The Research On Individual Investor's Portfolio Decisions Making Based On Herding Effect

With the continuous improvement of China's economic strength,the living standard of our people has also been improved,and the enthusiasm of residents to participate in the securities market has been continuously improved.According to statistics,the proportion of individual investors in China's current market has exceeded 90%.Although China is vigorously supporting the development of institutional investors,in a short time,individual investors will still be the main force in China's market,and their investment decisions will have a significant impact on the development of China's securities market.At the same time,scholars have found that herding effect still exists in China's securities market.Under the herding effect,the behaviors of individual investor are often influenced by the decisions of institutional investor,so it is necessary to analyze the change of individual investor's portfolio decision considering the decision of institutional investor.However,the existing literature mainly studies from the perspective of one investor,without considering the interaction between investors in the market.At the same time,most studies do not take into account the differences between institutional investors and individual investors in the investment behavior in the market.Therefore,based on herd effect theory,this paper comprehensively uses game theory and portfolio theory to analyze individual investor's investment decisions.In addition,based on the results of the analysis,some suggestions are put forward from three perspectives:individual investors,financial institutions and relevant government departments.This article mainly includes the following two aspects:Firstly,a multi-investors portfolio model is constructed and solved based on the traditional portfolio model,and the optimal decisions of individual investor considering the decisions of institutional investor is obtained by using the model.Then,the decisions of individual investor considering the decisions of institutional investor are further analyzed and the corresponding conclusions are drawn.The results show that there are obvious differences in the optimal investment decisions of individual investor under two different situations,whether or not institutional investor are considered.Moreover,the optimal decision differences of individual investor vary with the change of institutional investor's decisions and individual investor's risk preference.At the same time,we consider that the utility of individual investor's portfolio is always better when institutional investor make decisions,and the differences of portfolio utility between the two cases increase with the increase of individual investor's risk preference.Secondly,on the basis of the previous research,the background risk factor is added to construct a multi-investors portfolio model considering the background risk and solve it.Based on this model,the optimal decisions of individual investor considering the background risk is obtained.Then,the impact of the background risk on individual investor's decisions is further analyzed.The results show that there are obvious differences in the optimal decisions and the degree of influence between the two situations,and the decisions of the individual investor considering the background risk are always more affected by the institutional investor than that of the individual investor without considering the background risk.At the same time,considering the background risk,the degree of impact on individual investor's decisions decrease with the increase of their background risk preference.In addition,it is found that changing the risk preference of individual investor is more significant than changing the background risk preference for their decisions.