The Relationship between Behavioral Biases and Portfolio Performance among Individual Investors at the Nairobi Securities Exchange

Abstract

Behavioral finance, unlike traditional finance, holds the view that investors do not always act rationally in their investment decisions in the stock markets as they are influenced by behavioral predispositions, raising the question of how behavioural biases influenced individual investors’ portfolio performance in the securities exchange. This study’s broad objective was to assess how individual investors’ behavioural biases related to their portfolio-performance at the NSE. Specifically, the study evaluated how herding, loss aversion, overconfidence and anchoring biases related to the individual investors’ portfolio performance at the NSE. A descriptive cross-sectional research design was adopted. A sample of 384 individual investors at NSE was used. Primary data was collected using researcher-administered questionnaires. Study data was analyzed using descriptive statistics that included frequencies, mean scores and percentages while multiple regression analysis was utilized to analyze how the predictor variables related with the outcome variable at 5% significance level. The analytical software was SPSS Version 24. Findings were depicted in figures and tables. Key findings of the study were that a statistically significant positive relationship was established between the individual investors’ portfolio performance and several behavioral biases including herding, overconfidence and anchoring. However, the relationship with loss aversion bias was negative and significant. The study concluded that behavioral biases had a significant influence on portfolio performance among individual investors at the NSE. It is recommended that NSE in collaboration with CMA should initiate investor education programs or workshops with a view of enriching potential and existing individual investors’ understanding of how the stock market operates hence aiding them in making judicious investments. Individual investors should consider seeking guidance and necessary information from existing stock brokers and fund managers so they are able to make informed investment decisions at the NSE.

Keywords: Behavioural Biases, Portfolio Performance, Securities, Exchange