Herding Behaviour and Individual Investor Decision-Making at the Nairobi Securities Exchange, Kenya

Abstract

The securities market acts as a catalyst for economic development by providing investors an opportunity for wealth creation and financial security while providing companies with the necessary resources for expansion and innovation. Statistics from the Capital Markets Authority and the Nairobi Securities Exchange indicate a consistent decline in individual investor participation at the securities market. Previous studies have established that individual behavioral biases could be the reason for the decline. However, these studies have been inconsistent on the extent to which they relate with individual investor decisions as most of them have focused on a specific group of individual investors such as lawyers and teachers. Against this backdrop, the study assessed the relationship between behavioral factors and individual investor decision-making at the Nairobi Securities Exchange. Specifically, the study assessed the relationship between risk attitude, herding behavior, overconfidence, anchoring behavior, and individual investor decision-making at the Nairobi Securities Exchange. In addition, the study assessed the moderating effect of market information on the relationship between behavioral factors and individual investor decision-making at the Nairobi Securities Exchange. The study was anchored on behavioral factors theory, prospect theory, and expected utility theory. The study was guided by positivist research philosophy and correlational research design. The target population of the study was the 2.03 million individual investors who trade at the Nairobi Securities Exchange through 17 licensed brokerage firms in Kenya. Simple random sampling techniques were used to select a sample of 399 respondents. The study used a structured questionnaire to collect data. Construct validity of the data collection instrument was enhanced through a detailed literature review, and content validity was enhanced through consultation with the lecturers and other experts. Internal consistency of the instruments was measured using Cronbach’s alpha coefficient, where a coefficient of 0.865 was obtained. The obtained data was analyzed descriptively using frequencies, means, and standard deviation and inferentially using correlation and multiple regression model. The findings were presented using tables. The findings of the study revealed that risk attitude (β =0.159 p<0.05), herding behaviour (β =0.180 p<0.05), overconfidence (β =0.306, p<0.05) and anchoring behaviour (β =0.311, p<0.05) had a positive and significant relationship with individual investor decision making. Overall, the study established that the behavioural factors under the study explained 59.6% change in the individual investor decision making. The study revealed that market information had a positive and significant moderating effect on the relationship between behavioral factors and individual investor decision-making at the Nairobi Securities Exchange (NSE), as evidenced by an increase in R2 from 59.6% to 61.0%, a change of 1.4%. Risk attitude, herding behavior, overconfidence, and anchoring behavior were found to have significant relationships with investor decision-making. The study recommended that investors stay informed about market trends and economic indicators while seeking expert advice. The NSE should enhance transparency, offer regular market analysis, and introduce investment products catering to varying risk profiles. The findings are valuable for policymakers, financial experts, and scholars, contributing to theoretical developments in the field.