Purpose This paper examines how herding behaviour (HB) affected investment decisions (ID) of retail investors with respect to mediation by investor sentiment (IS) and risk perception (RP). Traditional finance theories presume that investors make decisions rationally based on available information. However, behavioural finance (BF) refutes this concept by citing the effects that psychology and emotions have when it comes to making ID. Design/methodology/approach “Partial Least Squares Structural Equation Modeling (PLS-SEM)” was employed to analyse data of 307 retail investors. Findings The results show that HB plays a significant role in both IS and RP that in turn have a significant role in ID. The mediation analysis confirms that IS and RP mediate the relationship between HB and ID, with evidence of a serial mediation effect where HB shapes IS which then influences RP and ultimately drives ID. Practical implications Findings have practical implications for financial advisors and policymakers in designing strategies to lessen the effects of HB and enhance market stability. Originality/value This study advances BF by empirically establishing a serial mediation framework. Study findings show that the herding → IS → RP → ID pathway is the most influential, with RP emerging as the strongest driver.
Dutta et al. (Wed,) studied this question.