Effect Of Behavioral Finance Factors On Investment Decisions Of Individual Investors At The Nairobi Securities Exchange In Nairobi County

Abstract

Recent studies on individual investors’ behaviour have shown that people tend to react to and interpret the same information differently, creating psychological biases which are categorized as Behavioural Finance. These behavioural biases were categorized into four broad behavioural factors: Heuristics, prospect, herd and Market factors. The objective of the study was to determine the effect of heuristic, prospect, herd and market factors on the investment decisions of individual investors at the Nairobi Securities Exchange in Nairobi County. The study incorporated cross sectional non-experimental descriptive research design. The target population was the individual investors at the Nairobi Securities Exchange, sampled from 385 individual investors in Nairobi County. Close-ended questionnaires were used to collect data whereas snowballing sampling technique was used to sample respondents from our field survey. The data was coded and analyzed using STATA, and analyzed using multiple linear regression method. The findings of the study reveal that heuristic factors, prospect factors, herd factors and market factors had a joint effect of 16.01% on the investment decision of individual investors at the NSE controlled by the year of schooling, income, gender, type of investor, type of security and age variables, while the remaining percentage was influenced by other factors excluded from the model. Heuristic, herd and market factors had a positive significant effect on investment decisions whereas prospect factor had a negative significant effect on investment decision. A multinomial logistic regression was also fitted to measure the same variables but the findings reveal that the overall p-value >0.05, making it insignificant. From the multiple linear regression models, the findings reveal that individual investors have little information or the technical knowhow of how to trade at the NSE. Individual investors should spend more time in school since this is evident from the study. The Nairobi Securities Exchange should step up its efforts to increase Investor education awareness since it key to overcoming unfavorable investment outcomes caused by behavioral biases.