Investor Behavior And Common Stock Investment Decisions Among Individual Investors At Nairobi Securities Exchange, Kenya

ABSTRACT

The traditional theory of finance assumes that investors act rationally on the quest of wealth

maximization, and that they follow the basic tenets of risk and return in determining which

ventures to spend money on. However, various authors who have examined investors’ behaviour

avow that heuristic driven biases and emotions cloud the investors’ judgment, and often negate

the rules of rational economic decision making. According to these studies, investors are in fact

irrational, and are largely influenced by behavioural factors that introduce biases in their

decisions. Behavioural finance is the phenomena where psychology and economics are combined

in explaining the irrational decision making processes of economic agents. Psychology explores

various facets of human behaviour, and explains how human behaviour deviates from traditional

economic assumptions about human behaviour. Proponents of the behavioural finance ideology

state that investment decisions are characterized by emotional factors such as endowment, loss

aversion, regret aversion and mental accounting, herding behaviour and cognitive factors

including overconfidence, gamblers fallacy, hindsight biases and over confidence. This study

aimed to determine the investor behavior and investment decision among individual investors at

the NSE, which was also the overriding objective of the study. The following theories were

employed in the study, Modern Portfolio, Heuristic and Prospect theory. Descriptive research

design was used to provide insight on the research problem by describing the behavioural factors

that influence individual investment decisions. The target population for this study was the 1,000

individuals’ investor who trade at the NSE and had permanent residential address in Nairobi.

Primary data was obtained through closed and open-ended questionnaires that were selfadministered.

Some questionnaires were emailed to the respondents, depending on the agreed

media with the respondent. The investors were reached through judgmental sampling technique.

Multiple regression analysis method of data analysis was adopted. Descriptive statistical

measures such as the mean, mode and standard deviation were calculated using SPSS. It was

presented in form of frequencies, percentages, tables, pie charts and bar graphs. Qualitative data

was analyzed by means of content analysis. The study findings from model summary revealed

that R squared was 0.802 which implies that 80.2% of changes on individual investors at NSE,

Kenya are explained by the independent variables of the study. The findings revealed that there is

a significant relationship between the investor behavior and investment decision since the Pvalue

is less than 0.05. According to the regression equation established, taking all factors

(Herding effects, Risk aversion, Anchoring effect and Loss aversion) constant at zero, the

investment decisions will be 4.212. The study provided a P-Value of 0.003 which is lower than

the significance level of 0.05, thus investor behaviour significant influence investment decisions

among individual investors at the NSE, Kenya. The study concluded that investors’ behaviour

influence individual investors on investment decision making of individual investors at NSE,

Kenya. The study recommended that Nairobi Stock Securities should continuously share

information which is geared towards positively influencing investment decision. Through this

information investor will be in a position to make wise investment decisions.