compliant alternative to conventional insurance, Takaful is founded on principles of cooperation and ethical risksharing. However, despite these religious and ethical foundations, cognitive limitations among stakeholders may distort judgment and compromise optimal decision outcomes. Drawing on behavioral finance theories, particularly Prospect Theory, this research employs a mixed-methods approach that combines a cross-sectional survey of 312 Takaful stakeholders across Malaysia, Indonesia, and selected GCC countries with expert interviews to provide qualitative insights. Structural Equation Modeling (SEM) is utilized to examine direct and indirect effects among constructs. The findings reveal that all three behavioral biases significantly impact decision-making, with risk perception acting as a mediating variable. Specifically, overconfidence reduces risk sensitivity, herding behavior fosters non-rational conformity, and loss aversion discourages participation in investment-linked Takaful products. These results highlight the importance of integrating behavioral risk management into the operational, regulatory, and communication strategies of Takaful institutions. This study contributes to the Islamic finance literature by contextualizing behavioral biases within a Shariah-compliant framework and advancing the theoretical understanding of risk perception in ethical finance. Practical recommendations include behavioral literacy training, simplification of product disclosures, and the development of enhanced regulatory frameworks. The study also suggests future research avenues in longitudinal and cross-cultural behavioral analysis within Islamic insurance systems.