The effect of heuristic biases on investment returns by unit trusts in Kenya

Abstract

The study investigated the effects of heuristic biases on investment returns of unit trust companies in Kenya. Literature has documented that individual and institutional investors have embraced heuristics in their investment decisions which is influenced by emotional biases leading to discrepancy between market price and fundamental value. This in returns affects their investment returns. This study sought to establish whether heuristics biases affect investment returns of unit trusts. Descriptive design study was used through census survey of 56 different funds operated by the 18 unit trust companies. Questionnaire was used to collect data and 76% response rate was registered. The data collected from the questionnaires were scored giving values for the 43 unit funds and this was analysed using Statistical Packages for Social Scientists. Descriptive statistics, regression analysis and correlation analysis were used to summarize the research findings. The study established that unit trusts’ returns are affected by representativeness, overconfidence, and anchoring. Representativeness has a strong positive correlation with investment returns of r = 0.631. Overconfidence also had a correlation of r=0.422 indicating that this also affected decisions of fund managers. Anchoring, with a correlation of r=0.157 is not common among the unit trust manager. The study recommends that fund managers should know the heuristic biases affecting them so as to up with strategies of avoiding them. This will help reduce market anomalies.