Effects of behavioral biases on investment decisions of individual investors at the Nairobi securities exchange

Abstract

The main objective of this study was to establish the effects of behavioral biases on individual investors’ investment decisions at the Nairobi Securities Exchange. The specific objectives guiding the study were to establish the effect of stereotyping on individual investment decisions in the Kenyan stock market, and to investigate the effects of an investor confidence on the decision making in stock market investments decisions in the Kenyan stock market. For this study, the target population was the 1,184,723 individual investors trading at the NSE with a sample size of 400 respondents. The study relied on primary data collected using self-administered drop and pick questionnaires. The research identified 400 potential respondents who agreed to take part in the study. 211 respondents filled the questionnaires in time for data analysis, which represented a 52.75% response rate. The relationship between the behavioral biases and investor choices was tested using multiple regression. Pearson correlation, was used in testing the relationship between the variables. The study established that Herding and Stereotyping are negatively correlated against Individual Investor Decisions. The correlation is however weak as it is close to zero than it is close to -1. Negative correlation means that when we increase herding and stereotyping the value of investment decreases while Mental Accounting and Overconfidence were found to be positively correlated which means when increased value of investment also increases but they are also weak as they are closer to 0 than they are closer to 1. The study concluded that herding effect, stereotyping, mental accounting and Overconfidence influence the investment decision making process in the securities market. The study recommended that pertinent information on the prevalent market and economic conditions be availed to investors to ease choice of investments in the securities market in addition to investors being encouraged to intentionally seek information and training on how to make rational decisions while investing.