The Behaviour and Financial Performance of Individual Investors in Kenya

Abstract

While conventional academic finance emphasizes theories such as Modern Portfolio Theory (MPT) and the Efficient Market Hypothesis (EMH), the emerging field of behavioral finance investigates the cognitive factors and emotional issues that impact the decision-making process of individuals, groups, and organizations. This paper presents some general principles of behavioral finance including: overconfidence, cognitive dissonance, regret theory, and prospect theory. The paper seeks to identify such behaviors from individual investors as they set out to make their investment decisions. The research also goes ahead to identify the companies that majority of the individuals sampled either buy or sell shares on. An analysis of the so identified companies on firm specific variables such as abnormal returns and measures risk such as volatility and market capitalisation will be used to reveal the financial performance of the investors. From this, the research will determine whether the individual investors were poised for no gains at all or benefited from long term or short term gains. The paper uses both * questionnaire survey and secondary data from the NSE and CMA to identify the individual investor behaviors and determine their financial performance respectively. From this research, the researcher hopes to provide strategies to assist individuals to resolve the mental errors and emotional pitfalls by recommending some important investment approaches for those who invest in stocks. This will enable the fund managers as a result of being able to set better investment outcomes, achieve better advisory relationships with their clients. The researcher will also be able to contribute literature which will form the basis of future more advanced research work on the field of behavioral finance.