The effect of anchoring on investment decision making by individual investors in Kenya

Abstract

Behavioral finance attempts to investigate the psychological and sociological issues that influence investment decision making process of individual and institutions. It also considers how various psychological traits affect how individuals or groups act as investors, analysts, and portfolio manager. Literature has documented that individual and even institutional investors have embraced heuristics in their investment decision making. The study objective therefore sought to establish whether anchoring affect investment decisions of individuals in Kenya. The study used descriptive researches that employed a survey study research design and targeted a population of individual investors in the 22 licensed brokerage firms operating in Kenya. Semi structured questionnaire was used for data collection with 85% response rate being registered. A random sample of 120 investors from the 22 licensed brokerage firms was picked for the study. Analysis was done using Statistical Packages for Social Scientists and Microsoft Excel, correlation to analyze the type of relationship between the variables in the study and Regression was used to determine the degree of relationship. The study established that individual investment decisions are affected by anchoring behavior and that decisions are affected by experience of their past performance suggesting the effect of anchoring. The determination coefficient as measured by the adjusted R-square presented a strong positive relationship between dependent and independent variables gave a value of 0.936. This depicts that the factors account for 93.6% of the total variations in investors choices. Behavioral finance models are not empirically supported and therefore should not be used in isolation for investment analysis by individuals. The study recommends that individuals should be sensitized on 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 as this is likely to help many individual investors make better decisions