Effect of behavioral influences on investor portfolio performance at the Nairobi securities exchange

Abstract

This research study was undertaken with the objective to establish how behavioral influences impact on portfolio performance of retail investors at the Nairobi Securities Exchange. Portfolio performance was measured using Sharpe ratio, while behavioral influences were anchoring, loss aversion, herding and overconfidence. A descriptive research design was used in carrying out this research study. The population of this study was all the retail investors at the Nairobi Securities exchange estimated to be 1.77 million in 2016 according to the Capital Market Authority. A sample of one hundred investors drawn using snowballing technique. Primary data was sourced through structured questionnaires administered to one hundred respondents through the drop and pick later method. Secondary data was also obtained on the shares past prices and the Treasury bill rate from the Nairobi Securities exchange and the Kenya National bureau of statistics respectively. A final response rate of fifty three percent was achieved. Data collected was then edited and coded ready for analysis. Data analysis was undertaken using descriptive statistics and correlation and regression analyses. The study finds that portfolio performance (measured by Sharpe ratio) and investor overconfidence are negatively correlated but correlated positively with anchoring, herding, and loss aversion. Overall, behavioral influences therefore have a weak positive effect on portfolio performance among retail investors at the Nairobi Securities Exchange. From this study even the financially literate investors suffer from behavioral effects, from the study eighty seven per cent of the respondents have financial training. The study recommends that the Nairobi securities Exchange, Capital Markets Authority and other capital market players clearly appreciate the role played by the retail investor behavior in influencing share price movements and use the information as a basis of investor education for purposes of minimizing the amount of noise trading and price distortion in the Kenyan capital market. It also serves as a reference point for investors to understand how their behavior affects their portfolio performance.