The Effect of Demographic Characteristics on Investor Behaviour at the Nairobi Securities Exchange

Abstract

Traditionally investors have been viewed as economically rational individuals who make decisions based on all available information. Most recent studies propose that investors are irrational and systematically over react to good and bad information events. The concept of rational investors has been supported by Efficient Market Hypothesis and Modern Portfolio Theory. Other studies have opposed the notion of rational investors have identified psychological biases that influence decision making process of an investor and leading them to make irrational decisions. Investors are irrational and make decisions based on some biases. This study applies Behavioral Finance Theory to explain the effect of demographic characteristics on investor behaviour. The demographic characteristics investigated are gender, age, education and income. The behavioral factors tested include overconfidence, anchoring, herding and loss aversion. The study concluded that the demographic characteristics have an effect on the way investor made their investment decisions. Those biases which varied with gender of an investor were overconfidence which was more prominent with the male investors, while herding and loss aversion affected female investors more. The younger investors were more affected by the biases than the older investors. The investors with high level of education were overconfident and less affected by herding. The study recommends that investors should include behavioral factors as part of their consideration when making investment decisions.