Effect of Behavioural Biases on Investment Decisions of Individual Investors in Kenya

Abstract

Major findings showed that results of individual investor decisions were significantly correlated to: representativeness bias (r=-.253, p<.01); Illusion of Control bias ((r=-.240, p<.01); Cognitive Dissonance bias (r=.200, p<.01); Herd Instinct bias (r=.200, p<.01); and Hindsight bias (r=.187, p<.01). These statistically significant correlations suggest that these dimensions of behavioural factors influence individual investor decisions. However, individual investor outcomes were not significantly related to loss aversion bias (r=.003, p<.01); Self attribution bias (r=-.020, p<.01); regret aversion bias (r=-.022, p<.01); over-optimism bias (r=-.023, p<.01). Successful stock investing is more than choosing a particular stock; it is also how to go about doing it. This is achieved through staying rational, choosing a few stocks that are likely to outperform the market, having fortitude to hold on them during short-term market volatility, keeping track of them and controlling excess optimism and pessimism. However, this has not been observed in practice. The field of behavioural finance has developed in response to the increasing number of stock market anomalies (undervaluation or overvaluation) that could not be explained by traditional asset pricing models. However, an apparent lack of consensus among financial scholars concerning the validity of behavioural finance theory has been noted in literature. This lack of consensus suggests that behavioural finance as a concept is still open for debate.