EFFECT OF BEHAVIOURAL BIASES ON INVESTMENT DECISIONS FOR INDIVIDUAL INVESTORS AT NAIROBI SECURITIES EXCHANGE

Abstract

While investors have traditionally been viewed as rational, with time, some variations from rationality have been experienced and this can be attributed to behavioural biases affecting investors. Investors trade excessively, follow the behaviours of other investors and sell wining stocks while holding onto losing stocks. The researcher aimed to determine the effect of behavioural biases on investment decisions for individual investors at NSE. The target population was individual investors at NSE.A sample of 100 investors was selected for this study and data collected through questionnaires. In the study, descriptive research design was used, as it is good in explaining behaviours and attitudes. Descriptive and inferential statistics were employed in the analysis and STATA 13.0 was used for analysis. Data were expressed in frequencies and percentages and results presented in tables and figures. The relationship between the dependent and independent variable was established using simple regression analysis. Regression diagnostics tests including tests for normality, heteroscedasticity and multicollinearity were carried out to ensure fitness of the model. The researcher did correlation analysis and results indicate there was a significant weak negative correlation between anchoring and investor's percentage returns. (R=-0.30, P= 0.03). Regression results indicate that anchoring, availability and herding had a significant effect on investment decisions with a P value of 0.03 for anchoring , 0.04 for availability and 0.04 for herding. Results indicates that investors who have anchoring and availability had lower returns than those without the biases. Those who had herding behaviour experienced better results than those who had no herding behaviour. Other behavioural biases were found to have no significant effect on investor's returns. From the multivariable analysis, R 2 results indicate that 27.90% of the changes in investors returns can be explained by behavioural biases. The other changes in returns, 72.10% can be explained by other factors not accounted for in this study. F test from ANOVA analysis