THE IMPACT OF BEHAVIORAL BIASES ON INVESTOR DECISIONS IN KENYA: MALE VS FEMALE (original) (raw)
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The International Journal of Business & Management, 2021
Lewllen,2001). But several studies in the developed capital markets found that many phenomena regarding stock investment decisions cannot be explained. Investors in capital asset exchanges, typically take many different and important decisions, the most common are taking investment decisions in order to maximize their wealth; while others deal with considerations seeking market timing techniques to maximize their wealth. In determining influence of behavioral biases on investment decisions of individual investors in NSE also several independent variables were taken into account. These are fear of regrets bias, human availability heuristics bias, mental accounting bias, and anchoring and herd mentality bias. These independent variables were expected to have either a positive or negative effect on the investment decisions of individual investors in NSE. This study therefore sought to answer the following research question;-was there any relationship between behavioral biases and investment decisions of individual investors in the NSE. In answering the above question, both qualitative and quantitative approach was used to develop the concept of the research (Creswell, 2003). A study of related relevant literature formed the major parts of this research and the result was presented using statistical tables. The main objective of this study was to establish whether the behavioral biases and investment decisions had an influence on individual investors in Nairobi Security Exchange (NSE).; hence, several studies had different results in identifying any of those factors as the most influential on stock investment decisions in the other markets. This study examined the effect of the following behavioral biases on individual investment decisions. These biases were; fear of regrets bias (Shiller, 1995), human availability heuristics bias (Hirshleifer,2001), mental accounting bias (Thaler, 2006), anchoring bias (Kahnman & Riepe, 1998) and herd mentality (Shiller et al., 2004). 1.1.1. Behavioral Biases Behavioral bias was defined by Shefrin, (2000) as "a rapidly growing area that deals with the influence of psychology on the behavior of financial practitioners". Individual stock investments behavior was concerned with choices about purchases of small amounts of securities for his or her own account (Nofsinger and Richard, 2002). No matter how much an investor was well informed, had done research, studied deeply about the stock before investing, he also behaves irrationally with the fear of loss in the future. This different behavior in the individual investors is caused by various factors which compromise the investor rationality. Several studies in the context of the stock markets on behavioral biases show that investors are greatly influenced by their behavioral characteristics. Ariely, Loewenstin, Prelec (2006), for instance, argue that the judgement of the fundamental values of assets is a tough task, so investors are likely to value their assets in relative terms, and mostly become anchored to the previous buying prices. Similarly, Barber, Odean, and Zhu (2009) found out that the investors are likely to buy `` attention grabbing'' or `` in new stock'' because these stocks are easily to recall. Moreover, the investors tended to buy previously owned stocks because they could easily recall them and had some information about them (Mutswenje, 2017). Fear of Regret Bias, according to Shiller, (1995), human beings had the tendency to feel the pain or the fear of regret at having made errors. As such, to avoid the pain of regret, people tended to alter their behavior which ended up being irrational at times. Linked with fear of regret was a cognitive dissonance, which was the mental suffering that people experience when they were presented with the evidence that their beliefs were wrong, (Odean,1998). People could be subjected to behavioral biases during decision making which prevented them from making rational decisions (Shefrin, 2000). Disposition bias was the tendency of individual investors to sell investments that were performing well too soon and hold on losing stock too long. In disposition bias people avoided action that created fear of regrets and sought actions that caused pride. Nofsinger, (2005) found that selling an increasing stock qualifies a good choice to buy that stock in the initial instance and brought pride. Doing away with an underperforming stock led to the realization that the initial choice to buy it was not good, and thus brought about fear of regrets found in the USA. Human Availability Heuristics Bias could be viewed as mental short cuts used to ease the cognitive load of making a decision or finding a satisfactory solution for a problem. Examples of this method included use a rule of thumb, or common sense. These rules worked well under most circumstances, but in certain cases led to systematic errors or cognitive biases-(Kahneman & Tversky,1974). Cognitive biases were a pattern of deviation from rational behavior in conclusion that occurred in specific situations. In a context where those specific situations occurred, such was the case of behavioral bias, human beings were considered as predictably irrational decision makers. Therefore, behavioral bias suggested that a new framework was to think about investors' behavior on investment decisions. Self-deception was a process which involved convincing oneself of a truth (or lack of truth) so that one does not reveal any self-knowledge of the deception. One deceived oneself to trust something that was not true as to better convince others of the truth. The biologist Trivers, (1991) suggested that deception plays a significant part in human behavior and communication (as in animal behavior in general). According to Trivers, (1991) self-deception has evolved so that one has an advantage over another:-the ability to read subtle cues such as facial expression, eye contact, posture, tone of voice, and speech tempo to infer the mental states of the other individuals. In Trivers self-deception theory, individuals are designed to think they are better (smarter, stronger, better friends) than they were because this helps individual fool others about these qualities. According to Hirshleifer (2001), most known judgments and decision biases had three common roots;-availability heuristic simplification. Availability Heuristic simplification happened when cognitive resource constraints (like read limitation attention, processing power and memory) force the use of human availability heuristics bias were used to make decisions. Another source of bias was that we were subject to emotions that could overpower reason. An evolutionary rationale for a lack of self-control was that emotions such as love and rage could act as mechanism that allowed credible THE INTERNATIONAL JOURNAL OF BUSINESS & MANAGEMENT
Behavioral Biases and Investment Performance: Does Gender Matter? Evidence from Amman Stock Exchange
This study investigates the existence of behavioral biases in Amman Stock Exchange and their effect on investment performance from investor's point of view. In specific, the effects of overconfidence bias, familiarity bias, loss aversion bias, disposition bias, availability bias, representativeness bias, confirmation bias and herding bias are investigated. Moreover, the study inspects whether the behavioral biases differ between males and females. The results show that there is a statistically significant effect of overconfidence bias, familiarity bias, availability bias, representativeness bias and herding bias on investment performance (p≤5%). Moreover, disposition bias, confirmation bias and loss aversion bias significantly affect investment performance but at a critical level of (p≤10%). No statistically significant differences are found between the answers of males and females.
