Behavioral factors and investment decisions by traders in Kibuye market, Kisumu town, Kenya
Investment decisions are influenced by many factors depending on individual investor’s state of mind and investment environment. Many theories have been advanced to explain how markets function and focus on rational human beings to explain how investors make their investment decisions. Sultana (2010), posit that traditional finance theory rely on two key assumptions under condition that investors make rational decisions; and that they are unbiased in their predictions about future returns of the securities. In contrast to these traditional finance theorists, Peters (1996) notes that it is not the question of rationality in making investment decisions but it can be said that how investors make their decisions is a subject matter of behavioral psychology. This implies that there are irrational behaviors that tend to shape the decision processes of traders on how, where and when to invest that go beyond rational market fundamentals. Heuristics and Prospect theories that emerged from the studies by Kahneman&Tversky (1974, 1979) conclude that investors do not always behave rationally. Some investors are overconfidence of their skills and knowledge of the market and hold the belief that any success is due to their talents and failure is due to “bad luck”. This is what Gervais and Odean (2001) refer to as self-attribution which causes them to overestimate their talents as (Brown and Reilly, 2009). Thus, there are behavioral factors that tend to influence investment decisions in different market set up. This study aimed at establishing behavioral factors that influence investment decisions by investors trading in Kibuye market, Kisumu Town. A descriptive survey design was adopted to help address study objective. The study populations were 400 traders who subscribe for annual trade licenses to operate in Kibuye market. This is according to the Kisumu County, Ministry of Trade Registry data (2015). A sample size representative of the population for the study consisted of 196determined using Krejcie& Morgan (1970) predetermined table of sample sizes for different population sizes. The study employed stratified random sampling technique to select the sample members. Purposive sampling was also used to identify the traders (respondents) of the selected businesses in the market during data collection. The study collected primary data using questionnaires containing a mixture of structured and a 5-point likert scale questions. Descriptive statistics and factor analysis were used to analyze the collected data with the help of SPSS 20.0 software. The findings are presented in tabular forms and complemented by discussions. The findings showed that investment decisions of traders in Kibuye market is significantly influenced by: over-confidence and market information (at mean of 4.01 each), availability/ anchoring bias (mean of 3.72), loss-aversion and mental accounting (mean of 3.60), representativeness bias (3.37), risk-aversion (3.06) and herd behavior (3.00) in that order. The study recommends investor education to the investing population in Kibuye market in order to help avert a possible unfavorable investments outcomes caused by behavioral biases. In order to manage the excesses of behavioral influences to investment decision making, training programs that create investor awareness and ability to identify and guard against behavioral biases that lead to poor investment choices should be offered to both potential and existing traders in the Kibuye market. For this, the County Government of Kisumu should undertake to formulate and implement these programs given the importance of Kibuye market in generation of revenue.