European Journal of Accounting, Auditing and Finance Research (EJAAFR)

EA Journals

Financial literacy

Effect of Prospect Factor and Herding Effect on Individual Investment Performance in Nigeria: Moderating Role of Financial Literacy (Published)

Investors exhibit irrational behavior when making an investment decision. The decision-making process itself is considered to be a cognitive process, as the investors have to make a decision based on various alternatives available to them. Prior studies had shown that the investors’ decision-making was adversely affected by the various behavioral factors. This study was carried forward to identify the moderating role of financial literacy (FL) on the effect of prospect factor (PF) and herding effect (HE) on investment performance. The population of study was 3,706 and the sample size was the active investors resident in Kaduna metropolitan within the first quarter of 2023. Thus, 460 structured questionnaires were administered and 349 were returned valid. A convenient sampling technique was adopted in this study, and a primary data was collected from the respondents using both the online Google form and self-administered questionnaire with the help of research assistants. A 7-point Likert-type scale ranging from ‘1’ “Extremely Agree” to ‘7’ “Extremely Disagree” was employed. Smart-PLS 4 and SPSS 20 version was used to analyses the data and explained the demographic characteristics of the individual respectively. Findings from this study revealed that prospect factor and financial literacy have positive and significant influence on individual investment performance, while the herding effect is found to have a negative and insignificant influence on individual investment performance. Furthermore, the moderating role of financial literacy revealed that prospect factor and herding effect have an insignificant negative effect on individual investment performance. The study recommends that individual investors should have high levels of financial literacy. It has been empirically proven that FL help investors make better investment decision, in addition to satisfaction in their investment performance. Also, the investors should maintain the use of prospect behavioral biases when making investment decision as it has improved investment performance.

Keywords: Financial literacy, Nigeria, herding effect, investment performance, prospect factor


Ensuring that all societies’ young people become financially capable is now widely seen as a necessary key pillar in helping Governments build economic stability in the future. The ability to read, analyze, manage, and communicate about the personal financial conditions that affect material wellbeing is of utmost importance. Being able to manage money, keep track of personal finances, plan ahead, choose financial products and stay informed about financial matters enable the avoidance of financial disaster. This research constitutes an essential component of the theory of the strategy of financial literacy framework which articulates a strategic direction for the delivery of financial education in Nigeria. Financial literacy education is very important because the journey to obtain independence and achieve financial success cannot just be prioritized by having good educational experiences, a sound résumé and a career with a nice salary. Rather, the financial freedom road requires development of good financial habits, practice and discipline. This work adopts a secondary data approach which critically examines Nigeria’s financial literacy education framework, the significance of financial literacy education, steps for best practices in financial education and awareness, and the challenges to building sustainable financial literacy education systems. It finds that promoting financial literacy among Nigerians provides them with the essential knowledge and financial responsibility to make decisions that will better their lives and ultimately grow the economy. This is because as financial markets become increasingly sophisticated and as households assume more of the responsibility and risk for financial decisions, financial education is increasingly necessary for individuals, not only to ensure their own financial well-being but also to ensure the smooth functioning of financial markets and the economy. The paper therefore strongly recommends, amongst others, the involvement of all tiers of government as well as key institutions and the private sector in the design and implementation of financial literacy programmes across all segments and sectors of the economy.

Keywords: Economic Development, Education, Financial freedom, Financial literacy, Nigeria

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