Herding Bias and Financial Risk Tolerance On Individual Investment Performance in Nigeria: Moderated by Financial Literacy

Abstract

Prior studies have shown that various individuals’ behavioral traits such as herding bias and risk tolerance have an unfavorable effect on investors' decision-making. This paper examined the moderating role of financial literacy on herding bias and financial risk tolerance on individual investment performance in Nigeria. The population consisted of 460 active individual investors in Kaduna city as at the first quarter of 2023. A total of 460 copies of questionnaires were distributed, with 349 valid. A census method of sampling was used, and primary data was collected using a self-administered questionnaire and an online Google form. A 7-point Likert scale that ranged from '1' "Extremely Agree" to '7' "Extremely Disagree" was used. Smart-PLS version 4 was used to analyze the data. The study discovered that the herding bias has a positive and significant effect on investment performance, whereas financial risk tolerance has an insignificant negative effect on investment performance. Financial literacy has a positive but insignificant impact on investment performance. Furthermore, the moderating effect of financial literacy demonstrated that the herding bias has a significant and positive impact on investment performance. Risk tolerance has a significant negative influence on investment performance. This study concluded that herding bias helps investors make better investment decisions, Consequently, the study recommends that investors should reduce their risk tolerance levels while maintaining the herding behavioral bias.