The Effect of Behavioral Biases on the Mutual Fund Choices by Investors in Kenya

Abstract

The aim of the study was to determine the effect of behavioral biases on the mutual fund choices by investors. The study was anchored in four specific objectives. These included the effects of: the disposition effect behavior, the narrow framing behavior, the overconfidence behavior and the lottery stock preference behavior on investor’s mutual fund choices. The study used descriptive researches that employed a case study research design and targeted a population of all mutual fund investors in the 16 licensed mutual fund operators in Kenya. A random sample of 80 investors from the 16 licensed firms was picked for the study. Primary data was collected through questionnaires while correlation was used to analyze the degree of relationship between the variables in the study. Regression was used to determine the type of relationship. The SPSS computer program was used for analysis. The study presents evidence of the existence of behavioral biases of mutual fund choices by investors in Kenya. It also found out that investors exhibit a positive bias, consistent with earlier studies carried on the same subject. The study recommends that individuals should have computational skills in simplifying complex tasks to make decision process easier instead of using heuristics which may lead people to some irrational behaviors. The study also recommends the need for a public campaign to increase awareness of basic investment principles and the benefits and pitfalls of mutual funds investment choices. This is likely to help many individual investors make better decisions.