Herding Behavior and Portfolio Management: A BehavioralA Finance Perspective on Individual Investors

This paper analyzes the impact of herding phenomena in terms of behavioral finance, i.e., individual investors, on the management of a portfolio. The herding behavior is characterized as a state of individuals being most likely to copy the behavior of other individuals, and this can be ‎highly ineffective in the market, leading to poor investments. The theories of finance are grounded in the assumption that rational investors ‎make decisions within the framework of general information availability; however, the behavioral theory of finance assumes that numerous ‎psychological biases, such as a sense of overconfidence, the fear of missing out (FOMO), and loss aversion, exert an immense influence on ‎the investment decision. The following paper will be dedicated to the comprehension of such biases and their application to the diversification-‎tion, risk tolerance, and asset allocation of a portfolio. This research employs a quantitative approach where they employ simple random ‎sampling and a structured survey to collect data about individual investors. The surveys are about demographics, investment strategies, herd-herding behavior, and the role that the Environmental, Social, and Governance (ESG) factors play in investment decisions. The results are that ‎individual investors are likely to be influenced by market trends, behaviour of peers, and social forces, hence leading to herding behaviour, ‎which has a negative impact on portfolio performance. Moreover, there is also the infiltration of ESG in decision-making, whereby investors ‎consider ethical interest and monetary benefits. This study indicates that awareness of psychological bias and devising solutions on how to ‎overcome herding in managing the portfolio is very important‎.