BEHAVIOURAL BIASES AND INVESTMENT DECISIONS AT THE NAIROBI SECURITIES EXCHANGE
Abstract
This research offered a comprehensive analysis of behavioral biases and their impact on investment decision making using the context of NSE and provides a much-needed understanding of the psychological aspects of financial markets in an emerging economy in Africa. The research thus deviated from the neoclassical finance frameworks that assume rational investors to analyze four behavioral biases, including overconfidence, anchoring, cognitive dissonance, and herding that negatively influence investment decisions and cause inefficiencies in the market. The study used both quantitative survey data gathered from 385 retail investors with 72% response rate and 277 usable responses, and qualitative assessment of behavioral patterns discerned from past market occurrences. The sample target was fairly young, with 44% of the sample being between 29-39 years old and 56% of the sample having a bachelor’s degree, which was indicative of an educated investor base that might exhibit behavioral biases typical of emerging markets. Statistical analysis incorporates descriptive metrics, correlation testing, and multiple regression modeling to quantify bias impacts while controlling for demographic variables. From the study findings, cognitive dissonance stood out as the most significant bias (mean = 4.16) showing investors’ inclination to justify their actions instead of adjusting their decisions. Consequently, anchoring effects revealed positive effects (ß = 0.299, p<0.01), implying that reference points can be useful in uncertain markets. On the other hand, overconfidence and herding presented significant negative effects (β = -0.152, p<0.05; β = -0.175, p<0.01) that led to excessive risk-taking and momentum trading that are detrimental to portfolio performance. The predictor variables accounted for 99.1% of the decision variation (R² = 0.991), further supporting the importance of behavioral factors over rational choice theories. This paper found that some biases provide short-term decision consistency, whereas others worsen investment performance. It suggested that financial literacy, choice architecture, and policy interventions can effectively address bias-driven distortions in the NSE. Future research should therefore examine how susceptibility to bias varies across different demographic groups and the long-term impact on the market.
Key Words: Overconfidence, Anchoring, Cognitive Dissonance, Herding
CITATION: Onderi, D. O., & Miroga, J. (2025). Behavioural biases and investment decisions at the Nairobi Securities Exchange. The Strategic Journal of Business & Change Management, 12 (2), 543 – 559. http://dx.doi.org/10.61426/sjbcm.v12i2.3227
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DOI: http://dx.doi.org/10.61426/sjbcm.v12i2.3227
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