Effect of Prospect Factor and Herding Effect on Individual Investment Performance in Nigeria: Moderating Role of Financial Literacy

Abstract

Investors exhibit irrational behavior when making an investment decision. The decision-making process itself is considered to be a cognitive process, as the investors have to make a decision based on various alternatives available to them. Prior studies had shown that the investors’ decision-making was adversely affected by the various behavioral factors. This study was carried forward to identify the moderating role of financial literacy (FL) on the effect of prospect factor (PF) and herding effect (HE) on investment performance. The population of study was 3,706 and the sample size was the active investors resident in Kaduna metropolitan within the first quarter of 2023. Thus, 460 structured questionnaires were administered and 349 were returned valid. A convenient sampling technique was adopted in this study, and a primary data was collected from the respondents using both the online Google form and self-administered questionnaire with the help of research assistants. A 7-point Likert-type scale ranging from ‘1’ “Extremely Agree” to ‘7’ “Extremely Disagree” was employed. Smart-PLS 4 and SPSS 20 version was used to analyses the data and explained the demographic characteristics of the individual respectively. Findings from this study revealed that prospect factor and financial literacy have positive and significant influence on individual investment performance, while the herding effect is found to have a negative and insignificant influence on individual investment performance. Furthermore, the moderating role of financial literacy revealed that prospect factor and herding effect have an insignificant negative effect on individual investment performance. The study recommends that individual investors should have high levels of financial literacy. It has been empirically proven that FL help investors make better investment decision, in addition to satisfaction in their investment performance. Also, the investors should maintain the use of prospect behavioral biases when making investment decision as it has improved investment performance.