Influence of Behavioural Biases on Investment Decisions of Individual Investors in Nairobi Securities Exchange

Abstract

Individual investment financial decision making was influenced by either modern or traditional finance. In traditional finance the individual investor was to determine the intrinsic value of a security to establish whether it's overvalued, correctly valued or undervalued. The tradition of traditional finance demanded use of mathematical formulae which some individual investors had limited knowledge. In the modern finance theory commonly denoted as behavioral bias applied psychological knowledge to evaluate the investment decision at investors' disposal. This study therefore sought to establish the effect of behavioral biases on investment decisions of individual investors in Nairobi Securities Exchange. The specific objectives of the study was: to determine the effect of fear of regrets bias on investment decisions of individual investors' decisions in NSE; to establish the effect of human availability heuristic bias on investment decisions of individual investors in NSE; to examine the effect of mental accounting bias on investment decisions of individual investors in NSE; to explain the effect of anchoring bias on investment decisions of individual investors in NSE; to determine the influence of herd mentality bias on investment decisions of individual investors in NSE and individual investment decisions in NSE. The research was guided by Modern Portfolio Theory, Efficient Market Hypothesis, Prospect Theory, Heuristic Theory and empirical literature on behavioral biases. The research population was individual investors who had invested in both equity and bonds in Nairobi Securities Exchange between 2013-2017 period under study which were 831,000 as individuals and investment banks through which they bought stock which were 22 firms. The study adopted multiple regression models. Purposive sampling was used to select 16 investment banks from which the quota sampling design was adopted to randomly selecting a sample 384 individual investors in the NSE. Primary data was collected through the use of closed ended questionnaires, pick and drop procedure was used to collect data through the use of registered offices of stock brokers. Descriptive statistics such as mean and standard deviation was used in data analysis where p- value (p<0.05) was used to determine the significant on behavioral biases and investment decisions of individual investors. Tests such as reliability tests using Cronbach's Alpha, normality tests among others were used. Inferential statistics which included correlation analysis and regression analysis was also applied in interpreting the results of the study and tables and graphs which was used to present the data collected for easy understanding. The findings from this research were therefore provided an understanding of how behavioral biases affected investment decisions of individual investors based on the prevailing biases and the eventual outcomes for each investment decisions hence identified the most influencing behavioral finance factors on the company's individual investors decisions, how their future policies and strategies was to be applied and effected.