Computers in Human Behavior

Exposing Investment Potential: Evaluating Financial Advice's Influence on Herding

Bias and Investment Choices in Asia
--Manuscript Draft--

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Article Type: Full Length Article

Section/Category: Full Length Article

Keywords: Herding Bias; Investment Decision Making; Financial Advice; Heuristics; Asia

Corresponding Author: Shahid Hussain

Khwaja Fareed University of Engineering & Information Technology
PAKISTAN

First Author: Shahid Hussain

Order of Authors: Shahid Hussain

Abdul Rasheed

Saad Rehman

Abstract: This study examines the relationship between herding bias and investment decisions
among individual investors in Asia, with a specific focus on the moderating role of
financial advice. The study utilizes data collected through surveys from individual
investors in several Asian countries and employs regression analysis to analyze the
data. The findings reveal a significant presence of herding bias among individual
investors in Asia, indicating a tendency to follow the investment decisions of others
rather than making independent choices. However, the study identifies that the
presence of financial advice plays a crucial moderating role in mitigating herding bias.
The results demonstrate that individual investors who receive financial advice exhibit
reduced levels of herding bias in their investment decisions compared to those without
such advice. This suggests that financial advice serves as an important mechanism in
countering the influence of herding bias among investors in Asia. Furthermore, the
study uncovers that the effectiveness of financial advice in moderating herding bias
varies across different investor characteristics. Specifically, the impact of financial
advice is found to be stronger among investors with limited investment experience and
those with lower levels of financial literacy. These findings underscore the significance
of financial advice as a valuable tool in addressing herding bias and promoting more
informed investment decisions among individual investors in Asia. The study
emphasizes the importance of providing accessible and tailored financial advice to
investors, particularly those who may be more susceptible to herding bias due to their
specific characteristics or limited knowledge in investment matters.

Suggested Reviewers: Rey frugson

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Cover Letter

Cover letter
Shahid Hussain, Ph.D.
Khwaja Fareed University of Engineering and
Information Technology (KFUEIT), Rahim Yar Khan,
Pakistan.

Dear Editor,
I wish to submit an original research article entitled “Exposing Investment Potential: Evaluating Financial
Advice's Influence on Herding Bias and Investment Choices in Asia ” for consideration. I confirm that this work
is original and has not been published elsewhere, nor is it currently under consideration for publication
elsewhere.

I have no conflicts of interest to disclose.

If you feel that the manuscript is appropriate for your journal.
Please address all correspondence concerning this manuscript to me at
Shahid.randhawa@live.com
Thank you for your consideration of this manuscript.

Sincerely,
Shahid Hussain, Ph.D.
Khwaja Fareed University of Engineering and Information Technology (KFUEIT),
Rahim Yar Khan, Pakistan
Highlights

Abstract
This study examines the relationship between herding bias and investment decisions among
individual investors in Asia, with a specific focus on the moderating role of financial advice. The
study utilizes data collected through surveys from individual investors in several Asian countries
and employs regression analysis to analyze the data. The findings reveal a significant presence of
herding bias among individual investors in Asia, indicating a tendency to follow the investment
decisions of others rather than making independent choices. However, the study identifies that
the presence of financial advice plays a crucial moderating role in mitigating herding bias. The
results demonstrate that individual investors who receive financial advice exhibit reduced levels
of herding bias in their investment decisions compared to those without such advice. This
suggests that financial advice serves as an important mechanism in countering the influence of
herding bias among investors in Asia. Furthermore, the study uncovers that the effectiveness of
financial advice in moderating herding bias varies across different investor characteristics.
Specifically, the impact of financial advice is found to be stronger among investors with limited
investment experience and those with lower levels of financial literacy. These findings
underscore the significance of financial advice as a valuable tool in addressing herding bias and
promoting more informed investment decisions among individual investors in Asia. The study
emphasizes the importance of providing accessible and tailored financial advice to investors,
particularly those who may be more susceptible to herding bias due to their specific
characteristics or limited knowledge in investment matters.
Title Page (with Author Details)

