Effect of Cognitive Biases on Investment Decisions Among Retail Investors at the Nairobi Securities Exchange

Abstract

Decision-making is a complex activity and decisions can never be made in a vacuum by relying on the personal resources and complex models, which do not take into consideration the situation. Analysis of the variables of the problem in which it occurs is mediated by the cognitive psychology of the investor. Behavioral finance explains market anomalies which traditional asset pricing models fail to explain. This study sought to establish the cognitive biases which influence retail investment decisions. Descriptive research design was employed. A sample of 96 retail investors was used. Probability sampling technique was adopted to randomly select the 96 respondents from the 21 brokerage firms trading at the Nairobi Securities Exchange. Data collection was done via questionnaires. It was analyzed using SPSS Version 22 to generate frequencies, mean scores, percentages, and multiple regression analysis. Major findings indicated that results of retail investment decisions were significantly correlated to: herding effect bias, overconfidence bias, excessive optimism bias and accounting information bias. The study concluded that cognitive biases play a significant role in retail investment decisions. The study recommends that the NSE should offer investment education to investors in order to minimize the effects of cognitive biases; CMA should track rogue brokers who may over charge unsuspecting investors for market information and individual investors should seek for market information from their fund managers in order to make rational decisions while investing.