Influence of Behavioral Biases on Professional Investment Decision in Kenya
Investment professionals at the NSE are believed to be rational and base their decisions on traditional finance models such as the modified portfolio theory. Recent studies have however shown the existence of behavioral biases and found that they affect the way investment decisions are made. This study therefore sought to determine the influence of behavioral biases on professional investment decision in Kenya. The study focused on cognitive dissonance, optimism, hindsight and status quo biases. The study covered in depth analysis of limits to arbitrage, prospect theory and herding theory which tries to explain the fundamental forces on which behavioral finance is anchored. It also critiqued empirical literature on behavioral finance. The research used a cross sectional research design and gathered primary data using questionnaires and interviews. The data was analyzed using multiple regression analysis. The results have been presented using tables. The study found that behavioral biases have an influence on professional investment decision making. The study specifically found that cognitive dissonance, optimism, hindsight and status quo biases influence the decisions made by professional investors. The study found that 64.5% of the variation in professional investment decision making was explained by the variations in the four behavioral biases studied. This was as a result of the R 2 value being 0.645 after running a regression of the dependent variable (professional investment decision making) and independent variables (cognitive dissonance bias, optimism bias, hindsight bias and status quo bias). The study therefore recommends that professional investors should be aware of cognitive biases that affect their decision making and take appropriate measures such as use of analytical tools in decision making.
International journal of scientific and research publications, 2021
Investment decisions are usually influenced by various behavioural factors. The assumption is that herding, prospecting and heuristics influence personal investment decisions among investors in the stock market. The main objective of this study was to analyze the behavioral factors influencing investment performance of individual investors in Nairobi Security Exchange. The specific objectives of the study were; assess whether the following factors-herding, prospect (loss aversion, regret aversion, and escalating the commitment), heuristic (availability bias and overconfidence) and investment decisions-are significantly correlated with each other in the NSE and establish whether the following behavioural factors-herding, prospect (loss aversion, regret aversion, and escalating the commitment) and heuristic (availability bias and overconfidence) combined together significantly influence the investment performance in the NSE. The investigator hypothesized that H01: The following behavioral factors-herding, prospect (loss aversion, regret aversion, and escalating the commitment) and heuristic (availability bias and overconfidence) and investment decisions-are not significantly correlated with each other in the NSE and H02: the following behavioural factors-herding, prospect (loss aversion, regret aversion, and escalating the commitment) and heuristic (availability bias and overconfidence) combined together do not significantly influence the investment performance in the NSE. In order to achieve the set objective, the investigator adopted survey research design targeting 1,196,995 individual investors in Nairobi Securities Exchange. The Slovin's formula was used to estimate the 400 sample size of a population whereas the researcher took the high limit of 500 individual investors in Nairobi Securities Exchange. Structured questionnaire was used to collect primary data. The study established that loss aversion and overconfidence behaviour was displayed by the individual investors at a high level. The researcher recommends that The individual investors should be encouraged to avoid the influence of loss aversion. Instead, they should rely on fundamental analysis of the stocks to make decisions.