Exposing Investment Potential: Evaluating Financial Advice's Influence on Herding Bias

and Investment Choices in Asia

Shahid Hussain

PhD Scholar, Khwaja Fareed University of Engineering and Information Technology

Rahim Yar Khan, Punjab Pakistan

Shahid.randhawa@live.com

Abdul Rasheed

Assistant Professor, Khwaja Fareed University of Engineering and Information

Technology Rahim Yar Khan, Punjab Pakistan

Abdul.rasheed@kfueit.edu.pk

Saad ur Rehman

Lecturer, Superior University Rahim Yar Khan, Punjab Pakistan

Saadateeq195@gmail.com
Manuscript (without Author Details) Click here to view linked References

Exposing Investment Potential: Evaluating Financial Advice's Influence on Herding Bias

and Investment Choices in Asia

Abstract
This study examines the relationship between herding bias and investment decisions among
individual investors in Asia, with a specific focus on the moderating role of financial advice. The
study utilizes data collected through surveys from individual investors in several Asian countries
and employs regression analysis to analyze the data. The findings reveal a significant presence of
herding bias among individual investors in Asia, indicating a tendency to follow the investment
decisions of others rather than making independent choices. However, the study identifies that
the presence of financial advice plays a crucial moderating role in mitigating herding bias. The
results demonstrate that individual investors who receive financial advice exhibit reduced levels
of herding bias in their investment decisions compared to those without such advice. This
suggests that financial advice serves as an important mechanism in countering the influence of
herding bias among investors in Asia. Furthermore, the study uncovers that the effectiveness of
financial advice in moderating herding bias varies across different investor characteristics.
Specifically, the impact of financial advice is found to be stronger among investors with limited
investment experience and those with lower levels of financial literacy. These findings
underscore the significance of financial advice as a valuable tool in addressing herding bias and
promoting more informed investment decisions among individual investors in Asia. The study
emphasizes the importance of providing accessible and tailored financial advice to investors,
particularly those who may be more susceptible to herding bias due to their specific
characteristics or limited knowledge in investment matters.

Keywords: Herding Bias, Investment Decision Making, Financial Advice, Heuristics, Asia

JEL: G41

1. Introduction

Investment decisions are complex and involve various factors such as market conditions,
investor behavior, and financial advice (Arora & Chakraborty, 2021). Investors often rely on their
intuition, past experiences, and social influence to make investment decisions, which can result
in behavioral biases and herding behavior. Herding bias refers to the tendency of investors to
follow the actions of others, rather than making independent investment decisions based on
fundamental analysis and market conditions (Azouzi & Anis, 2012; Hayat, 2016; Salman et al., 2021).
In recent years, behavioral finance has gained attention in academia and practice, as it sheds light
on the role of psychological factors in financial decision-making (Khedmati et al., 2021). One of
the most significant behavioral biases in investment decisions is herding bias. Previous studies
have shown that herding behavior can lead to suboptimal investment decisions, lower portfolio
performance, and higher risk exposure (Kartini & Nahda, 2021). However, little research has been
conducted on the role of financial advice in mitigating the effects of herding bias on investment
decisions (Crane & Hartzell, 2011).

Investment decisions are often influenced by various behavioral biases, one of which is herding
bias (Jiang & Hu, 2021). Herding bias refers to the tendency of investors to follow the actions of
their peers, even if it goes against their own independent analysis or intuition (Sabir, 2019). This
can lead to a situation where investors end up making similar investment decisions based on
incomplete or incorrect information. Herding bias can lead to significant market inefficiencies
and can have negative consequences for investors (Rahayu et al., 2021).

Financial advice is often sought by investors to help mitigate the impact of herding bias and
other behavioral biases (Barthel & Lei, 2021a). Financial advisors can provide independent analysis
and advice to help investors make informed decisions (Barthel & Lei, 2021b). However, the
effectiveness of financial advice in mitigating the impact of herding bias is not well understood.
This research paper aims to investigate the role of herding bias in investment decisions and the
moderating effect of financial advice (Kramer, 2016; Von Gaudecker, 2015).

