The Effect of Cognitive Biases on Individual Investment Decisions at the Nairobi Securities Exchange

Abstract

Behavioral finance explains market anomalies which traditional asset pricing models fail to explain. This study sought to establish the cognitive biases which influence individual investment decisions at the Nairobi securities exchange. Descriptive research design was used. A sample of 69 individual investors was used. Primary data was collected using self-administered questionnaires. It was analyzed using SPSS Version 22 to generate frequencies, mean scores, percentages, and multiple regression analysis. Major findings indicated that results of individual investment decisions were significantly correlated to a number of cognitive biases including; random walk (r=-.764, p<.01); anchoring (r=-.810, p<.01); excessive optimism (r=.661, p<.01) and accounting information (r=.609, p<.0). The study concluded that cognitive biases play a significant role in individual investment decisions. The study recommends the education of investors to enable them to be rational, while the Capital Market Authority should track rogue brokers who may over charge unsuspecting investors for market information. Individual investors should seek for knowledge from their fund managers before they commit money in particular stocks so that they put money in stocks that are likely to yield returns as opposed to random walk. The Nairobi Securities Exchange should also initiate investor education programs for potential and existing investors so they understand the happenings in the stock exchange which would guide proper investment.