The effect of behavioral finance factors on stock investment decisions in Kenya

Abstract

NSE investors in stocks are believed to base their decisions on the standard finance models of CAPM by Sharpe, portfolio theory by Markowitz, arbitrage asset pricing by Modigliani and Miller and the option pricing of Black, Scholes and Merton.However empirical research has shown that, when selecting a portfolio, investors not only consider statistical measures such as risk and return, but doalso consider psychological factors closely related to the field of finance. This study therefore applied behavioral finance factors to explain investment decision making by investors of the NSE market in Kenya. The study investigated the behavioral finance factors influencing investment decisions in the Kenyan NSE with a particular interest inMachakosCounty. This wasaimed at better reflecting the way NSE investors think and behave by use of behavioral finance. It intended to verify the extent to which these behavioral factors contribute to the success or failure of the investments made by these investors. Finally the study focused on establishing the frequency at which these factors are utilized ininforming investment decisions making by NSE investors. The study employedcross-sectional survey research design with a survey questionnaire to collect data from NSE investors within MachakosCountyas provided by registered stockbrokerage firms operating within MachakosCounty. This entailed employing qualitative research methodswhich are deemed to be the best in understanding and interpreting behavioral finance trends and ideologies. The researcher utilized field surveys for data collection and development as this has be deemed to be the most appropriate tool in gathering data that needs to reveal attitudes and opinions. The study targetedpopulationof1.67million active NSE investors under 3 stock brokerage firmswithinMachakosCounty. From the target population, a sample of 60 respondents was randomly obtained from the 3 stock brokerage firms to represent the interests of the rest. The samplewas to be wholly covered based on the fact that it was not too large and had the possibility of being centralized within MachakosCounty. To collect data the researcher utilized a closed ended structured questionnaire that was personally administered to the respondents while at the same time administering short interviews to those respondents that could spare some time for the same. This data collection was carried out within a period of 24 days by the researcher in person due to the sensitivity and confidentiality of the subject matter. The data collected wasanalyzed using SPSS Version 20 to generate frequencies, mean scores, standard deviations, percentages, and multiple regression analysis. This studyestablished thata unit increase in Certain- return bias is associated with - 0.468 decreases in stock investment,loss aversion 0.445, fear of regret 0.278and random walk framing 0.340 increase while the coefficient of determination was found to be 26.5% meaning the above factors accounted for this percent while other factors accounted for 73.5% of the NSE investors financial and investment decisions. These findings have been presented by use of tablesand charts. In conclusion this study is not an end in itself as it suggests further studies and research in this field with a view of identifying the most influential factors on stock market investors‟ behavior on how they base their future investment strategies and how they are likely to affect their investment decisions.