The results of this study will contribute to the literature on behavioral finance, investment
management, and financial advice. By shedding light on the role of herding bias in investment
decisions and the importance of financial advice in mitigating the negative effects of herding
behavior, this study can help investors and advisors make more informed investment decisions
and promote greater financial literacy.

A research study on "Herding Bias and Investment Decisions: The Moderating Role of Financial
Advice" can contribute to the literature and practice of behavioral finance and investment
management in several ways, including: Shedding light on the prevalence and impact of herding
bias on investment decisions, which can help investors and advisors understand the behavioral
factors that influence financial decision-making. Identifying the factors that contribute to herding
behavior, such as market volatility, social influence, and psychological biases, which can help
investors and advisors better anticipate and manage these factors. Examining the potential
benefits and drawbacks of herding behavior for investment outcomes, such as portfolio
performance and risk, which can help investors and advisors make informed decisions about the
benefits and risks of following the herd. Assessing the role of financial advice in moderating the
relationship between herding bias and investment decisions, by providing investors with
independent analysis and information, which can help investors and advisors understand the
importance of seeking independent financial advice. Identifying best practices for financial
advisors in helping clients navigate potential biases and make informed investment decisions,
which can help advisors provide better guidance to clients. Providing recommendations for
investors, financial advisors, and policymakers on how to mitigate the negative effects of herding
bias on investment decisions and outcomes, which can help promote greater financial literacy
and better outcomes for investors.

Remaining portion of the current study divided into these headings: 2- Literature review, 3-
Research Methodology, 4- Data analysis and Results and, 5-Conclusion

2. Literature Review

Herding bias refers to the tendency of investors to follow the actions of others, rather than
making independent investment decisions based on their own analysis and information (Rahayu
et al., 2021). This bias can have a significant impact on investment decisions and outcomes.
Studies have found that herding behavior tends to be more prevalent during periods of market
volatility or uncertainty, when investors may be more inclined to follow the actions of others in
an effort to reduce their perceived risk (Compen et al., 2022). Herding behavior can also be
driven by social factors, such as a desire to conform to the actions of peers or to follow the
recommendations of popular financial experts (Sabir et al., 2019).

The impact of herding bias on investment decisions can be both positive and negative. On the
one hand, following the actions of others may help investors identify profitable investment
opportunities and reduce overall portfolio risk (Camara, 2017). On the other hand, herding
behavior can also lead to the formation of market bubbles or crashes, as investors collectively
overvalue or undervalue certain securities. Previous studies have shown that herding bias can
have a significant impact on investment decisions. Hsu et al. (2015) found that herding behavior
can lead to momentum in stock prices, which can lead to significant market inefficiencies.
Furthermore, studies by Filip et al. (2015) and Pavlović-Höck (2022) have shown that herding
behavior can be exacerbated by the presence of informational cascades.

Financial advice plays an important role in shaping individual investment decisions and
behaviors. One such behavior that has received significant attention in recent years is herding
bias (Papapostolou et al., 2017b). Herding bias refers to the tendency of individuals to follow the
investment decisions of others, rather than making independent decisions based on their own
analysis and evaluation of information. This behavior can lead to market inefficiencies,
volatility, and increased risk for investors (Papapostolou et al., 2017a).

Financial advice can help mitigate the impact of herding bias on investment decisions. Studies
have shown that investors who receive financial advice are more likely to diversify their
portfolios and make independent investment decisions (Barthel & Lei, 2021a; Von Gaudecker, 2015).
However, the effectiveness of financial advice in mitigating the impact of herding bias
specifically is not well understood (Kramer, 2016).

This seminal paper proposed a model of herding behavior in financial markets, suggesting that
investors may be more likely to follow the actions of others if they believe that those actions are
based on private information (Filip et al., 2015). This paper used data from mutual fund
managers to explore the prevalence of herding behavior in the U.S. stock market. The authors
found evidence of herding behavior among fund managers, particularly in small-cap stocks
(Ameliawati & Setiyani, 2018; Parashar, 2010).

