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The Role of Overconfidence and Past Investment Experience in Herding Behaviour with a Moderating Effect of Financial Literacy: Evidence from Pakistan Stock Exchange

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  • Saeed Ahmad Sabir
  • Hisham Bin Mohammad
  • Hanita Binti Kadir Shahar

Abstract

The most stimulating task for investors is to make rational investment decisions. Normally, investors indulge in behavioural biases in uncertain situations. Numerous cognitive factors influence investors during decision making for investment and lead towards herding the acts of others. The core objective of this study is to investigate the influence of overconfidence and past investment experience on the herding behaviour of individual investors participating in the Pakistan stock exchange. To accomplish this aim, researcher used a quantitative research method and a cross-sectional research design. Data was collected from 352 individual investors participating in Pakistan stock exchange via survey questionnaires. A partial least square (PLS) was used to assess the measurement model and structural equation model. Additionally, the study examines the moderating effect of financial literacy on the relationship of overconfidence and past investment experience with the herding behaviour of individual investors. The results provided strong evidence that both overconfidence and past investment experience motivate investors towards herding behaviour. It was found that financial literacy has a moderate impact on the relationship between the cognitive profile and herding behaviour. This study contributes to behavioural finance literature and provides empirical evidence that the cognitive factors of investors are significant predictors of herding behaviour of investors. The study offers new empirical insights of investors’ behaviour due to the cognitive characteristics in Pakistan stock market.

Suggested Citation

  • Saeed Ahmad Sabir & Hisham Bin Mohammad & Hanita Binti Kadir Shahar, 2019. "The Role of Overconfidence and Past Investment Experience in Herding Behaviour with a Moderating Effect of Financial Literacy: Evidence from Pakistan Stock Exchange," Asian Economic and Financial Review, Asian Economic and Social Society, vol. 9(4), pages 480-490.
    • Handle: RePEc:asi:aeafrj:v:9:y:2019:i:4:p:480-490:id:1815
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    Citations

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    Cited by:

    1. Hind Lebdaoui & Youssef Chetioui & Elias Guechi, 2021. "The Impact of Behavioral Biases on Investment Performance: Does Financial Literacy Matter?," International Journal of Economics and Financial Issues, Econjournals, vol. 11(3), pages 13-21.
    2. Marvello Yang & Abdullah Al Mamun & Muhammad Mohiuddin & Sayed Samer Ali Al-Shami & Noor Raihani Zainol, 2021. "Predicting Stock Market Investment Intention and Behavior among Malaysian Working Adults Using Partial Least Squares Structural Equation Modeling," Mathematics, MDPI, vol. 9(8), pages 1-16, April.
    3. Muhammad Waqas & Alishba Hania & Farzan Yahya & Iqra Malik, 2023. "Enhancing Cybersecurity: The Crucial Role of Self-Regulation, Information Processing, and Financial Knowledge in Combating Phishing Attacks," SAGE Open, , vol. 13(4), pages 21582440231, December.
    4. , Aisdl, 2020. "Determinants of Stock Market Investors’ Behavior in COVID-19: A Study on the Pakistan Stock Exchange," OSF Preprints 4s9xe, Center for Open Science.
    5. Isidore, Renu & Arun, C. Joe, 2023. "The Moderating Effect of Financial Literacy on the Relationship Between Decision-Making Tools and Equity Returns in the Indian Secondary Equity Market," Revista Finanzas y Politica Economica, Universidad Católica de Colombia, vol. 15(1), pages 185-211, January.
    6. Maheshwari H & Anup K. Samantaray & Jyoti Ranjan Jena, 2023. "Unravelling Behavioural Biases in Individual and Institutional Investors Investment Decision- making: Intersection of Bibliometric and Systematic Literature Review," South Asian Journal of Business and Management Cases, , vol. 12(3), pages 275-299, December.
    7. Nur Alya Afiqah Binti Mahat & Wei-Theng Lau, 2023. "Financial Literacy, Experience, Risk Tolerance and Investment Behavior: Observations during Pandemic," International Journal of Research and Innovation in Social Science, International Journal of Research and Innovation in Social Science (IJRISS), vol. 7(10), pages 558-573, October.
    8. Waleed Mansi G Alshammari & Fahad Maiyah M Alshammari & Faiz Mayah M Alshammry, 2021. "Factors Influencing the Adoption of E-Health Management among Saudi Citizens with Moderating Role of E-Health Literacy," Information Management and Business Review, AMH International, vol. 13(3), pages 47-61.

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