Does Financial Literacy Reduce Herding? Evidence from Investment Decisions in East Java

Abstract

This study aims to examine the effect of financial literacy on investment decisions, both directly and indirectly through herding behavior among investors in East Java Province. This research employs a quantitative approach using a survey method, with data analyzed through SEM-PLS. The population consists of retail investors in East Java, with a sample of 262 respondents. The results indicate that financial literacy has a positive and significant effect on investment decisions, and a negative and significant effect on herding behavior. Furthermore, herding behavior positively influences investment decisions and acts as a mediating variable in the relationship between financial literacy and investment decisions. These findings suggest that investment decisions are influenced not only by cognitive factors but also by psychological and social factors. This study implies that improving financial literacy can enhance the quality of investment decisions while reducing herd behavior tendencies among investors. Theoretically, the findings support Prospect Theory in explaining investor behavior under uncertainty and contribute to the behavioral finance literature by integrating financial literacy and herding behavior into a single conceptual model. The novelty of this study lies in examining the mediating role of herding behavior within the context of retail investors in regional Indonesia, particularly East Java.