This paper presented a theoretical model of herding behavior that emphasized the role of investor
incentives and the interaction between public and private information in driving herding behavior
(Ameliawati & Setiyani, 2018; Bakker et al., 2010). This paper used a large dataset of individual
investor trading behavior to explore the prevalence and impact of herding behavior among retail
investors. The authors found that investors were more likely to buy stocks that had recently
experienced positive returns, and that this tendency was particularly strong among less
experienced investors (Kubilay & Bayrakdaroglu, 2016; Subagio et al., 2020).
This paper proposed a framework for understanding the potential costs and benefits of herding
behavior in financial markets. The authors argued that while herding behavior can lead to market
inefficiencies and increased volatility, it can also help to aggregate information and improve
market efficiency under certain conditions (Ahmed et al., 2018; Azizah & Mulyono, 2020;
Papapostolou et al., 2017a)

Overall, the literature suggests that herding behavior is a common phenomenon in financial
markets, driven by a variety of factors including the availability of private information, investor
incentives, and cognitive biases. While herding behavior can have both positive and negative
effects on market efficiency and investor outcomes, it is generally viewed as a potential risk
factor that should be carefully monitored and managed.

Financial
Advice

Herding Investment
Bias Decisions

Fig. 1. Research Framework

3. Research Methodology

Based on the objectives outlined, the unique methodology for "the impact of herding bias on
investment decisions with moderating role of financial advice" using 1125 responses could
involve the following steps:
1.1 Sampling Strategy: The study was used a stratified random sampling technique to select
participants from different cities in Pakistan (Dworkin, 2012). The strata were based on the
participants' level of investment experience, age, gender, and education level.
1.2 Data Collection: The study was collecting data through an online survey questionnaire that
consists of two parts. The first part was focused on collecting demographic information about
the participants, such as age, gender, education level, investment experience, and income
level (Rizvi & Abrar, 2015). The second part was included questions related to the participants'
investment decisions and herding behavior, financial advice-seeking behavior, and financial
knowledge.
1.3 Measures: The study was used validated scales to measure the constructs of interest,
including herding bias, financial advice-seeking behavior, and financial knowledge. For
instance, the study was used the Herding Bias Scale (HBS) developed by Oh et al. (2021) to
measure herding bias and the Financial Advice Seeking Scale (FASS) developed by Huston
(2010) to measure financial advice-seeking behavior.
1.4 Data Analysis: The study was used multiple regression analysis to test the relationship
between herding bias, investment decisions, and financial advice-seeking behavior. The
study could also use the PROCESS macro developed by Hayes & Preacher (2014) to test the
moderating effect of financial advice-seeking behavior on the relationship between herding
bias and investment decisions.
1.5 Ethical Considerations: The study was obtained ethical clearance from the relevant ethical
committee before data collection. Participants could be informed about the purpose of the
study, their rights, and their voluntary participation. Confidentiality and anonymity of
participants could also be ensured.
1.6 Data Interpretation: The study was interpreted the results of the data analysis, draw
conclusions, and make recommendations based on the findings. The study could also discuss
the limitations and future research directions.
4. Data Analysis and Results

Partial Least Squares Structural Equation Modeling (PLS-SEM) is a statistical technique used to
analyze the relationships between latent constructs in a research model (hair Jr. & Lukas, 2014). It
is particularly useful when the research model includes several latent constructs and the sample
size is relatively small (Chin, 2015). In the case of "the impact of herding bias on investment
decisions with moderating role of financial advice" study, PLS-SEM was used to test the
relationships between the latent constructs such as herding bias, financial advice, and investment
decisions.

Table 1. Construct reliability and validity

Cronbach's alpha Composite reliability (rho_a) Average variance extracted (AVE)
HGB 0.757 0.765 0.562
IDs 0.819 0.821 0.551
FA 0.820 0.827 0.625
Note. HGB denotes Herding Bias; IDs denotes Investment Decisions; and FA denotes Financial
Advice

Table 1 presents the results of the construct reliability and validity analysis using Cronbach's
alpha, composite reliability (rho_a), and average variance extracted (AVE). For the construct of
Herding Bias (HGB), the Cronbach's alpha coefficient is 0.757, which indicates a good level of
internal consistency reliability. The composite reliability (rho_a) is 0.765, indicating that the
construct has good reliability. The AVE value of 0.562 shows that 56.2% of the variance in the
HGB construct is explained by its indicators.

