The Effect of Individual Behavioral Biases on Investment Choices at the Nairobi Securities Exchange: a Case of Kisumu County Investors

Abstract

Behavioral finance assumes that investors are normal and have differing views regarding utility maximization. Thus, investors make decisions that are not fully rational based on their beliefs and preferences. This study sought to establish how individual investors’ choices at NSE are affected by behavioral biases for Kisumu County investors. Data from a sample of 60 individual investors was collected through structured questionnaires administered by the researcher. The study employed both descriptive and correlation research design to identify the underlying relationships between individual behavioral biases and investment choices. Data analysis was done using descriptive statistics and linear regression analysis. The results obtained were presented in the form frequencies, percentages, charts and graphs. The study findings indicated that investors’ choices were modified by behavioral biases. Based on the applied regression model, 9.1% of the choices could be explained by behavioral biases considered in this study. The study further found out that representativeness and mental accounting biases were most influential biases. The investors were also indicative of having a high appetite for gains while clinging more on losing stocks. The study concludes that behavioral biases were an integral part of how investors arrive at their choices. Thus not all investment choices may be arrived at rationally as expected by applying conventional finance models. The study finally recommends investor sensitization on behavioral biases would and that be important for investors to seek investment advice from experts in orders to mitigate cognitive errors of such biases