IMPACT OF HEURISTIC BIASES ON INDIVIDUAL INVESTOR DECISION MAKING PROCESS AT NAIROBI SECURITIES EXCHANGE: A SURVEY OF INDIVIDUAL INVESTORS IN MERU COUNTY

Abstract

Although finance has been studied for many years, behavioural finance is quite a new area. Behavioural finance theories, which are based on psychology, attempt to understand how emotions and cognitive errors influence individual investors’ decisions. The concept of investors’ decision-making process informs the design and delivery of investment opportunities. Traditional finance proposes a rational, risk-averse investor seeking to maximize returns, making the right decisions at the right time with correct information at hand and is not diverted by emotions and feelings. Recent empirical research has identified deficits in the traditional finance view. Investor irrationality, multiple risk attitudes for the same investment, and other investor behaviours cannot be explained fully by the traditional finance models. A significant insight of behavioural finance has been the manner in which individuals compress massive information into simple rules, known as heuristics, to simplify and speed up complex decision-making. This study analyzed the influence of heuristics variables on the individual investor decision making process in Meru County, with overconfidence, information availability, anchoring, gamblers fallacy, representativeness and hindsight measured as the indicative parameters. The target group was individual investors residing in Meru County with regular trading at the bourse. A descriptive survey was adopted and purposive sampling used to select the 144 individual investors to whom a pre-tested questionnaire was administered through use of Kobo Collect Toolbox. Data was analyzed using Factor Analysis aided by SPSS software version 2.0. Information availability bias had the highest impact on investment decisions, implying that investors rely on readily available and familiar information for their stock investment decisions. Other heuristics biases that impacted investor decision making process moderately were overconfidence and anchoring biases while Gambler’s fallacy and representativeness biases had low impacts on the decision making process. The influence of the factors has both positive and negative influence ob the individual investor. This study contributes to behavioral finance research, and provides insights on “how investors think” to develop and market investment products, and development planners and policy makers.