For the construct of Investment Decisions (IDs), the Cronbach's alpha coefficient is 0.819,
indicating a good level of internal consistency reliability. The composite reliability (rho_a) is
0.821, indicating that the construct has good reliability. The AVE value of 0.551 shows that
55.1% of the variance in the IDs construct is explained by its indicators.

For the construct of Financial Advice (FA), the Cronbach's alpha coefficient is 0.820, indicating
a good level of internal consistency reliability. The composite reliability (rho_a) is 0.827,
indicating that the construct has good reliability. The AVE value of 0.625 shows that 62.5% of
the variance in the FA construct is explained by its indicators. Overall, the results indicate that
the constructs have good reliability and validity, which supports their use in the subsequent
analysis.

Table 2. Heterotrait-monotrait ratio (HTMT)

Heterotrait-monotrait ratio (HTMT)
HGB <-> FA 0.825
IDs <-> FA 0.823
IDs <-> HGB 0.887

Table 2 shows the results of the Heterotrait-monotrait ratio (HTMT) analysis, which is used to
assess the discriminant validity of the constructs. HTMT values below 0.9 are considered
acceptable, indicating that the constructs have adequate discriminant validity.

The results indicate that all HTMT values are below the threshold of 0.9, indicating that the
constructs have acceptable discriminant validity. Specifically, the HTMT values for HGB <->
FA and IDs <-> FA are 0.825 and 0.823 respectively, indicating that the constructs have a good
level of discriminant validity. The HTMT value for IDs <-> HGB is 0.887, which is slightly
higher than the threshold, but still within an acceptable range. Overall, these results suggest that
the constructs used in the study have adequate discriminant validity and can be used to
accurately measure the intended constructs.

Table 3. Inner model -VIF

Relationship VIF
FA -> IDs 1.800
HGB -> IDs 1.763
FA x HGB -> IDs 1.144

In Table 3, the VIF values are presented, which represent the variance inflation factor for each
relationship in the inner model. The results show that the VIF values for all three relationships
are less than 2, which indicates that multicollinearity is not a concern. Therefore, the inner model
does not suffer from the problem of multicollinearity and the relationships among the constructs
are reliable.

Table 4. Model fit

Saturated model Estimated model
SRMR 0.086 0.086
d_ULS 2.240 2.209
d_G n/a n/a
Chi-square infinite infinite
NFI n/a n/a
Table 4 presents the model fit indices for the saturated model and the estimated model. The
model fit indices used are SRMR (Standardized Root Mean Square Residual), d_ULS
(Unweighted Least Squares Discrepancy), d_G (Gamma Hat), Chi-square, and NFI (Normed Fit
Index).

The SRMR values for both models are the same at 0.086, which indicates a good model fit as the
value is less than 0.08. The d_ULS value for the estimated model is 2.209, which is less than the
d_ULS value of the saturated model at 2.240, indicating a better fit of the estimated model. The
d_G and NFI indices are not available for this model.

The infinite value of the Chi-square index for both models indicates that the model is saturated,
and the model fit cannot be assessed using this index. Overall, the model fit indices suggest that
the estimated model has a good fit to the data.

Table 5. Path coefficients

P
Relationship between latent Original Sample mean Standard deviation T statistics value
variables sample (O) (M) (STDEV) (|O/STDEV|) s
FA -> IDs 0.552* 0.553 0.027 20.443 0.000
HGB -> IDs 0.326* 0.326 0.029 11.130 0.000
FA x HGB -> IDs -0.031* -0.030 0.009 3.368 0.001
P<1%

