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

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.