Abstract
The study aimed to investigate the impact of behavioral biases on herding for Islamic financial products with the mediation of shariah literacy. An adopted questionnaire from several published studies was used to collect data. The data were collected from 410 respondents and were analyzed with SmartPLS. The results for the direct impact showed that self-attribution, illusion of control, and information availability have a positive and significant impact on herding for Islamic financial products while shariah literacy showed an insignificant impact on herding. The results for mediation showed that previously significant and positive impact turned to insignificant when shariah literacy was introduced as mediating variable between the illusion of control, self-attribution, information availability, and herding. From a theoretical perspective, this study would contribute to the existing body of knowledge of financial decision making from shariah literacy point-out. On the other hand, the findings of this study may be useful for investors to avoid herding in the Islamic financial markets. The authors synthesize the contribution made by behavioral finance studies in extending the knowledge of herding behavior in Islamic financial products with a mediating role of shariah literacy. The key limitation of the study includes data that were collected from three districts of Punjab, Pakistan.
Highlights
The efficient market hypothesis (EMH) theory was considered as one of the key foundations for investment decision making
The objective of this study is to examine the impact of selfattribution, illusion of control, information availability, and herding for Islamic financial products with the mediating role of sharia literacy
The items for information availability, self-attribution, illusion of control, and herding were adopted from Sabir et al (2018), while Islamic sharia literacy items were adopted from Albaity and Rahman (2018)
Summary
The efficient market hypothesis (EMH) theory was considered as one of the key foundations for investment decision making. Under EMH, no investor can earn abnormal returns, over and above from average market returns, based on his knowledge and information-processing capabilities (Alnajjar, 2013; Ross et al, 2016). It assumes that investors are rational and utilize a diverse range of models to shortlist and select the optimal investment opportunities. EMH failed to justify market anomalies, which resulted in different financial crisis, i.e., internet bubble burst of the 1990s, dot-com crisis, stock market crash of 2002, and bank leading crises of 1994 (Sharma and Kumar, 2019). The opponents of EMH such as Shefrin and Statman (2011), Pompian (2012), and Barberis (2017) argued that investors not necessarily act rationally as claimed in EMH and that their irrationality may be explained through different behavioral anomalies.
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