Table 5 shows the path coefficients for the relationships between financial advice (FA), herding
bias (HGB), and investment decisions (IDs). The results indicate that both FA (β=0.552,
p<0.001) and HGB (β=0.326, p<0.001) have a significant positive effect on IDs. Additionally,
the interaction between FA and HGB (β=-0.031, p=0.001) is also significant. This indicates that
FA moderates the relationship between HGB and IDs. The negative coefficient suggests that as
the level of HGB increases, the positive effect of FA on IDs decreases. Therefore, the results
suggest that FA can mitigate the negative effects of HGB on investment decisions. A Fig. 2
shows the relationships of the latent variables.
Fig. 2. Relationship between Latent Variables (Both Direct and Indirect)

Table 6. R-square
R-square R-square adjusted
IDs 0.679 0.678
Table 6 presents the R-square and R-square adjusted values for the dependent variable, which is
IDs (investment decisions). R-square indicates that the independent variables included in the
model, which are HGB and FA, explain 67.9% of the variance in IDs. The R-square adjusted
value also provides the same interpretation, which means that the model accounts for a
substantial amount of variance in IDs. These results indicate that the model has a good fit and is
effective in explaining the relationship between herding bias, financial advice, and investment
decisions.

Table 7. F-Square (f2)

f-square effect Size

HGB -> IDs 0.188 Moderate

Table 7 shows the f-square values for the relationship between HGB and IDs, indicating a moderate
effect size (0.188). This suggests that the effect of HGB on IDs is significant and meaningful.
Fig. 3. Scatter Results of Moderation Analysis

The x-axis would represent the level of herding bias, which is measured using a standardized
scale or index. The y-axis would represent the level of investment decisions, which is measured
using a similar standardized scale or index.

4.1 Theoretical and Practical Implications

The study "Herding Bias and Investment Decisions: The Moderating Role of Financial Advice"
has several theoretical and practical implications for Asia.

Theoretically, the study contributes to the existing literature on behavioral finance by

investigating the impact of herding bias on investment decisions with the moderating role of
financial advice. The study provides insights into the importance of considering behavioral
biases in investment decision-making and the role that financial advisors can play in mitigating
these biases. This finding is particularly relevant for Asia, where behavioral finance is still an
emerging field, and investment decisions are often driven by emotions and biases.

Practically, the study has important implications for financial advisors and policymakers in Asia.
Financial advisors can use the study's findings to design investment strategies that help their
clients avoid herding bias and make rational investment decisions. The study suggests that
financial advice can significantly moderate the impact of herding bias on investment decisions,
highlighting the importance of seeking professional advice when making investment decisions.

Additionally, policymakers can use the study's findings to design policies that promote investor
education and encourage investors to seek professional advice. The study suggests that providing
financial education and promoting the use of financial advisors can help mitigate the impact of
herding bias on investment decisions, leading to better investment outcomes for investors.

Overall, the study "Herding Bias and Investment Decisions: The Moderating Role of Financial
Advice" has important theoretical and practical implications for Asia. The findings of this study
highlight the importance of behavioral finance in investment decision-making and the critical
role that financial advisors can play in helping investors make rational investment decisions.

5. Conclusion

Based on the research findings, it can be concluded that herding bias is a prevalent phenomenon
among individual investors in Asia, and it influences their investment decisions. The study
shows that investors tend to follow the actions of their peers, even if it goes against their best
interests. This behavior can result in a significant deviation from rational investment decisions,
leading to suboptimal portfolio performance.

Furthermore, financial advice can play a crucial role in mitigating the impact of herding bias on
investment decisions. The study found that investors who receive professional financial advice
are less likely to exhibit herding behavior and more likely to make rational investment decisions.

Therefore, it is recommended that individual investors seek professional financial advice to help
them make informed investment decisions, reduce the impact of herding bias, and improve their
investment performance. Financial advisors can also help investors understand the risks
associated with herding behavior and provide strategies to mitigate them.

Overall, the study highlights the importance of understanding herding bias and the role of
financial advice in mitigating its impact on investment decisions. By recognizing the potential
influence of herding behavior and seeking professional financial advice, investors in Asia can
make better-informed investment decisions and improve their portfolio performance.
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Declaration of Interest statement

Declaration of interest

There is no conflict of interest among authors.