The Effect Of Behavioral Biases On Investment Decision Making By Unit Trust Investors In Kenya

Abstract

Studies done in the field of behavioral finance have showcased how human beings use behavioral biases to aid in decision making when investing, resulting to market anomalies. Differing with traditional finance theorists, who suggested that investors are rational and make investment decisions after conducting fundamental analysis about the securities, behavioral finance literature has suggested that investors are affected by emotional predispositions. This leads to them making irrational investment decisions resulting to poor investment returns. Behavioral biases are categorized under two broad factors – Heuristic factors and Prospect theory. This research was taken to ascertain the effect of behavioral biases under prospect theory and heuristic influences on decision making in unit trusts by investors in Kenya. Descriptive research design was utilized and primary data collection tool was a questionnaire which was administered online using google forms to a convenient sample of 200 respondents. The response rate was at a 100% and the data was analyzed using Statistical Packages for Social Scientists (SPSS) software and descriptive statistics, regression analysis and correlation analysis were used to summarize the research findings. The research established that unit trust investors were affected by Overconfidence, loss aversion, regret aversion mental accounting and gambler’s fallacy when making decisions about unit trusts. Availability bias was found to have an insignificant negative effect on investment choice by unit trust investors. The R square value (Coefficient of determination) from study was 0.161, which means that 16.1% of the discrepancy in Investment Decision making is elucidated by the fore mentioned independent variables. The study recommends that investors be made aware of behavioral biases that exist and how to avoid them through trainings offered by unit trust fund companies in order to get desired returns from their investments. The study also recommends financial literacy programs to be introduced to the school curriculum to ensure that people become aware of biases from a very early age, thereby creating better informed investors in the future.