Effect of Behavioural Biases on Investments at the Rwanda Stock Exchange
Journal of Accounting and Finance, 2017
The main objective of this study was to establish the effect of behavioural biases on investment in the Rwanda Stock Exchange. The specific objectives were to establish the effects of self-serving bias, over-optimism bias, loss aversion, self-attribution bias and confirmatory bias on investment in the Rwanda stock exchange. The prospect theory, heuristics theory and herding theory formed the foundation of this study. The underlying epistemology of this research was positivist; focusing on examining earlier established theories under the assumption that reality is objectively given and can be described by measurable properties independent of the observer and the instruments. The study used cross-sectional descriptive survey research design to ascertain and establish the effect of behavioural biases on investment in the Rwanda stock exchange. The target population comprised of 13,543 individual, group investors at the Rwanda Stock Exchange. Random sampling was used where the targeted population was individual investors to finally yield a sample size of 374 respondents. A questionnaire was used to collect the primary data. Data analysis involved the use of descriptive and inferential statistics. A linear regression model was used to predict the probability of different possibility outcomes of dependent variables, helping to predict the probability of an investor to invest in Rwanda Stok Exchange. The results confirmed that there was a significant positive linear relationship between self-serving bias, over-optimism bias, loss aversion bias, self-attribution bias, confirmatory bias and Investment in Rwanda stock market. The study also concluded that most investors suffered from behavioural biases in investment in stock markets. The study further recommends that the individual investors to seek the advice of stock brokers/fund managers to advise them accordingly in terms of performance of a specific security in which an investor would wish to invest in.
Behavioral Biases and Their Impact on the Satisfaction of the Investor- Muhammad Asif
Behavioral Biases and Their Impact on the Satisfaction of the Investor- Muhammad Asif, 2016
Pakistan stock markets are quite volatile and there have been some incidents like the crash of 2008 which call for research in this domain of knowledge so, in order to fill the gap this study tries to see whether behavioral biases exist among the small investors at Lahore Stock Exchange and how these behavioral biases play their role with regard to the investment outcomes of the investors and their relative satisfaction with the outcomes. Survey methodology was used in the study using questionnaire as data collection tool. The study considers the behavioral biases of overconfidence, overtrading, disposition effect, herding behavior and anchoring and assesses their impact on the satisfaction of the investor with its investment results. Statistical Package for the Social Sciences version-16 (SPSS) was used for analysis and simple descriptive along with the regression analysis techniques are employed to draw inferences from the data. Key words: Overconfidence, Overtrading, Disposition effect, Herd behavior, Anchoring.
Determinants of individual investors’ behaviour in the Nairobi Securities Exchange
2012
The study of individual investors’ behaviour, anchored on the behavioural finance theory, is of interest and a relatively new phenomenon in Kenya Behavioural finance theories are based on psychological attempts aimed at comprehending how sentiments and cognitive errors influence the individual investors’ behaviours, especially in regard to the investment decision making process. The objective of this study is to identify the determinants of individual investors’ behavior in the NSE. In cognizance that there are few studies relating to the individual investors’ behaviour at the NSE, it is expected that this study will contribute significantly to this area of study in Kenya This research examines some of the existing theories relevant to the investors’ behaviour and behavioural finance under the theoretical literature review. Subsequently, a review of some of the behavioural studies is covered under the empirical studies section. Data for the study is primary data collected by the use...
The Impact of Behavior Biases on Investor Decision Making Regarding Financial Securities
Asian Journal of Economics, Business and Accounting, 2022
Investor’s irrationality is an inevitable truth that has been over and over highlighted by using researchers [1]. Consequently, this look at is any other effort to assess the role of behavioral biases in financial choice making in Pakistan stock alternate (PSX). A survey questionnaire is designed and used to acquire responses the use of convenience sampling approach from pattern of 184 investor of PSX. Behavioral biases encompass overconfidence, anchoring, disposition, representativeness and availability bias impact of traders. Multiple regression models are used to check impact of five behavioral biases on investment decision. We want to test whether or not those biases overconfidence, anchoring, disposition, representativeness and availability bias effect have significant effective impact on investment decision or not. Primarily based on effects we conclude that whether or not there are lots adjustments in investment decision is because of behavioral biases. This look at will help...
Investor Behavioral Bias Based on Demographic Characteristics
Advances in Economics, Business and Management Research, 2020
This study aims to examine the effect of demographic characteristics such as age, gender, income, and occupation on investor behavioral biases such as overconfidence bias, disposition effect, and herding bias. This research was conducted by distributing questionnaires to respondents who are 151 stock investors listed on the Indonesia Stock Exchange with a minimum age of 17 years. The results of the study showed that each dependent variable was at least influenced by one of the demographic characteristics. From the hypothesis test, it can be seen that overconfidence bias was influenced by gender and income. While the disposition effect was influenced by age, and the herding behavior bias was influenced by occupation.
An Analysis of Behavioral Biases in Investment Decision-Making
International Journal of Financial Research, 2019
Individual investor’s behavior is extensively influenced by various biases that highlighted in the growing discipline of behavior finance. Therefore, this study is also one of another effort to assess the impact of behavioral biases in investment decision-making in National Stock Exchange. A questionnaire is designed and through survey responses collected from 243 investors. The present research has applied inferential statistics and descriptive statistics. In the existing study, four behavioral biases have been reviewed namely, overconfidence, anchoring, disposition effect and herding behavior. The results show that overconfidence and herding bias have significant positive impact on investment decision. Overall results conclude that individual investors have limited knowledge and more prone towards making psychological errors. The findings of the study also indicate the existence of these four behavioral biases on individual investment decisions. This study will be helpful to finan...