Understanding herding behavior among Indonesian stock market investors

Abstract

This paper examined the factors that affect investor herd behavior. Herd behavior bias is a well- known phenomenon in financial markets in which individuals blindly follow the investing decisions of others without understanding the fundamental principles of investment. While extensive research has explored herd behavior in financial markets, there remains a significant research gap in understanding herding behavior at the level of individual investors. Previous studies have primarily focused on herding behavior within market contexts, neglecting the examination of specific factors that influence herding behavior among individual investors. Using a sample of 217 Indonesian investors this study investigates the factors that influence herding behavior. The findings showed that stock influencer credibility had a significant positive impact on herd behavior bias, suggesting that investors with high trust in stock influencers were likely to follow the herd. Financial literacy also had a significant negative impact on herd behavior bias, indicating that investors with higher financial knowledge are less likely to herd. However, financial literacy was found to have a significance towards herding behavior when mediated through risk perception. Lastly, risk perception had a significant positive impact on herd behavior bias, indicating that investors with higher risk perception are more likely to follow the herd. This study contributes to the existing literature by enhancing our understanding of herd behavior dynamics among investors, specifically at the individual level. By exploring the factors that influence herding behavior, it provides valuable insights into the mechanisms that drive this bias. The findings highlight the importance of targeted financial education programs and regulatory measures to address herding behavior bias among Indonesian investors, focusing on enhancing financial literacy and reducing risk perception.