Individual Investors' Learning Behavior and Its Impact on Their Herd Bias: An Integrated Analysis in the Context of Stock Trading

The efficient functioning of capital markets ensures that information on companies' sustainable development endeavors is fully and instantly incorporated into stock prices, which facilitates them in raising capital requirements at a lower cost. It, however, is impaired when market participants are inclined to behavioral biases. The Adaptive Market Hypothesis predicts that such behavioral biases are evolutionary. In that sense, market participants are capable of learning their behavioral mistakes and adapting to market conditions over time. Based on this perspective, this paper aims to explore how learning occurs within individual investors to reduce their herd bias. The data was collected by distributing a web-based self-administrated questionnaire to a sample of 1000 individual investors of the Colombo Stock Exchange, who were randomly selected during a period from March to August 2018. A total of 189 responses were received, which were analyzed using the structural equation modelling technique to test the hypotheses of the theoretical model. The results show that learning takes place when investors cognitively evaluate past trading experiences, which is induced by their desire for learning, and, consequently, reduces their herd bias. However, as the model predicts, strengthening this cognitive reflection from the relationship with the investment advisor and social learning among investors through their peer-relationships appear to be absent due to uncertain market conditions prevailed during the study period and dominance of unsophisticated investors in the market. From these findings, this paper concludes that the cognitive reflection of past experiences and the nature of the trading environment determine the extent of learning within individual investors.